UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
one)
o
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended
:
October
31, 2008
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For the
transition period from _________ to _________
WELLSTAR INTERNATIONAL,
INC.
(Exact
name of registrant as specified in its charter)
Nevada
(State
or other jurisdiction of incorporation or organization)
|
20-1834908
(I.R.S.
Employer Identification No.)
|
6911
Pilliod Road
Holland,
Ohio 43528
(Address
of principal executive offices)
|
(419)
865-0069
(Registrant’s
telephone number, including area code)
Former
name, former address, and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer
|
Accelerated
filer
|
|
|
Non-accelerated
filer
|
Smaller
reporting company
|
(Do
not check if smaller reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No X
The
number of shares of the registrant's Common Stock, $0.001 par value per share,
outstanding as of November 30, 2008 was 534,916,475.
Table
of Contents
|
|
Page
|
Part
I –
|
Financial
Information
|
|
|
Item
1. Financial Statements (unaudited)
|
F-1
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
3
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
9
|
|
Item
4T. Controls and Procedures
|
9
|
Part
II –
|
Other
Information
|
|
|
Item
1. Legal Proceedings
|
10
|
|
Item
1A. Risk Factors
|
10
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
10
|
|
Item
3. Defaults upon Senior Securities
|
10
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
10
|
|
Item
5. Other Information
|
10
|
|
Item
6. Exhibits
|
10
|
Signatures
|
|
11
|
Exhibit
Index
|
|
Rule
13a-14(a) Certification executed by John Antonio
|
|
Rule
13a-14(a) Certification executed by Howard Bielski
|
|
Section
1350 Certification
|
|
PART I
FINANCIAL
INFORMATION
WELLSTAR
INTERNATIONAL, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
OCTOBER
31, 2008 AND 2007
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED
FINANCIAL STATEMENTS
OCTOBER
31, 2008 AND 2007
CONTENTS
|
PAGE
|
|
|
CONSOLIDATED BALANCE
SHEETS
|
F-1 -
F-2
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
F-3
|
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
|
F-4
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
F-5 -
F-6
|
|
|
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
F-7 -
F-22
|
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
ASSETS
|
|
October
31
2008
(Unaudited)
|
|
|
July
31
2008
(Audited)
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
113
|
|
|
$
|
25,560
|
|
Prepaid
Expenses
|
|
|
169,400
|
|
|
|
40
|
|
Rent
Refund Receivable
|
|
|
1,580
|
|
|
|
1,580
|
|
Total
Current Assets
|
|
|
171.093
|
|
|
|
27,180
|
|
Fixed
Assets:
|
|
|
|
|
|
|
|
|
Imaging
Equipment
|
|
|
837,874
|
|
|
|
837,874
|
|
Office
Equipment and Fixtures
|
|
|
154.884
|
|
|
|
154,540
|
|
Subtotal
|
|
|
992,758
|
|
|
|
992,414
|
|
Less:
Accumulated Depreciation
|
|
|
424,407
|
|
|
|
374,414
|
|
Net
Fixed Assets
|
|
|
568.351
|
|
|
|
618,000
|
|
Intangible
Assets:
|
|
|
|
|
|
|
|
|
Covenant
Not To Compete
|
|
|
20,000
|
|
|
|
20,000
|
|
Manufacturing
and Distribution Agreement
|
|
|
700,000
|
|
|
|
700,000
|
|
Subtotal
|
|
|
720,000
|
|
|
|
720,000
|
|
Less:
Accumulated Amortization
|
|
|
384,384
|
|
|
|
352,304
|
|
Net
Intangible Assets
|
|
|
335,616
|
|
|
|
367,696
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
Loan
Acquisition Cost (net of amortization of $231,805 @ 10/31/08 and $216,861
@ 7/31/08)
|
|
|
65,720
|
|
|
|
80,664
|
|
Software
and Manuals (net of amortization of $104,080
|
|
|
31,320
|
|
|
|
35,975
|
|
@
10/31/08 and $99,425 @ 7/31/08)
|
|
|
|
|
|
|
|
|
Security
Deposit
|
|
|
4.525
|
|
|
|
4,525
|
|
Total
Other Assets
|
|
|
101.565
|
|
|
|
121,164
|
|
Total
Assets
|
|
$
|
1,176,625
|
|
|
$
|
1,134,040
|
|
See
Accompanying Notes to Consolidated Financial Statements
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
LIABILITIES LESS
SHAREHOLDERS' DEFICIT
|
|
October
31
2008
(Unaudited)
|
|
|
July
31
2008
(Audited)
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Cash
Book Overdraft
|
|
$
|
15,637
|
|
|
$
|
|
|
Accounts
Payable
|
|
|
761,955
|
|
|
|
699,295
|
|
Accrued
Expenses
|
|
|
2,077,554
|
|
|
|
1,915,925
|
|
Note
& Loan Payable - Other
|
|
|
21,500
|
|
|
|
13,000
|
|
Notes
Payable
|
|
|
750,000
|
|
|
|
750,000
|
|
Derivative
Instrument Liability - Loan
|
|
|
391,079
|
|
|
|
374,952
|
|
Derivative
Instrument Liability - Convertible Notes
|
|
|
1,995,230
|
|
|
|
2,525,027
|
|
Convertible
Debt
|
|
|
1,033,656
|
|
|
|
530.452
|
|
Total
Current Liabilities
|
|
|
7,046.611
|
|
|
|
6,808,651
|
|
Long
Term Liabilities:
|
|
|
|
|
|
|
|
|
Convertible
Debt
|
|
|
29,442
|
|
|
|
85,499
|
|
Derivative
Instrument Liability - Convertible Notes
|
|
|
4,238,688
|
|
|
|
5,841,505
|
|
Derivative
Instrument Liability - Warrants
|
|
|
244,305
|
|
|
|
1.153.454
|
|
Total
Long-Term Liabilities
|
|
|
4.512.435
|
|
|
|
7.080,458
|
|
Total
Liabilities
|
|
|
11,559,046
|
|
|
|
13,889.109
|
|
Stockholders'
Deficit:
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
Authorized
1,000,000,000 Shares, par value .001 per
|
|
|
|
|
|
|
|
|
Share
Issued Shares, 519,940,017 - Outstanding Shares, 518,440,017 (10/31/08)
and 460,040,217 (7/31/08)
|
|
|
518,441
|
|
|
|
460,041
|
|
Paid
in Surplus
|
|
|
1,400,210
|
|
|
|
1,098,260
|
|
Retained
Earnings (Deficit)
|
|
|
(12,301,072
|
)
|
|
|
(14,313,370
|
)
|
Total
Shareholders' Deficit
|
|
|
(10,382,421
|
)
|
|
|
(12,755,069
|
)
|
Total Liabilities Less
Stockholder's
Deficit
|
|
$
|
1,176,625
|
|
|
$
|
1,134,040
|
|
See
Accompanying Notes to Consolidated Financial Statements
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF OPERATIONS
(UNAUDITED)
|
|
Three Months October
31,
|
|
Income:
|
|
2008
|
|
|
2007
|
|
Revenue from Medical
Imaging
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of Sales
|
|
|
-
|
|
|
|
-
|
|
Gross
Profit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative
|
|
|
426,244
|
|
|
|
396,439
|
|
Depreciation
and Amortization
|
|
|
101,672
|
|
|
|
92,506
|
|
Total
Operating Expenses
|
|
|
527,916
|
|
|
|
488,945
|
|
Loss
from Operations
|
|
|
(527,916
|
)
|
|
|
(488,945
|
)
|
Other
Expense (Income):
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
(
59
|
)
|
|
|
(
436
|
)
|
Interest
Expense
|
|
|
121,852
|
|
|
|
107,561
|
|
Derivative
Instrument (Income) Expense, Net
|
|
|
(2,770,907
|
)
|
|
|
1,449,594
|
|
Non-Registration
Penalties
|
|
|
108,900
|
|
|
|
60,000
|
|
Total
Other Expenses (Income)
|
|
|
(2,540,214
|
)
|
|
|
1,616,719
|
|
Income
(Loss) before Provision for Taxes
|
|
|
2,012,298
|
|
|
|
(2,105,664
|
)
|
Provision for Taxes
|
|
|
-
|
|
|
|
-
|
|
Net
Income (Loss)
|
|
$
|
2,012,298
|
|
|
$
|
(2,105,664
|
)
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Share,
Basic and Diluted
|
|
|
(.0
|
)
|
|
$
|
(.02
|
)
|
Weighted
Average Number of Common Shares
Outstanding,
Basic and Diluted
|
|
|
484,409,682
|
|
|
|
124,234,564
|
|
See
Accompanying Notes to Consolidated Financial Statements
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF CHANGES IN
STOCKHOLDERS'
EQUITY (DEFICIT)
FOR
THE THREE MONTHS ENDED OCTOBER 31, 2008
|
|
Common Stock
|
|
|
Additional
Paid in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
August 1, 2008
|
|
|
460,040,217
|
|
|
$
|
460,041
|
|
|
$
|
1,098,260
|
|
|
$
|
(14,313,370
|
)
|
|
$
|
(12,755,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Issued to Consultants and Others for Services and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
33,000,000
|
|
|
|
33,000
|
|
|
|
279,660
|
|
|
|
|
|
|
|
312,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of
Debentures
|
|
|
15,400,000
|
|
|
|
15,400
|
|
|
|
25,140
|
|
|
|
|
|
|
|
40,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Issued for Cash
|
|
|
10,000,000
|
|
|
|
10,000
|
|
|
|
(2,850
|
)
|
|
|
|
|
|
|
7,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income for the Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,012,298
|
|
|
|
2,012,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 31, 2008
|
|
|
518,440,217
|
|
|
$
|
518,441
|
|
|
$
|
1,400,210
|
|
|
$
|
(12,301,072
|
)
|
|
$
|
(10,382,421
|
)
|
See Accompanying Notes to Consolidated Financial Statements
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF CASH FLOWS
(UNAUDITED)
|
|
Three
Month Ended October 31,
|
|
Cash
Flows from Operating Activities:
|
|
2008
|
|
|
2007
|
|
Net
Income (Loss)
|
|
$
|
2,012,298
|
|
|
$
|
(2,105,664
|
)
|
Adjustments
to Reconcile Net Loss to Net Cash used in Operating
Activities:
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
101,672
|
|
|
|
92,506
|
|
Services
Paid in Stock
|
|
|
143,260
|
|
|
|
45,385
|
|
Interest
Paid in Stock
|
|
|
|
|
|
|
5,670
|
|
Derivative
Instrument (Income) Expense, Net
|
|
|
(2,770,907
|
)
|
|
|
1,449,594
|
|
Delinquent
Registration Penalty
|
|
|
108,900
|
|
|
|
60,000
|
|
Changes
in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
Increase
(Decrease) In:
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
|
|
|
|
50,000
|
|
Prepaid
Expenses
|
|
|
40
|
|
|
|
12,040
|
|
Accounts
Payable
|
|
|
78,637
|
|
|
|
29,965
|
|
Accrued
Expenses
|
|
|
285,347
|
|
|
|
161,052
|
|
Net Cash Used
in Operating Activities
|
|
|
(40,753
|
)
|
|
|
(199,452
|
)
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of Equipment and Software
|
|
|
(344
|
)
|
|
|
(20,025
|
)
|
Net
Cash Used in Investing Activities
|
|
|
(344
|
)
|
|
|
(20,025
|
)
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Loan
Payable - Other
|
|
|
8,500
|
|
|
|
|
|
Payments
of Financing Costs
|
|
|
|
|
|
|
(5,000
|
)
|
Proceeds
from Issuance of Convertible Notes
|
|
|
|
|
|
|
175,000
|
|
Issuance
of Stock for Cash
|
|
|
7.150
|
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
|
15.650
|
|
|
|
170.000
|
|
Net
Increase in Cash
|
|
|
(25,447
|
)
|
|
|
(49,477
|
)
|
Cash
at Beginning of Period
|
|
|
25,560
|
|
|
|
64,791
|
|
Cash
at End of Period
|
|
$
|
113
|
|
|
$
|
15,314
|
|
Cash
Paid for Interest
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
Cash
Paid for Taxes
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
See Accompanying Notes to Consolidated Financial
Statements
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF CASH FLOWS
FOR
THE THREE MONTHS ENDED OCTOBER 31, 2008 AND 2007
Supplemental
Disclosure of Non-Cash Investing and Financing Activities:
1.
|
During
the three months ended October 31, 2008, convertible debentures in the
amount of $40,540 were converted into 15,400,000 shares of Common
Stock.
|
2.
|
33,000,000
shares of Common Stock was issued for services rendered in the three
months ended October 31, 2008. The amount was
$312,660.
|
3.
|
During
the three months ended October 31, 2007, stock purchase warrants
exercisable for 15,000,000 shares of Common Stock were issued in
connection with a closing on $175,000 of convertible notes had no cash
effect.
|
4.
|
5,682,142
shares of Common Stock was issued for services rendered. The amount was
$45,385 in the three months ended October 31,
2007.
|
5.
|
During
the three months ended October 31, 2007, convertible debentures and
related accrued
interest
in the amount of
$5,670
were converted into 900,000 shares of Common
Stock.
|
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
AS
OF OCTOBER 31, 2008
(UNAUDITED)
NOTE
1
Summary of
Significant Accounting Policies and Organization
a)
Organization
and Recent Company History
Wellstar
International, Inc. (the "Company") was incorporated December 15, 1997, under
the laws of the State of Nevada. Through its wholly owned subsidiary,
Trillennium Medical Imaging, Inc. ("TMr'), it is developing and licensing the
use of advanced thermal imaging technology.
b)
Principles
of Consolidation
The
consolidated financial statements include the accounts of Wellstar
International, Inc. and its wholly owned subsidiary, Trillennium Medical
Imaging, Inc. (collectively, the "Company").
c)
Interim
Condensed Consolidated Financial Statements
The
consolidated financial statements as of and for the three months ended October
31, 2008 and 2007 are unaudited.
In
the opinion of
management, such consolidated financial statements include all adjustments
(consisting only of normal recurring accruals) necessary for the fair
presentation of the consolidated financial position and the consolidated results
of operations. The consolidated results of operations for the three months ended
October 31, 2008 and 2007 are not necessarily indicative of the results to be
expected for the full year. The consolidated balance sheet information as of
July 31, 2008 was derived from the audited consolidated financial statements
included in the Company's annual report Form 10-KSB for the year ended July 31,
2008. The interim consolidated financial statements should be read in
conjunction with that report.
d)
Revenue
Recognition
The
Company recognizes revenues utilizing the accrual method of accounting. More
specifically, the Company enters into licensing agreements for its advanced
thermal imaging technology. Under the licensing agreements, the Company supplies
the camera equipment, related software and training for each facility. Once the
facility is operational, the licensing agreement provides for a fixed fee
monthly fee for the use of the camera. Accordingly, the revenue is recognized in
the month that the camera is in use at the customer's facility, which represents
the Company's right to receive the fixed fee. The Company's revenue recognition
policy is in compliance with the provisions of EITF 00-21.
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
AS
OF OCTOBER 31, 2008
(UNAUDITED)
NOTE
1
Summary
of Significant Accounting Policies and Organization
(cont'd)
e)
Use
of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, they may ultimately differ from
actual results.
For the
purpose of the Statement of Cash Flows, cash is defined as balances held in
corporate checking accounts and money market accounts.
g)
Income
(Loss) Per Share
Basic and
diluted net income (loss) per common share for the three months ended October
31, 2008 and 2007 are computed based upon the weighted average number of common
shares outstanding. The assumed conversion of Common Stock equivalents was not
included in the computation of diluted Income (loss) per share because the
assumed conversion and exercise would be anti-dilutive due to the net Income
(loss) incurred. Based on the conversion formula in the Agreements (see Note 2
and 3) on the conversion of its convertible notes would have resulted in the
issuance of additional common shares in the amount of 28,380,807,648, on October
31, 2008.
h)
Stock
Based Compensation
Stock
based compensation will be valued in accordance with SFAS 123(R) under the Fair
Valued based method. Compensation cost is measured at the grant date based on
the value of the award and is recognized over the service period which is
usually the vesting period. Transactions with non-employees shall be accounted
for based on the Fair Value of the consideration received or Fair Value of the
equity installments issued, whichever is more reliably measurable.
i)
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.
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
AS
OF OCTOBER 31, 2008
(UNAUDITED)
NOTE
1
Summary
of Significant Accounting Policies and Organization
(cont'd)
i)
Derivative Instruments
(cont'd)
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 instrument 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.
j)
Income
Taxes
The
Company will provide for income taxes based on the provisions of Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
No. 109 ("SFAS No. 109"), "Accounting for Income Taxes", which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements and
tax returns in different years. Under this method, deferred income tax assets
and liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse.
k)
Concentration of Credit
Risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consists of a checking account with a financial institution in excess of
insured limits. There was no excess above insured limits at October 31, 2008.
The Company does not anticipate non-performance by the financial
institution.
l)
Fair Value of Financial
Instruments
Carrying
amounts of certain of the Company's financial instruments, including cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value because of their short maturities.
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
AS
OF OCTOBER 31, 2008
(UNAUDITED1
NOTE
1
Summary
of Significant Accounting Policies and Organization
(cont'd)
m)
Equipment
Imaging
and office equipment are recorded at cost and depreciated on the straight line
method with an estimated life of five (5) years. Imaging equipment is at the
customers facility where the equipment is used or stored by the Company until
placed in use. The Company retains title to the imaging equipment while it is at
the customers location. Depreciation expense for the three months ended October
31, 2008 and 2007 were $49,993 and $33,257, respectfully.
n)
Intangible
Assets
Loan
acquisition costs are stated at cost and relate to the costs of acquiring the
convertible notes (see Note 2) and to obtaining the $400,000 Note Payable (see
Note 3). Amortization is provided for under the straight line method over three
(3) years, which is the term of the convertible notes and six months for the
original term of the Note Payable. Total amorti-zation for the three months
ended October 31, 2008 and 2007 were $14,944 and $10,128,
respectfully.
Software
and manuals, Covenant Not To Compete and Manufacturing & Distribution
Agreement acquired in the acquisition of Micro Health Systems, Inc. (See Note 3)
with cost of $80,000, $20,000 and $700,000 respectively are being amortized over
a 24 month period for the software and the Covenant and 5 V2 years for the
manufacturing and distribution agreement. The total amortization expense for the
three months ended October 31, 2008 and 2007 were $36,735 and $49,120,
respectfully.
o)
Derivative
Instruments
Because
of the limited trading history of 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.
p)
Registration Rights
Agreements
In
connection with the sale of debt or equity instruments, we may enter into
Registration Rights Agreements. Generally, these 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.
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
AS
OF OCTOBER 31,
2008
(UNAUDITED)
NOTE
1
Summary
of Significant Accounting Policies and Organization
(coned)
p)
R
egistration Rights Agreements
(cont'd)
The
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 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 expenses over the period to which they relate.
NOTE
2 Convertible
Notes
On
October 31, 2005, the Company
entered into a Securities Purchase Agreement with AJW Partners,
LLC
and its related entities for the sale of $3,000,000 of 8% secured
convertible notes, each advance is evidenced by a note which is due three years
from the date of the advance, and for stock purchase warrants exercisable for a
total of 5,000,000 shares of Common Stock each issuance of warrants expiring on
the fifth anniversary from the date of issue. The warrants are issued at the
time funds are advanced at 1,666,667 per $1 million advanced. The notes are
convertible, at the holder's option, into shares of Common Stock, in whole or in
part, at any time after the original issue date. No interest shall be due and
payable for any month in which the Company's stock trading price is greater than
$0.1125 for each trading day of the month.
The
number
of
shares of Common Stock issuable upon a conversion is to be determined by
dividing the outstanding principal amount
of
the notes to be converted, plus related accrued interest, by the
conversion price. The conversion price in effect on any conversion date will be
at the selling stockholder's option, at the lower of (i) $0.12
or
(ii) a 40% discount
to
the average of the three lowest intraday trading prices for the Common
Stock
on
a principal market for the twenty trading days preceding, but not
including, the conversion date for all notes except a discount of 67.50% relates
to stock conversions for the convertible debentures dated April 22, 2008, June
12, 2008 and August 29, 2008. The total shares at October 31, 2008 were
25,807,934,847.
The stock
purchase warrants have an exercise price of $0.50 per share.
The
Company has closed on the entire $3,000,000 of convertible notes contemplated by
the Securities Purchase Agreement and issued stock purchase warrants exercisable
for 5,000,000 shares of Common Stock in connection therewith. The dates of the
advance of the funds of $1 million each were October 31, 2005 and January 20,
2006 and $500,000 each on July
25,
2006 and August 8, 2006. The stock registration was effective
August
4,
2006.
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENT
AS
OF OCTOBER 31, 2008
NOTE
2
Convertible
Notes (cont'd)
On
November 30, 2006, the Company entered into an additional securities purchase
agreement with AJW Partners, LLC and its related entities for the sale of
$400,000 of 8% secured convertible notes due November 30, 2009, and for stock
purchase warrants of 4,000,000 shares of Common Stock exercisable at anytime at
$.08 per share, expiring on the seventh anniversary from the date of issue,
November 30, 2013.
The funds
were advanced on November 30, 2006, in the amount of $392,500, less a $7,500
charge as a loan acquisition cost, amortized over the loan period of 36
months.
The notes
are convertible, at the holders option, into shares of Common Stock, in whole or
in part,.at any time after the original issue date.
No
interest shall be due on any payable for any month in which the Company's stock
trading price is greater than $.0775 for each trading day of the month. The
notes are secured by all the assets and intellectual property of the
Company.
On March
26, 2007, the Company entered into an additional securities purchase agreement
with AJW Partners, LLC and its related entities for the sale of $165,000 of 8%
secured convertible notes due March 26, 2010, and for stock purchase warrants of
1,000,000 shares of Common Stock exercisable at anytime at $.03 per share,
expiring on the seventh anniversary from the date of issue, March 26,
2014.
The funds
were advanced on March 26, 2007, in the amount of $150,000, less a $15,000
charge
as
a loan acquisition cost, amortized over the loan period of 36 months. The
notes are convertible, at the holders option, into shares of Common Stock, in
whole or in part, at any time after the original issue date. No interest shall
be due or any payable for any month in which the Company's stock trading price
is greater than $.0775 for each trading day of the month. The notes are secured
by all the assets and intellectual property of the Company.
On May
30, 2007, the Company entered into an additional securities purchase agreement
with AJW Partners, LLC and its related entities for the sale of $435,000 of 8%
secured convertible notes due May 30, 2010, and for stock purchase warrants of
10,000,000 shares of Common Stock exercisable at anytime at $.02 per share,
expiring on the seventh anniversary from the date of issue, May 30,
2014.
The funds
were advanced on May 30, 2007, in the amount of $415,000, less a $20,000 charge
as a loan acquisition cost, amortized over the loan period of 36 months. The
notes are convertible, at the holders option, into shares of Common Stock, in
whole or in part, at any time after the original issue date. No interest shall
be due or any payable for any month in which the Company's stock trading price
is greater than $.0775 for each trading day of the month. The notes are secured
by all the assets and intellectual property of the Company.
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF OCTOBER 31, 2008
NOTE
2
Convertible
Notes (cont'd)
On
October 12, 2007, the Company entered into an additional securities purchase
agreement with AJW Partners, LLC and its related entities for the sale of
$175,000 of 8% secured convertible notes due October 12, 2010, and for stock
purchase warrants of 15,000,000 shares of common stock exercisable at anytime at
$ .0001 per share expiring on the seventh anniversary from the date of issue
October 12, 2014.
The funds
were advanced on October 12, 2007 in the amount of $170,000, less a $5,000
charge as loan acquisition cost, amortized over the loan period of 36 months.
The notes are convertible, at the holders option, into shares of common stock,
in whole or in part, at any time after the original issue date. No interest
shall be due or payable for any month in which the Company's stock trading price
is greater than $ .0775 for each trading day of the month. The notes are secured
by all the assets and intellectual property of the Company.
On
November 15, 2007, the Company entered into an additional securities purchase
agreement with AJW Partners, LLC and its related entities for the sale of
$325,000 of 8% secured convertible notes due November 15, 2010, and for stock
purchase warrants of 10,000,000 shares of common stock exercisable at anytime at
$ .0001 per share expiring on the seventh anniversary from the date of issue
November 15, 2014.
The funds
were advanced on November 15, 2007 in the amount of $310,000, less a $15,000
charge as loan acquisition cost, amortized over the loan period of 36 months.
The notes are convertible, at the holders option, into shares of common stock,
in whole or in part, at any time after the original issue date. No interest
shall be due or payable for any month in which the Company's stock trading price
is greater than $ .0775 for each trading day of the month. The notes are secured
by all the assets and intellectual property of the Company.
On
December 14, 2007, the Company entered into an additional securities purchase
agreement with AJW Partners, LLC and its related entities for the sale of
$315,000 of 8% secured convertible notes due December 14, 2010, and for stock
purchase warrants of 10,000,000 shares of common stock exercisable at anytime at
$ .0001 per share expiring on the seventh anniversary from the date of issue
December 14, 2014.
The funds
were advanced on December 14, 2007 in the amount of $300,000, less a $15,000
charge as loan acquisition cost, amortized over the loan period of 36 months.
The notes are convertible, at the holders option, into shares of common stock,
in whole or in part, at any time after the original issue date. No interest
shall be due or payable for any month in which the Company's stock trading price
is greater than $ .0775 for each trading day of the month. The notes are secured
by all the assets and intellectual property of the Company.
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF OCTOBER 31,
2008
NOTE
2
Convertible
Notes (cont'd)
On
December 31, 2007, the
Lender issued the Company a new note for all accrued unpaid interest. The Lender
applied all of its conversions from convertible notes into stock to the
principal of its original note issued October 31, 2005.
The
Company which had been applying the conversions to interest first then principal
made this adjustment to be in agreement with the Lender and will apply all
conversion to principal beginning January 1, 2008. The Callable Secured
Convertible Note dated December 31, 2007 in the amount of $427,759.61 bears
interest at 2% per annum, payable quarterly. The note is due December 31, 2010.
All of the terms are identical to the above notes, including the conversion
options.
On
April 22, 2008, the Company entered
into an additional securities purchase agreement with AJW Partners, LLC and its
related entities for the sale of $190,000 of 8% secured convertible notes due
April 22, 2011, and for stock purchase warrants of 20,000,000 shares of common
stock exercisable at anytime at $ .0001 per share expiring on the seventh
anniversary from the date of issue April 22, 2015.
The funds
were advanced on April 22, 2008 in the amount of $185,000, less a $5,000 charge
as loan acquisition cost, amortized over the loan period of 36 months. The notes
are convertible, at the holders option, into shares of common stock, in whole or
in part, at any time after the original issue date. No interest shall be due or
payable for any month in which the Company's stock trading price is greater than
$.0775 for each trading day of the month. The notes are secured by all the
assets and intellectual property of the Company.
On
June 12, 2008, the Company entered
into an additional securities purchase agreement with
AJW
Partners, LLC and its
related entities for the sale of $135,000 of 8% secured convertible notes due
June 12, 2011.
The funds
were advanced on June 12, 2008 in the amount of $105,000, less a $20,000 charge
as loan acquisition cost, amortized over the loan period of 36 months. The notes
are convertible, at the holders option, into shares of common
stock,
in whole or in part, at
any time after the original issue date. No interest shall be due or payable for
any month in which the Company's stock trading price is greater than $.0775 for
each trading day of the month. The notes are secured by all the assets and
intellectual property of the Company.
On
August 29, 2008, AJW Partners, LLC
and its related entities (the Lender) issued the Company a new Note for all
accrued unpaid interest from January 1, 2008 through August 29, 2008. The
Callable Secured Convertible Note, dated August 29, 2008, in the amount of
$235,113.84, bears interest at 2% per annum, payable quarterly. The Note is due
on August 29, 2011. The conversion price is the average of the three (3) lowest
trading prices in the 20 days prior to conversion (before the conversion date)
X
32.5% = conversion
price. All other terms are identical with the other Note.
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF OCTOBER 31, 2008
NOTE
2
Convertible
Notes (cont'd)
See
Paragraph 2 of this note related to the terms of conversion. The total shares at
October 31, 2008, included in Paragraph 2 above, includes all additional
convertible notes.
All notes
include a Registration Rights Agreement. The Company was required to register
additional shares in relation to all the additional agreements listed above,
this was not done. There is a penalty of 2% per month of the note amount, a
penalty of $804,474 was accrued through October 31, 2008.
In
connection with the aforementioned issuance of the $1,000,000 of convertible
notes, on October 31, 2005, the Company granted a first priority security
interest in all the assets of the Company. The issuance of convertible notes
resulted in conversion features being accounted for as embedded derivative
liabilities in accordance with EITF00-19 and SFAS 133 (see Note 4). The note
holder's have converted notes of $749,132 into 340,748,200 shares of Common
Stock as of October 31, 2008. The balance of the notes are $5,051,590, at
October 31, 2008. Interest due of $95,372 is included in Accrued
Expenses.
NOTE
3
Notes
Payable
a)
The
Company has borrowed $150,000 from an unrelated individual. The Note is dated
August 1,
2005. The outstanding balance of the loan shall bear monetary interest at the
fixed rate of six percent (6%) simple, non-compounding interest payable in
arrears per annum.
The
outstanding balance of principal and interest is due and payable on demand on or
after August 1, 2006. All payments shall apply first to interest accrued and
then principal. The Company may prepay all or part without a pre-payment
penalty. The loan was not paid on August 1, 2006 and was extended under the same
terms by mutual agreement. Interest due of $29,675 is included in Accrued
Expenses.
Default
shall occur upon (1) failure to make payment on the note or transfer of stock
when due, (2) Company institutes bankruptcy or solvency proceedings or make an
assignment for the benefit of creditors.
Note
Payable -
Current $150,000
b)
The
Company has entered into a loan agreement with an unrelated individual. The note
is
dated October 11, 2005. The note provides for a total loan of $400,000, the
Company received $190,000 by October 31, 2005. The balance of $210,000 was
subsequently received on November 29, 2005. The note bears interest at a fixed
rate of 8%, plus the prevailing variable margin rate charged to the lender. As
of October 31, 2008, the margin rate was 7.625%. The lender was paid a loan
acquisition cost on December 5, 2005, in Common Stock of 1 million
shares.
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF OCTOBER 31,
2008
NOTE
3
Notes
Payable
The cost
was recorded at market value at the date of the loan which was $ .12 per share,
for a total of $120,000. The outstanding balance of principal and accrued
interest was due and payable on April 11, 2006. The note has been extended to
February 28, 2007 by addendum under the current terms and interest is being
accrued. The addendum was signed on November 11, 2006. In consideration of the
waiver and extension, the Company, with the signing, paid the lender $20,000.
The lender was also issued additional warrants to purchase 400,000 shares of
common stock, 200,000 at $0.10 per share and 200,000 at $0.20 per share, which
expire on February 28, 2008. As of October 31, 2008, the note has not been
paid.
At
October 31, 2008, $186,618 of interest expense is included in Accrued Expenses.
As security for the loan, the Company has pledged all of its tangible and
intangible assets. Commencing on January 1, 2006, the Company shall establish an
escrow account and shall deposit 25% of all proceeds generated by the thermal
imaging cameras purchased with $210,000 of proceeds from the loan. The funds
shall remain in escrow for use in paying all sums due to the lender. To October
31, 2008, no funds have been put into escrow.
In
addition, the lender has the option to convert the loan into fully registered,
unsecured Common Stock of the Company at a conversion price on the day of
conversion, minus 40%. The total shares at October 31, 2008 were 2,572,876,801.
The lender shall have the right to convert on the prepayment date or the due
date, whichever occurs first. The issuance of the notes and warrants resulted in
conversion features being accounted for as embedded derivative liabilities in
accordance with EITF00-19 and
FASB
133 (see Note
4).
Balance
due at October 31,
2008
$400,000
c)
On
December 21, 2005, the Company
completed the purchase of certain assets of Micro
Health
Systems, Inc. ("MHS") under a definitive agreement.
Total
consideration paid by the Company was $600,000, plus 2,000,000 shares of
Restricted Common Stock. The Company paid $400,000 at closing. A promissory note
was executed for $200,000 with interest at 8% per annum. $100,000 is due with
accrued interest on or before the 180
th
day
following the date of the Note which is June 19, 2006, with the balance of
principal and interest due and payable on or before the 365
th
day
following the date of the note.
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF OCTOBER 31, 2008
NOTE
3
Notes
Payable
The
2,000,000 shares of Restricted Common Stock were issued on December 21, 2005 and
priced at the market price of $ .10 per share for a total value of $200,000. The
cost was allocated as follows:
Mikron
Manufacturing Distribution Agreement Customer List and Intangible
Assets
|
|
$
|
700,000
|
|
Tangible
Assets
|
|
|
80,000
|
|
Covenant
Not-To-Compete
|
|
|
20,000
|
|
Total
|
|
$
|
800,000
|
|
In
addition, 1,500,000 shares of Restricted Common Stock are being held in escrow
as security for the note payable of $200,000. These shares have been shown as
issued but not outstanding. The Company is in default on $200,000 of the Note
Payable and interest of $4,000 which was due June 19, 2006 on the first $100,000
of notes due. Due to the default, the interest charged from June 19, 2006 is 18%
on the $200,000 Note Payable. Interest expense of $87,411 is included in Accrued
Expenses.
On
November 28, 2006, the Company received a letter due to the default, giving it
ten (10) days to pay the note and accrued interest or the 1,500,000 shares held
in escrow will be issued to the shareholder of Micro Health Systems, Inc. As of
October 31, 2008 and through December 12, 2008 nothing has
transpired.
Balance
due at October 31,
2008
$200,000
d)
The
Company has borrowed $10,000 from an unrelated company. The Note is dated
April
14, 2008,
and was due on July 15, 2008 (maturity date). The Note has an interest rate of
15% per annum. Per the terms of the Note, the Company is in default as it failed
to pay the principal and interest due upon the maturity date. In an event of
default, Lender by notice given to Borrower may declare the unpaid principal and
accrued interest owing upon this notice to be immediately payable. The Company
(Borrower) has not received any demand for payment from the Lender as of October
31, 2008. The Note is included as a current liability in Note and Loan Payable -
Other, in the amount of $10,000.
NOTE
4
Derivative Financial
Instrument Liabilities
We use
the Black-Scholes option pricing model to value options and warrants, and the
embedded conversion option components of any bifurcated embedded derivative
instruments that are recorded as derivative liabilities. See Note 1, related to
embedded derivative instruments accounting policy.
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF OCTOBER 31,
2008
NOTE
4
Derivative
Financial Instrument Liabilities (cont'd)
In
valuing the options and warrants and the embedded conversion option components
of the bifurcated embedded derivative instruments, at the time they were issued
and at October 31, 2008, we used the market price of our Common Stock on the
date of valuation, an expected dividend yield of 0% and the remaining period to
the expiration date of the options or warrants or repayment date of the
convertible debt instrument. All options, warrants and conversion options can be
exercised by the holder at any time.
Because
of the limited historical trading period of our Common Stock, the expected
volatility of our Common Stock over the remaining life of the options and
warrants has been estimated at 123%, based on a review of the historical
volatility and of entities considered by management as comparable. The risk-free
rates of return used ranged from 0.12% to 1.80%, based on constant maturity
rates published by the U.S. Federal Reserve, applicable
to
the remaining life of the
options or warrants.
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF OCTOBER 31, 2008
NOTE
4
Derivative
Financial Instrument Liabilities (cont'd)
At
October 31, 2008, the following derivative liabilities related to Common Stock
options and warrants and embedded derivative instruments were outstanding (see
Notes 2 and 3):
Issue
Date
|
Expiry Date
|
|
No.
of
Warrants
|
|
Issued To
|
|
Exercise
Price
Per
Share
|
|
|
Value
- Issue
Date
|
|
|
Value
- Oct. 31, 2008
|
|
10/11/05
|
04/11/06
|
|
|
1,000,000
|
|
Thompson
|
|
$
|
.50
|
|
|
$
|
41,526
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/19/06
|
02/18/08
|
|
|
200,000
|
|
Thompson
|
|
$
|
.10
|
|
|
|
3,845
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/19/06
|
02/18/08
|
|
|
200,000
|
|
Thompson
|
|
$
|
.20
|
|
|
|
2,276
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/31/05
|
10/31/10
|
|
|
1,666,667
|
|
AJW
Partners
|
|
$
|
.50
|
|
|
|
169,629
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
01/20/06
|
01/20/11
|
|
|
1,666,667
|
|
AJW
Partners
|
|
$
|
.50
|
|
|
|
81,321
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
07/25/06
|
07/25/11
|
|
|
833,333
|
|
AJW
Partners
|
|
$
|
.50
|
|
|
|
146,197
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
08/04/06
|
08/04/11
|
|
|
833,333
|
|
AJW
Partners
|
|
$
|
.50
|
|
|
|
102,816
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/30/06
|
11/30/13
|
|
|
4,000,000
|
|
AJW
Partners
|
|
$
|
.08
|
|
|
|
158,741
|
|
|
|
7,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
03/26/07
|
03/26/14
|
|
|
1,000,000
|
|
AJW
Partners
|
|
$
|
.03
|
|
|
|
25,433
|
|
|
|
2,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
05/30/07
|
05/30/14
|
|
|
10,000,000
|
|
AJW
Partners
|
|
$
|
.02
|
|
|
|
163,409
|
|
|
|
27,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/12/07
|
10/12/14
|
|
|
15,000,000
|
|
AJW
Partners
|
|
$
|
.0001
|
|
|
|
179,353
|
|
|
|
56,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
I1/15/07
|
11/15/10
|
|
|
10,000,000
|
|
AJW
Partners
|
|
$
|
.0001
|
|
|
|
39,649
|
|
|
|
37,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/14/07
|
12/14/10
|
|
|
10,000,000
|
|
AJW
Partners
|
|
$
|
.0001
|
|
|
|
24,000
|
|
|
|
37,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
04/22/08
|
04/22/15
|
|
|
20,000,000
|
|
AJW
Partners
|
|
$
|
.0001
|
|
|
|
17,540
|
|
|
|
75.205
|
|
Fair
value of derivative instrument liabilities for warrants
|
|
|
|
|
|
$
|
1,155,735
|
|
|
$
|
244,305
|
|
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF OCTOBER 31, 2008
NOTE
4
Derivative
Financial Instrument Liabilities (cont'd)
Issue Date
|
Due
Date
|
|
Note
Amount
|
|
Instrument
|
Exercise
|
|
|
|
|
Value - Oct.
31,
2008
|
|
10/11/05
|
04/11/06
|
|
$
|
400,000
|
|
Loan
|
Various
|
|
$
|
370,189
|
|
|
$
|
391,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/31/05
|
10/31/08
|
|
|
1,000,000
|
|
Convertible
Notes
|
Various
|
|
|
2,681,204
|
|
|
|
186,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
01/20/06
|
01/20/09
|
|
|
1,000,000
|
|
Convertible
Notes
|
Various
|
|
|
1,363,058
|
|
|
|
810,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
07/25/06
|
07/25/09
|
|
|
500,000
|
|
Convertible
Notes
|
Various
|
|
|
791,994
|
|
|
|
495,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
08/04/06
|
08/04/09
|
|
|
500,000
|
|
Convertible
Notes
|
Various
|
|
|
616,127
|
|
|
|
501,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/30/06
|
11/30/09
|
|
|
400,000
|
|
Convertible
Notes
|
Various
|
|
|
523,047
|
|
|
|
433,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
03/26/07
|
03/26/10
|
|
|
165,000
|
|
Convertible
Notes
|
Various
|
|
|
274,500
|
|
|
|
190,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
05/30/07
|
05/30/10
|
|
|
435,000
|
|
Convertible
Notes
|
Various
|
|
|
825,801
|
|
|
|
516,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/12/07
|
10/12/10
|
|
|
175,000
|
|
Convertible
Notes
|
Various
|
|
|
711,289
|
|
|
|
218,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/15/07
|
11/15/10
|
|
|
325,000
|
|
Convertible
Notes
|
Various
|
|
|
465,052
|
|
|
|
410,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/14/07
|
12/14/07
|
|
|
315,000
|
|
Convertible
Notes
|
Various
|
|
|
631,254
|
|
|
|
401,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/07
|
12/31/10
|
|
|
427,760
|
|
Convertible
Notes
|
Various
|
|
|
894,835
|
|
|
|
547,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
04/22/08
|
04/22/11
|
|
|
190,000
|
|
Convertible
Notes
|
Various
|
|
|
569,394
|
|
|
|
510,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
06/12/08
|
06/12/11
|
|
|
135,000
|
|
Convertible
Notes
|
Various
|
|
|
555,374
|
|
|
|
365,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
08/29/08
|
08/29/11
|
|
|
235,114
|
|
Convertible
Notes
|
Various
|
|
|
875,919
|
|
|
|
643.441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of bifurcated embedded derivative instrument
liabilities
|
|
$
|
12,149,037
|
|
|
$
|
6,624,997
|
|
|
|
|
|
|
|
|
|
|
Total
derivative financial instruments
|
|
$
|
13,304,772
|
|
|
$
|
6,869,302
|
|
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF OCTOBER 31, 2008
NOTE
5
Stockholders'
Equity (Deficit)
During
the three months ended October 31, 2008, the Company issued the following shares
of restricted common stock for services rendered; for Public Relations/Marketing
services 29,900,000 shares, at market value, for computer software design
1,500,000 shares at 70% of market value and for unreimbursed expenses 2,600,000
shares at 70% of market value. The total was recorded as common stock $33,000
and additional paid-in capital of $279,660. The total of $312,660 is reflected
as an expense in the Statement of Operations.
NOTE
6 Derivative
Instruments Income, Net
Derivative
instruments income of $2,770,907 represents the net unrealized (non-cash) change
during the three months ended October 31, 2008, in the fair value of our
derivative instrument liabilities related to certain warrants and embedded
derivatives in our convertible debt that have been bifurcated and accounted for
separately.
NOTE
7
Going
Concern
The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business.
As
reflected in the accompanying consolidated financial statements, the Company had
a net income of $2,012,298 after derivative instrument income of $2,770,907, and
a loss from operations of ($527,916) and a negative cash flow from operations of
$40,753 for the three months ended October 31, 2008, negative working capital of
$6,875,518 and a stockholders' deficiency of $10,382,421 at October 31,
2008.
The
ability of the Company to continue as a going concern is dependent on the
Company's ability to raise additional funds and implement its business plan. The
accompanying consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going
concern.
Management's
plans include the raising of additional capital through private or public
transactions and implementation of its business and marketing plan to increase
revenues.
WELLSTAR
INTERNATIONAL, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF OCTOBER 31, 2008
NOTE
8
Lease
Agreement
On July
17, 2007, Trillenium Medical Imaging, Inc., a wholly owned subsidiary, entered
into a lease agreement with an unrelated party for a facility in New York City.
The lease replaced a prior lease in the same facility. The lease is for a period
of one year with a monthly rent of $4,435. The lease expires July 16, 2009. The
Company incurred a rent expense of approximately $13,305 for the three months
ended October 31, 2008. Future rental payments under the lease for the year
ended July 31, 2009 is $39,915.
NOTE
9
Subsequent
Events
AJW
Partners, LLC and related entities converted a portion of their notes (See Note
2) into 12,500,000 shares of Common Stock during the period November 1, 2008
through December 11, 2008.
On
December 3, 2008, the President of the Company issued Promissory Notes to AJW
Partners, LLC, a related entity, in the amount of $57,500. $50,000 was loaned to
the Company and $7,500 was paid as Loan Acquisition Costs. The Notes bear no
interest unless and until an event of default occurs, as specified in the Notes.
The Notes are due December 31, 2009.
ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Special
Note on Forward-Looking Statements
Certain
statements in Management's Discussion and Analysis ("MD&A"), other than
purely historical information, including estimates, projections, statements
relating to our business plans, objectives and expected operating results, and
the assumptions upon which those statements are based, are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements generally are
identified by the words "believe," "will," "would," "will be," "will continue,"
"will likely result," and similar expressions. Forward-looking statements are
based on current expectations and assumptions that are subject to risks and
uncertainties which may cause actual results to differ materially from the
forward-looking statements. These statements are subject to a number of risks,
uncertainties and developments beyond our control or foresight including changes
in the trends of the mobile computing industry, formation of competitors,
changes in governmental regulation or taxation, changes in our personnel and
other such factors. We undertake no obligation to update or revise
publicly any forward-looking statements, whether as a result of new information,
future events, or otherwise. Readers should carefully review the risk
factors and related notes included in the Company’s Form S-1 and Form
S-1a filed with the Securities and Exchange Commission.
Overview
The
following MD&A is intended to help the reader understand the results of
operations, financial condition, and cash flows of Wellstar International,
Inc. MD&A is provided as a supplement to, and should be read in
conjunction with, our financial statements and the accompanying notes to the
financial statements ("Notes").
Background
Wellstar
through it’s wholly owned subsidiary, Trillennium Medical Imaging, Inc.
(“Trillennium,” “TMI” or “the Company”) has developed an innovative thermal
imaging system designed for the evaluation and early detection of heat patterns
within the body that indicate the presence of physiological changes such as
pressure ulcers, referred pain and metabolic changes within the breast. The
Company’s infrared imaging involves the detection and recording of skin
temperature and injury patterns, providing visual and quantitative documentation
to accurately capture body temperature data. The Company’s system map changes in
skin blood flow by translating temperature data into pictures. The
interpretation of these temperatures and thermal patterns can play an important
role in the development of a diagnosis. The Company’s system consists of
proprietary imagers (“TMI 7800 Imager”), operating software (“Image MHS 5.0
Software”) and a comprehensive data transmission and collection network, for
which TMI has patents pending. The Company seeks to be the
first-to-market in deep tissue injury and pressure ulcer detection using its
proprietary infrared imaging system. Thermal Imaging is a low cost, noncontact,
non-radioactive diagnostic screening procedure designed for clinical evaluation.
In addition, thermal imaging provides an ability to track the progress of
therapies being utilized in a low cost, non-invasive manner. Thermal
Imaging can detect signs of pressure ulcers before they are visible with the
naked eye through detection of temperature changes at the site which allows for
treatment of the pressure ulcer before it erupts. The TMI system can be used to
scan all new patients into hospitals and long-term care facilities prior
admittance and begin treating existing wounds before they are visible.The TMI
technology and software is approved by the FDA as an Adjunctive Diagnostic
screening procedure for early breast cancer detection, differential diagnosis of
pain dysfunctions, (such as Reflex Sympathetic Dystrophy, Neuromuscular Skeletal
Syndromes and Neurological disorders), the early detection of pressure ulcers,
deep tissue injuries, and bed sores, as well as orthopedic applications. The
Company’s imaging research concurrently looks to initiate consideration of
thermography as a viable tool and a medical standard for predicting and
preventing pressure ulcers in the medical community.
TMI is
currently seeking financing to complete the necessary changes to the System and
bring the System to market. The company will initially focus is efforts on
Hospitals and long term care facilities.
Plan
of Operation and Financing Needs
We are
seeking financing in different amounts. Initiallty we are attempting to raise
one million dollars. This money would be used for the roll out of our TMI System
to the long term care market. With the million dollars, the company will be in a
position to start implementing sales within the first quarter of 2009. The next
round of investment the company will be looking for will be approximately eleven
million dollars. This money will be used to retire the current company debt and
for expansion.
If We Are
Unable to Obtain Additional Funding, Our Business Operations Will be Harmed. In
Addition, Section 4e of the October 2005 Securities Purchase Agreements Contains
Certain Restrictions and Limitations on Our Ability to Seek Additional
Financing. If We Do Obtain Additional Financing, Our Then Existing Shareholders
May Suffer Substantial Dilution.
Results
of Operations
Quarter
Ended October 31, 2008 compared to Quarter Ended October 31, 2007 (all
references are to the Quarter Ended October 31)
Total Net
Sales: Total Net Sales were none in the first quarter ended October 31, 2008 and
none for the same period in 2007.
Cost of
Sales and Gross Profit: Cost of Sales for the first quarter of 2008
was none and none for the same period in
2007.
Operating,
Selling, General and Administrative Expenses: Operating, selling,
general and administrative expenses increased by $38,971, or 8% in the 2008
first quarter to $527,916 from $488,945 in 2007. This increase
reflects increases in stockholder relations expenses. In addition, penalties for
failure to register securities increased by $ 48,900 to $ 108,900 from $ 60,000,
salaries decreased by $ 32,831 from $ 196,931 to $ 161,100 and professional fees
decreased by $ 32,192 from $ 77,452 to $ 45,260 for the same period in
2007.
Loss from
Operations: Loss from operations for the first quarter of 2008 was
$527,916, an increase of $38,971 or 8% from the loss from operations in 2007 of
$488,945 as a result of the aforementioned increase in operating, sales and
administrative expenses.
Other
Income and Expense: Total other income of $2,540,214 in 2008
represented an increase of $4,156,933 from the expense of $1,616,719 in 2007 as
a result of higher income from derivative instrument income for the period
related to a decrease in derivative instrument liabilities caused by higher
stock prices.
Net
Income: Net income of $2,012,298 for the first quarter of 2008 was
$4,117,962 higher than the net loss of $2,105,664 for the same period in 2007
due to other income from derivative instrument income.
Liquidity
and Capital Resources
As
of October 31, 2008, we had a working capital deficit of approximately
$6,875,518, and cash of $113. We have acquired additional financing in the
amount of $50,000 when the President of The Company issued Promissory
Notes to AJW Partners, LLC and affiliates entered into in December of 2008.
However, we do not have the funds necessary to maintain our operations for the
remainder of our fiscal year, and will need to raise additional
funding.
The
liquidity impact of our outstanding debt is as follows:
Our
secured convertible note with Andrew W. Thompson (the "Thompson Note"), in the
principal amount of $400,000, matured on April 11, 2006 and remains outstanding.
We are in default pursuant to the terms of the Thompson Note, although we have
not received a notice of default from Mr. Thompson, nor has Mr. Thompson
indicated to the Company that he intends to place the Company in default under
the loan agreement. Interest on the Thompson Note is at the rate of 8% plus the
prevailing margin rate charged to the lender, which is currently 7.625%. If
these rates remain at these levels, the accrued interest at maturity will exceed
$108,365. The lender has the option of converting the loan into fully registered
common stock at a discount of 40% on the day of conversion, which is the
prepayment date or the due date, whichever occurs first. Additionally, the
lender also received warrants to purchase 1,000,000 shares of the company's
fully registered common stock at an exercise price of $0.50 per share. If the
lender converts, the Company will issue the appropriate number of shares and
will not be required to use cash to liquidate the debt. Additionally, the
Company will receive the cash proceeds in the amount of $500,000 if the lender
exercises the $0.50 warrants. On November 10, 2006, the Thompson Note was
amended to include a provision stipulating that the holder may not convert the
secured convertible note if such conversion or exercise would cause him to
own more than 9.99% of our outstanding common stock. However, this restriction
does not prevent the holder from converting a portion of the note and then
converting the rest of the note. In this way, the holder could sell more than
this limit while never holding more than this limit.
Our
unsecured demand note with Michael Sweeney (the "Sweeney Note"), in the
principal amount of $150,000, matured on August 1, 2006 and remains outstanding.
In addition to the outstanding principal, we also owe accrued interest in the
amount of $18,250. We are in default pursuant to the terms of the Sweeney Note
and we have not received a notice of default from Mr. Sweeney, nor has Mr.
Sweeney indicated to the Company that he intends to place the Company in default
under the note.
Our
unsecured demand note with Micro Health Systems (the "MHS Note"), dated December
21, 2005 in the principal amount of $200,000, with interest at 8% per annum, has
two maturity dates: at the 180th day and the 365th day following issuance. A
payment of $100,000.00 is due at each maturity date. We did not make the first
or second payment. There is an acceleration provision in the MHS Note
stipulating that the entire $200,000.00 was due upon non-payment of the first
$100,000. The interest rate then goes to the highest rate allowed by Florida
law. We received a notice of default from MHS on November 28, 2006 but no
further action has been taken. The MHS Note is secured by a pledge of 1.5
million shares of the Company's treasury stock.
To obtain
funding for our ongoing operations, we entered into a Securities Purchase
Agreement with four accredited investors - AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Partners II, LLC on October
31, 2005 for the sale of (i) $3,000,000 in secured convertible notes and (ii)
warrants to buy 5,000,000 shares of our common stock. The gross financing
proceeds were paid to the Company in three separate tranches of $1,000,000 each.
The first tranche of the financing, in the amount of $1,000,000, was received by
the Company upon closing. The second tranche was received on January 20, 2006.
The third tranche was received as follows:
$500,000
in July 2006 and $500,000 in August 2006.
The secured convertible notes issued pursuant to our October 2005
through June 2008 Securities Purchase Agreements bear interest at 8%, mature
three years from the date of issuance, and are convertible into our common
stock, at the selling stockholders' option, at the lower of (i) $0.12 or (ii)
generally a 40% discount to the average of the three lowest intraday trading
prices for the common stock on a principal market for the 20 trading days before
but not including the conversion date. As of November 28, 2008, the average of
the three lowest intraday trading prices for our common stock during the
preceding 20 trading days as reported on the Over-The-Counter Bulletin Board was
$ .0012 and, therefore, the conversion price for the secured convertible notes
was $ .0007. Based on this conversion price, the $5,064,048 outstanding
principal amount of the secured convertible notes, excluding interest, were
convertible into approximately 7,234,354,285 shares of our common stock.The
stock purchase warrants have an exercise price of $0.0001 and $0.50 per share.
If the lender converts, the Company will issue the appropriate number of shares
and will not be required to use cash to liquidate the debt. Additionally, the
Company will receive cash proceeds in the amount of $3,055,000 if the lender
exercises the warrants. If the lender converts, the Company will
issue the appropriate number of shares and will not be required to use the cash
to liquidate the debt.
The
registration statement we filed to register the shares underlying the
convertible notes and warrants was declared effective by the Securities &
Exchange Commission on August 4, 2006 (File No. 333-130295).
We
presently do not have any available credit, bank financing or other external
sources of liquidity. Due to our brief operating history as a start up company,
our operations have not been a source of liquidity. We will need to obtain
additional capital in order to maintain and expand our operations. We are
currently investigating other financial alternatives, including additional
equity and/or debt financing. In order to obtain capital, we may need to sell
additional shares of our common stock or borrow funds from private lenders.
However, there can be no assurance that that any additional financing will
become available to us, and if available, on terms acceptable to
us.
Sources
and Uses of Cash
|
|
Three
Months Ended Oct 31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Cash
flow data:
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
(41
|
)
|
|
|
(199
|
)
|
Net
cash (used in) investing activities
|
|
|
(0
|
)
|
|
|
(20
|
)
|
Net
cash provided (used) by financing activities
|
|
|
16
|
|
|
|
170
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(25
|
)
|
|
|
(49
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
26
|
|
|
|
65
|
|
Cash
and cash equivalents, end of period
|
|
|
0
|
|
|
|
15
|
|
Operating
Activities
Net cash
used in operating activities for the Three Months ended October 31, 2008 was
$40,753, a decrease of $158,699 from the same period in 2007 reflecting the
decrease in operating expenses.
Investing
Activities
Cash used
in investing activities for the Three Months ended October 31, 2008 was
$344, down $19,681 from the same period in 2007 represented principally in
a decrease in the purchase of imaging equipment.
Financing
Activities
Net cash
provided by financing activities for the Three Months ended October 31, 2008 was
$15,650 as compared with $170,000 for the same period last year. The
decrease is attributed to a decrease in the prodeeds from the issuance of
convertible notes.
As of
October 31, 2008, the Company had cash and cash equivalents in the amount of
$113 as compared with $15,314 at October 31, 2007.
Critical
Accounting Policies
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires that management make a number
of assumptions and estimates that affect the reported amounts of assets,
liabilities, revenues and expenses in our consolidated financial statements and
accompanying notes. Management bases its estimates on historical information and
assumptions believed to be reasonable. Although these estimates are based on
management's best knowledge of current events and circumstances that may impact
the Company in the future, actual results may differ from these
estimates.
Our
critical accounting policies are those that affect our financial statements
materially and involve a significant level of judgment by
management.
The
Company has adopted the policy of capitalizing the cost of its imaging equipment
and depreciating the cost against earnings over the straight line method using
an estimated useful life of five years. Because the useful life of any new
technology is difficult to estimate due to factors such as competition,
obsolescence, government regulations, etc., this accounting estimate is
reasonably likely to change from period to period with a material impact on our
financial statements. The significance of the accounting estimate to the
Company's financial statements is that the equipment on the balance sheet is
stated at cost less accumulated amortization and the corresponding depreciation
is an expense on the statement of operations. The estimate as to the useful life
of these assets will directly affect the carrying amount on the balance sheet
and the expense for depreciation recorded in the statement of operations.
Accordingly, shareholders' equity and earnings will be materially
affected.
Revenue
Recognition
Revenue
will be recognized as earned per the licensing agreements which provide for a
fixed fee for each thermal imaging camera we install. The revenue is recognized
in the month that the camera is in use at the customer's facility.
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.
In
September, 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
157, “Fair Value Measurements”. SFAS No. 157 provides a new single authoritative
definition of fair value and enhanced guidance in measuring the fair value of
assets and liabilities. It requires additional disclosures related to the extent
to which companies measure assets and liabilities at fair value, the information
used to measure fair value , and the effect of fair value measurement on
earnings. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years. We are currently
evaluating what effect, if any, the adoption of SFAS No. 157 will have on its
financial position, results of operations, or cash flows for the current fiscal
year.
On
December 21, 2006, the Financial Accounting Standards Board (FASB) posted FASB
Staff Position (FSP) FSPEITF00-19-2, Accounting For Registration Payment
Arrangements. The FSP specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision
of a financial instrument or other agreement, should be separately recognized
and measured in accordance with FASB Statement No. 5, Accounting For
Contingencies. This FSP further clarifies that the financial instrument subject
to a registration payment arrangement should be accounted for in accordance with
other applicable generally accepted accounting principles (GAAP) without regard
to the contingent obligation to transfer consideration pursuant to the
registration payment arrangement. We have accounted for registration payments as
required under its securituies purchase agreement and will follow this
pronouncement effect from date of issue.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option For
Financial Assets And Financial Liabilities” (SFAS 159). SFAS 159 expands the use
of fair value accounting but does not affect the existing standards that require
assets or liabilities to be carried at fair value. Under SFAS 159, a company may
elect to use fair value to measure accounts and loans receivable,
available-for-sale and held-to-maturity securities, accounts payable and issued
debt. If the use of fair value is elected, any up-front costs and fees related
to the item must be recognized in earnings and can not be deferred. The fair
value election is irrevocable and generally made on an instrument-by-instrument
basis, even if a company has similar instruments that it elects not to measure
based on fair value. At the adoption date, unrealized gains and losses on
existing items for which fair value has been elected are reported as a
cumulative adjustment to beginning retained earnings. Subsequent to the adoption
of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. We are currently
assessing the impact of SFAS 159 will have on our financial position and results
of operations.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk.
N/A
Item
4T. Controls and Procedures.
Management’s
Evaluation of Disclosure Controls and Procedures
In
accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of October 31, 2008 to provide reasonable assurance
that information required to be disclosed in our reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’
s rules and forms.
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.
From time
to time we may be a defendant and plaintiff in various legal proceedings arising
in the normal course of our business. We are currently not a party to any
material pending legal proceedings or government actions, including any
bankruptcy, receivership, or similar proceedings. In addition, management is not
aware of any known litigation or liabilities involving the operators of our
properties that could affect our operations. Should any liabilities be incurred
in the future, they will be accrued based on management’s best estimate of the
potential loss. As such, there is no adverse effect on our consolidated
financial position, results of operations or cash flow at this time.
Furthermore, Management of the Company does not believe that there are any
proceedings to which any director, officer, or affiliate of the Company, any
owner of record of the beneficially owned more than five percent of the common
stock of the Company, or any associate of any such director, officer, affiliate
of the Company, or security holder is a party adverse to the Company or has a
material interest adverse to the Company.
Item
1A. Risk Factors.
There
have been no material changes in our risk factors from those disclosed in our
Annual Report on Form 10-KSB filed with the SEC on November 17, 2008 for
the period ended July 31, 2008.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
Issuance
of Unregistered Securities
None.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers.
None.
Item 3. Defaults Upon Senior
Securities.
None.
Item 4.
Submission of Matters to a Vote of
Security Holders.
None.
Item 5.
Other Information.
None.
Item 6.
Exhibits.
31.1
|
Certification
of Periodic Financial Reports by John AntonioJohn Antonio in
satisfaction of Section 302 of the Sarbanes-Oxley Act of
2002
|
31.2
|
Certification
of Per
iodic
Financial Reports by Howard Bielski in satisfaction of Section 302 of the
Sarbanes-Oxley Act of 2002
|
32.1
|
Certification
of Periodic Financial Reports by John Antonio in satisfaction of
Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section
1350
|
32.2
|
Certification
of Periodic Financial Reports by Howard Bielski in satisfaction of Section
906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section
1350
|
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.
|
WELLSTAR
INTERNATIONAK, INC.
|
|
|
|
|
|
Date: December
19, 2008
|
By:
|
/s/ John
Antonio
|
|
|
|
John
Antonio
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
Date: December
19, 2008
|
By:
|
/s/ Howard
Bielski
|
|
|
|
Howard
Bielski
|
|
|
|
Chief
Financial Officer
|
|
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