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WLSI.OB > SEC Filings for WLSI.OB > Form 10-Q on 15-Jun-2009All Recent SEC Filings

Show all filings for WELLSTAR INTERNATIONAL, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for WELLSTAR INTERNATIONAL, INC.


15-Jun-2009

Quarterly Report


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 presently do not have any available credit, bank financing or other external sources of liquidity. Due to our brief history and historical operating losses, our operations have not been a source of liquidity. We will need to obtain additional capital in order to expand operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding.

We will still need additional capital in order to continue operations until we are able to achieve positive operating cash flow. Additional capital is being sought, but we cannot guarantee that we will be able to obtain such investments. This money would be used for the roll out of our TMI System to the long term care market.

Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the North American stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.

Results of Operations

Quarter Ended April 30, 2009 compared to Quarter Ended April 30, 2008 (all references are to the Quarter Ended April 30)

Total Net Sales: Total Net Sales were none in the quarter ended April 30, 2009 and none for the same period in 2008.

Cost of Sales and Gross Profit: Cost of Sales for the quarter ended April 30, 2009 was none and none for the same period in 2008.

Operating, Selling, General and Administrative Expenses: Operating, selling, general and administrative expenses decreased by $96,208, or 15% in the 2009 third quarter to $543,770 from $639,978 in 2008. This decrease reflects increases in stockholder relations expenses by $45,975. In addition, salaries increased by $ 35,529 to $ 225,000 from $ 189,471, professional fees decreased by $ 11,679 from $ 73,562 to $ 61,883 and research and development expense decreased by $ 172,800 from $ 172,800 in 2008 to none for the same period in 2009.

Loss from Operations: Loss from operations for the third quarter of 2009 was $543,770, a decrease of $96,208 or 15% from the loss from operations in 2008 of $639,978 as a result of the aforementioned decrease in operating, sales and administrative expenses.

Other Income and Expense: Total other income of $99,239 in 2009 represented an increase of $2,467,833 from the expense of $2,368,594 in 2008 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 loss of $444,531 for the third quarter of 2009 was $3,453,103 lower than the net loss of $3,008,572 for the same period in 2008 due to other income from derivative instrument income.

Nine Months Ended April 30, 2009 compared to Nine Months Ended April 30, 2008
(all references are to the Nine Months Ended April 30)

Total Net Sales: Total Net Sales were none for the nine months ended April 30, 2009 and none for the same period in 2008.

Cost of Sales and Gross Profit: Cost of Sales for the nine months ended April 30, 2009 was none and none for the same period in 2008.


Operating, Selling, General and Administrative Expenses: Operating, selling, general and administrative expenses decreased by $248,512, or 13% for the nine months ended April 30, 2009 to $1,679,823 from $1,928,335 in 2008. The decrease is primarily due to a decrease in research and development expense of $ 259,200 to none for the nine months ended April 30, 2009 from $ 259,200 in 2008.

Loss from Operations: Loss from operations for the nine months ended April 30, 2009 was $ 1,679,823, a decrease of $248,512 or 13% from the loss from operations in 2008 of $1,928,335 as a result of the aforementioned decrease in sales and administrative expenses.

Other Income and Expense: Total other income of $785,702 for the nine months ended April 30, 2009 represents a decrease of $1,228,159 from the expense of $442,457 in 2008 as a result of a higher income from derivative instrument income for the period due to a decrease in derivative instrument liabilities caused by higher stock prices.

Net Loss: Net loss of $894,121 for the nine months ended April 30, 2009 was $1,476,671 lower than the net loss of $2,370,792 for the same period in 2008 due to the increase in income from derivative instruments.

Liquidity and Capital Resources

As of April 30, 2009, we had a working capital deficit of approximately $9,141,761, and cash of $69. 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).

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