Wellstar International, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - CERTIFICATION - Wellstar International, Inc.	f10q0410ex31i_wellster.htm
EX-32.1 - CERTIFICATION - Wellstar International, Inc.	f10q0410ex32i_wellster.htm
EX-31.2 - CERTIFICATION - Wellstar International, Inc.	f10q0410ex31ii_wellster.htm
EX-32.2 - CERTIFICATION - Wellstar International, Inc.	f10q0410ex32ii_wellster.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: April 30, 2010

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

6911 Pilliod Road

Holland, Ohio 43528

(Address of principal executive offices)

419-865-0069

(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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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 o	Accelerated filer o

Non-accelerated filer o	Smaller reporting company x
(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 o No x

The number of shares of the registrant's Common Stock, $0.001 par value per share, outstanding as of May 20, 2010 was 1,670,358,234.

Table of Contents

		Page
Part I –	Financial Information
	Item 1. Financial Statements (unaudited)	1
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2
	Item 3. Quantitative and Qualitative Disclosures about Market Risk	11
	Item 4. Controls and Procedures	11
Part II –	Other Information
	Item 1. Legal Proceedings	12
	Item 1A. Risk Factors	12
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	12
	Item 3. Defaults upon Senior Securities	12
	Item 4. Removed and Reserved	12
	Item 5. Other Information	12
	Item 6. Exhibits	12
Signatures		13

PART I

FINANCIAL INFORMATION

WELLSTAR INTERNATIONAL, INC.

CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2010 AND 2009

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2010 AND 2009

CONTENTS

	PAGE

CONSOLIDATED BALANCE SHEETS	F-1, F-2

CONSOLIDATED STATEMENTS OF OPERATIONS	F-3

ONSOLIDATED STATEMENT OF CHANGES IN TOCKHOLDERS’ EQUITY (DEFICIT)	F-4

CONSOLIDATED STATEMENT OF CASH FLOWS	F-5, F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENT	F-7 to F-21

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

ASSETS

	April 30, 2010		July 31, 2009
	(Unaudited)		(Audited)

Current Assets:
Cash	$	176,044	$	29,564
Prepaid Expenses		-		5,186
Total Current Assets		176,044		34,750

Fixed Assets:
Imaging Equipment		829,169		802,169
Office Equipment and Fixtures		157,213		154,884
Subtotal		986,382		957,053

Less: Accumulated Depreciation		699,264		552,985
Net Fixed Assets		287,118		404,068

Intangible Assets:
Covenant Not To Compete		-		-
Manufacturing and Distribution Agreement		700,000		700,000
Subtotal		700,000		700,000

Less: Accumulated Amortization		554,770		459,577
Net Intangible Assets		145,230		240,423

Other Assets:
Loan Acquisition Cost (net of amortization of $333,802
@ 4/30/10, and $261,550 @ 7/31/09).
Software and Manuals (net of amortization of $51,674		188,723		110,645
@ 4/30/10, and $37,892 @ 7/31/09).		3,726		17,508
Security Deposit
Total Other Assets		-		4,525
		192,449		132,678
Total Assets
	$	800,841	$	811,919

See Accompanying Notes to Consolidated Financial Statements

F-1

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

LIABILITIES LESS SHAREHOLDERS’ DEFICIT

	April 30, 2010			July 31, 2009
	(Unaudited)			(Audited)

Current Liabilities:
Accounts Payable	$	673,699		$	616,537
Accrued Expenses		3,663,416			2,879,727
Note & Loan Payable - Other		63,382			63,382
Notes Payable		540,000			750,000
Derivative Instrument Liability - Loan		126,667			422,243
Derivative Instrument Liability - Convertible Notes		20,814,215			23,072,247
Convertible Debt		3,816,081			2,861,918
Total Current Liabilities		29,697,460			30,666,054

Long Term Liabilities:
Convertible Debt		2,382,967			2,697,938
Derivative Instrument Liability - Convertible Notes		11,744,802			20,564,516
Derivative Instrument Liability - Warrants		123			15,373
Total Long-Term Liabilities		14,127,892			23,277,827

Total Liabilities		43,825,352			53,943,881

Stockholders’ Deficit:
Preferred Stock
Series A, Authorized 100,000 Shares,
par value .001 per share
Issued and Outstanding Shares, 60,000	$	60		$	60
Paid in Surplus		59,940			59,940

Series B, Authorized 1,000,000 Shares,
par value .001 per share
Issued and Outstanding Shares, 200,000 Shares,		200			-
Paid in Surplus		199,800			-

Common Stock
Authorized 5,000,000,000 Shares, par value .001 per share
Issued Shares, 990,828,504 - Outstanding Shares,
990,813,504 (4/30/10) and 39,486,147 (7/31/09)		990,814			39,481
Paid in Surplus		2,739,956			2,914,448
Retained Earnings (Deficit)		(47,015,281	)		(56,145,891	)
Total Shareholders’ Deficit		(43,024,511	)		(53,131,962	)

Total Liabilities Less Stockholder’s Deficit	$	800,841		$	811,919

See Accompanying Notes to Consolidated Financial Statements

F-2

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months April 30,						Nine Months April 30,
	2010			2009			2010			2009

Income:
Revenue from Medical Imaging	$	- 0 -		$	- 0 -		$	- 0 -		$	- 0 -
Cost of Sales		- 0 -			- 0 -			- 0 -			- 0 -
Gross Profit (Loss)		- 0 -			- 0 -			- 0 -			- 0 -

Operating Expenses:
Selling, General and Administrative		336,999			451,540			1,018,491			1,390,579
Depreciation and Amortization		109,131			92,230			327,177			289,244
Total Operating Expenses		446,130			543,770			1,345,668			1,679,823

Loss from Operations		(446,130	)		(543,770	)		(1,345,668	)		(1,679,823	)

Other Expense (Income):
Interest Income		(52	)		(106	)		(233	)		(168	)
Interest Expense		222,220			127,039			585,827			377,163
Derivative Instrument, Net		16,691,012			(335,072	)		(11,388,572	)		(1,489,397	)
Delinquent Stock Registration Penalty		108,900			108,900			326,700			326,700
Total Other Expenses (Income)		17,022,080			(99,239	)	(10,476,278)			(785,702)

Income (Loss) before Provision for Taxes		(17,468,210	)		(444,531	)		9,130,610			(894,121	)
Provision for Taxes		-			-			-			-
Net Income (Loss)	$	(17,468,210	)	$	(444,531	)	$	9,130,610		$	(894,121	)

Net Income (Loss) Per Share, Basic and Diluted	$	(.04	)	$	- 0 -		$	.03		$	(.01	)

Weighted Average Number of Common Shares
Outstanding, Basic and Diluted		460,045,424			148,101,993			263,026,423			88,098,884

Note:

Effective January 15, 2010, the Company had a reverse split of their Common Shares of 100 - 1. The above average number of Common Shares Outstanding reflects the split. The three months and nine months ended April 30, 2009 have been restated to reflect the split.

See Accompanying Notes to Consolidated Financial Statements

F-3

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE NINE MONTHS ENDED APRIL 30, 2010



					Additional						Additional
	Preferred Stock				Paid in		Common Stock				Paid in			Accumulated
	Shares		Amount		Capital		Shares		Amount		Capital			Deficit			Total

Balance, July 31, 2009		60,000	$	60	$	59,940		39,481,147	$	39,481	$	2,914,448		$	(56,145,891	)	$	(53,131,962	)

Series B, Preferred		100,000		100		99,900												100,000

Series B, Preferred Additional Shares		100,000		100		99,900												100,000

Conversion of Debentures								951,332,357		951,333		(174,492	)					776,841

Net Income for the Period															9,130,610			9,130,610

Balance,		260,000	$	260	$	259,740		990,813,504	$	990,814	$	2,739,956		$	(47,015,281	)	$	(43,024,511	)

See Accountants' Report and Accompanying Notes to Financial Statements

F-4

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	Nine MonthsEnded April 30,
	2010			2009
Cash Flows from Operating Activities:
Net Income (LossZ)	$	9,130,610		$	(894,121	)
Adjustments to Reconcile Net Loss to Net Cash used
in Operating Activities:
Depreciation and Amortization		327,176			289,244
Delinquent Registration Penalty		326,700			326,700
Services Paid in Stock		200,000			551,372
Derivative Instrument Income, Net		(11,388,572	)		(1,489,397	)
Changes in Operating Assets and Liabilities:
Increase (Decrease) In:
Prepaid Expenses		5,186			40
Accounts Payable		57,162			(85,6780
Accrued Expenses		457,022			833,081
Net Cash Used in Operating Activities		(884,716	)		(468,759	)

Cash Flows from Investing Activities:
Purchase of Equipment and Furniture		(29,329	)		(344	)
Security Deposit - Reduction		4,525			-
Net Cash Used in Investing Activities		(24,804	)		(344	)

Cash Flows From Financing Activities:
Proceeds from Issuance of Convertible Notes		1,056,000			-
Note and Loans Payable - Other		-			50,382
Note Payable - Officer		-			49,680
Issuance of Stock for Cash		-			343,550
Net Cash Provided by Financing Activities		1,056,000			443,612

Net Decrease in Cash		146,480			(25,491	)

Cash at Beginning of Period		29,564			25,560
Cash at End of Period	$	176,044		$	69

Cash Paid for Interest	$	- 0 -		$	- 0 -

Cash Paid for Taxes	$	- 0 -		$	- 0 -

See Accompanying Notes to Consolidated Financial Statements

F-5

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED APRIL 30, 2010 AND 2009

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

1.	During the nine months ended April 30, 2010, convertible debentures in the amount of $776,841 were converted into 951,332,357 shares of Common Stock.

2.	During the nine months ended April 30, 2010, two officers were issued Series B Preferred Stock in lieu of salaries for a value of $200,000, no cash was expended.

3.	There was an assignment of Convertible Notes Payable of $210,000 from one Lender to new Lenders, which had no effect on cash.

4.	During the nine months ended April 30, 2009, convertible debentures in the amount of $293,194 were converted into 8,104,000 shares of Common Stock after reflecting a reverse split of 100-1 on January 15, 2010.

5.	2,300,653 shares of Common Stock after reflecting a reverse split of 100-1 in January 2010 was issued for services rendered in the nine months ended April 30, 2009. The amount was $551,372.

See Accompanying Notes to Consolidated Financial Statements

F-6

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

(UNAUDITED)

NOTE 1 Summary of Significant Accounting Policies and Organization

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. (“TMI”), it is developing and licensing the use of advanced thermal imaging technology.

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”).

Interim Condensed Consolidated Financial Statements

The consolidated financial statements as of and for the nine months ended April 30, 2010 and 2009 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 nine months ended April 30, 2010 and 2009 are not necessarily indicative of the results to be expected for the full year. The consolidated balance sheet information as of July 31, 2009 was derived from the audited consolidated financial statements included in the Company’s annual report Form 10-K for the year ended July 31, 2009. 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.

F-7

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

(UNAUDITED)

NOTE 1 Summary of Significant Accounting Policies and Organization (cont’d)

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.

f) Cash

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 nine months ended April 30, 2010 and 2009 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, 3 and 4) on the conversion of its convertible notes would have resulted in the issuance of additional common shares in the amount of $60,587,076,265, on April 30, 2010.

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.

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.

F-8

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

(UNAUDITED)

NOTE 1 Summary of Significant Accounting Policies and Organization (cont’d)

Derivative Instruments (cont’d)

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.

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 April 30, 2010. The Company does not anticipate non-performance by the financial institution.

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.

F-9

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

(UNAUDITED)

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 nine months ended April 30, 2010 and 2009 were $146,279 and $148,352, 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 4) 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 nine months for the original term of the Note Payable. Total amortization for the nine months ended April 30, 2010 and 2009 was $71,922 and $31,887, 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 ½ years for the manufacturing and distribution agreement. The total amortization expense for the nine months ended April 30, 2010 and 2009 was $108,976 and $109,005, respectfully.

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.

F-10

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 1 Summary of Significant Accounting Policies and Organization (cont’d)

p) Registration 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.

q) Long-lived Assets

Estimates of future cash flows used to test recoverability of long-lived assets shall be based on the existing service potential of the asset or asset group at the date it is tested. The testing will be done annually prior to July 31st, the Company’s fiscal year end, but will also be tested whenever events or changes in circumstances indicate that its carrying value may not be recoverable.

Management, in reviewing the value, is of the opinion that its carrying values of its imaging equipment are not higher than fair value to sell. It also is of the opinion that it’s exclusive Mikron Manufacture and Distribution Agreement which is at a carrying value below 50% of its cost three years ago, is a low value. Tests of its imaging equipment were completed by a major medical facility and have yielded positive results which management believes will have a beneficial effect on future revenue and cash flow.

NOTE 2 Convertible Notes

On September 5, 2008, The Company and AJW partners, LLC and it’s related entities amended their agreement related to all the notes, which are convertible, into shares of the Company’s Common Stock. The applicable percentage shall be 25% of the computed conversion price and the interest rate, as defined in each of the notes, shall be 13%. All other provisions, as amended from time to time, shall remain in full force and effect.

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% (amended to 13%) 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.

F-11

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 2 Convertible Notes (cont’d)

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) an amended 75% 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. The total shares available for conversion at April 30, 2010 were 50,582,810,815.

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. $270,500 of the $500,000 Notes issued August 8, 2006 have been sold to JMJ Financial by the holder in an agreement dated June 18, 2009 (See Note 4).

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% (amended to 13%) 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% (amended to 13%) 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.

F-12

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 2 Convertible Notes (cont’d)

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% (amended to 13%) 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 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 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% (amended to 13%) 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% (amended to 13%) 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.

F-13

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 2 Convertible Notes (cont’d)

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% (amended to 13%) 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.

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% (amended to 13%) 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% (amended to 13%) 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. On May 19, 2009, $76,000 of these notes were sold to JMJ Financial by the Holder (See Note 4).

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.

F-14

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 2 Convertible Notes (cont’d)

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% (amended to 13%) 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 accrued interest has been reclassified to a convertible note payable. The Callable Secured Convertible Note, dated August 29, 2008, in the amount of $235,113.84, bears interest at 2% (amended to 13%) 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% (amended to X 25%) = conversion price. All other terms are identical with the other Note.

On May 15, 2009, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $79,500 of 13% secured convertible notes due May 15, 2012.

The funds were advanced on May 15, 2009 in the amount of $79,500. 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 $ .045 for each trading day of the month. The notes are secured by all the assets and intellectual property of the Company.

On June 30, 2009, AJW Partners, LLC and its related entities (the Lender) issued the Company a new Note for all accrued unpaid interest from August 30, 2008 through June 30, 2009. The accrued interest has been reclassified to a convertible note payable. The Callable Secured Convertible Note, dated June 30, 2009 in the amount of $551,564.55 bears interest at 2% per annum, payable quarterly. The Note is due on June 30, 2012. 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 25% = conversion price. All other terms are identical with the other Notes.

F-15

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 2 Convertible Notes (cont’d)

On December 7, 2009, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $50,000 of 13% secured convertible notes due December 7, 2012.

The funds were advanced on December 7, 2009 in the amount of $50,000. 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 $ .00438 for each trading day of the month. The notes are secured by all the assets and intellectual property of the Company.

See Paragraph 2 of this note related to the terms of conversion. The total shares at April 30, 2010, 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 $1,367,974 was accrued through April 30, 2010.

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 5). The note holder’s have converted notes of $1,055,639 into 215,480,268 shares of Common Stock as of April 30, 2010 after reflecting a 100 - 1 reverse stock split. The balance of the notes are $4,841,799 at April 30, 2010. Interest due of $621,145 is included in Accrued Expenses.

The classification as short-term and long-term derivative instrument liabilities-convertible notes, derivative instrument liabilities warrants and convertible debt is based upon the due date of the notes and the date the warrants expire. Some of the notes have passed their due dates and others are due within one year; these are shown as current liabilities, the other are shown as long-term liabilities. The warrants are shown as long-term as the expiration dates are over one year.

NOTE 3 Notes Payable

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.

F-16

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 3 Notes Payable (cont’d)

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 $43,325 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 - April 30, 2010 $150,000

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 April 30, 2010, 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.

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 April 30, 2010, the note has not been paid.

At April 30, 2010, $267,290 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 April 30, 2010, 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 April 30, 2010 were 1,088,785,714. 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 5).

Balance due at April 30, 2010 $190,000

F-17

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 3 Notes Payable (cont’d)

On August 20, 2009, the Lender assigned $70,000 of its Notes Receivable to two individuals for $30,000 and $40,000 and assigned $80,000 in December 2009 to a company and an individual and $60,000 in March 2010 to a different company and individual. The Company accepted the assignment of the Notes and drew an agreement with the New Lenders, (see Note 3-E and Note 4).

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 was due with accrued interest on or before the 180th 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 365th day following the date of the note.

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 $141,170 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 April 30, 2010 and through February 18, 2010, nothing has transpired.

Balance due at April 30, 2010

$200,000

F-18

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 3 Notes Payable (cont’d)

The Company has borrowed $16,912 from an unrelated party. The note is dated January 16, 2009, and was due on February 16, 2009 (maturity date). The note has an interest rate of 12% 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 the event of default, the lender, by notice given to the borrower, may declare the unpaid principal and accrued interest owing to be paid. The Company (borrower) has not received any demand for payment as of May 26, 2010. The note is included as a current liability in Notes and Loans Payable - Other in the amount of $16,912.

See Note 3(b), this Lender assigned $210,000 of his Notes Receivable to two individuals and two Companies and entered into an agreements with them. The Notes are convertible into the Company’s Common Stock and are being accounted for as Embedded Derivative Liabilities in accordance with EITF 00-19 and SFAS 133 (See Note 5). The Lenders have converted $184,540 of these Notes into 231,679,081 shares of Common Stock after reflecting a reverse split of 100 - 1 in January 2010. The Notes have an interest rate of 0.0% and mature August 20, 2011. Total shares available for conversion at April 30, 2010 are 153,710,000.

NOTE 4 Convertible Notes - Other

On June 18, 2009, JMJ Financial purchased $270,500 of certain Convertible Notes from AJW Partner and related entities (see Note 2). Through April 30, 2010, $270,500 of these Notes were converted to Common Stock. These Notes bear interest at 8% per annum. The Company has consented to the sale of these Notes. The Notes bear the same terms as in the hands of the seller, AJW Partners, and related entities. $5,334 is included in Accrued Interest at April 30, 2010.

Balance Due at April 30, 2010 $ - 0 -

The Company has entered into an agreement with JMJ Financial, the Lender, and the Company as the Borrower. They will loan to the Company the principal sum of $575,000 of which $75,000 has been recorded as a loan acquisition cost and is being amortized over 36 months. The loan has a 12% one time interest charge on the principal sum. No interest or principal payments are required until the maturity date three (3) years from the effective date (May 22, 2009). Both principal and interest may be included in conversion prior to maturity date. The conversion formula, the number of shares issued through conversion, is the conversion amount, divided by the conversion price which is 70% which was amended to 35% on March 9, 2010 of the lowest trading price in the 20 trading days previous to the conversion, as applied to the Company’s voting Common Stock. Prepayment of the loan is not permitted, unless approved by Holder.

F-19

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 4 Convertible Notes - Other (cont’d)

The Company entered into an additional agreement to borrow up to $1,150000 from JMJ Financial of which $150,000 has been recorded as a loan acquisition cost and is being amortized over 36 months. The interest rate will be 12% one time interest charge on the principal sum. No interest or principal payments are required until the maturity date, but both principal and interest may be included in the conversion prior to maturity. Maturity is three (3) years from the effective date (August 19, 2009). The loan is convertible into voting common stock of the Company. The conversion formula, the number of shares issued through conversion is the conversion amount, divided by the conversion price which is 70% amended to 35% on March 9, 2010 of the lowest trading price in the 20 trading days previous to the conversion. Prepayment of the loan is not permitted, unless approved by holder.

Balance Due at April 30, 2010 $1,331,789

In December 2009, this Lender was assigned a note of $40,000 from another lender (see Note 3 (b). The Lender converted $40,000 into Common Stock, there is a balance due as of April 30, 2010 is $- 0 -.

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 5). Total shares available for conversion on all Notes A, B & C above, are 8,761,769,736 at April 30, 2010.

NOTE 5 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.

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 April 30, 2010, 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 0.03% to 0.15%, based on constant maturity rates published by the U.S. Federal Reserve, applicable to the remaining life of the options or warrants.

F-20

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 5 Derivative Financial Instrument Liabilities (cont’d)

At April 30, 2010, the following derivative liabilities related to Common Stock options and warrants and embedded derivative instruments were outstanding (see Notes 2, 3 and 4):

	IssueDate	Expiry Date	No. of Warrants	Issued To	Exercise Price Per Share	Value - Issue Date	Value - April 30, 2010
	10/11/05 11/19/06 11/19/06 10/31/05 01/20/06 07/25/06 08/04/06 11/30/06 03/26/07 05/30/07 10/12/07 11/15/07 12/14/07 04/22/08	04/11/06 02/18/08 02/18/08 10/31/10 01/20/11 07/25/11 08/04/11 11/30/13 03/26/14 05/30/14 10/12/14 11/15/14 12/14/14 04/22/15	10,000 2,000 2,000 16,667 16,667 8,333 8,333 40,000 10,000 100,000 150,000 100,000 100,000 200,000	Thompson Thompson Thompson AJW Partners AJW Partners AJW Partners AJW Partners AJW Partners AJW Partners AJW Partners AJW Partners AJW Partners AJW Partners AJW Partners	$ .50 $ .10 $ .20 $ .50 $ .50 $ .50 $ .50 $ .08 $ .03 $ .02 $ .0001 $.0001 $.0001 $.0001	$ 41,526 3,845 2,276 169,629 81,321 146,197 102,816 158,741 25,433 163,409 179,353 39,649 24,000 17,540	$ 0 0 0 0 0 0 0 0 0 1 50 34 35 3

Fair value of derivative instrument liabilities for warrants

$1,155,735

$ 123

The number of shares have been adjusted to reflect the 100 - 1 reverse split.

F-21

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 5 Derivative Financial Instrument Liabilities (cont’d)

	Issue Date	Due Date	Note Amount	Instrument	Exercise Price Per Share	Value - Issue Date	Value - April 30, 2010
	10/11/05 10/31/05 01/20/06 07/25/06 08/04/06 11/30/06 03/26/07 05/30/07 10/12/07 11/15/07 12/14/07 12/31/07 04/22/08 06/12/08 08/29/08	04/11/06 10/31/08 01/20/09 07/25/09 08/04/09 11/30/09 03/26/10 05/30/10 10/12/10 11/15/10 12/14/07 12/31/10 04/22/11 06/12/11 08/29/11	$ 400,000 1,000,000 1,000,000 500,000 500,000 400,000 165,000 435,000 175,000 325,000 315,000 427,760 190,000 135,000 235,114	Loan Convertible Notes Convertible Notes Convertible Notes Convertible Notes Convertible Notes Convertible Notes Convertible Notes Convertible Notes Convertible Notes Convertible Notes Convertible Notes Convertible Notes Convertible Notes Convertible Notes	Various Various Various Various Various Various Various Various Various Various Various Various Various Various Various	$ 370,189 2,681,204 1,363,058 791,994 616,127 523,047 274,500 825,801 711,289 465,052 631,254 894,835 569,394 555,374 875,919	$ 126,667 0 5,143,135 2,723,077 1,249,892 1,851,692 179,723 2,113,660 957,544 1,780,468 1,728,778 2,349,192 631,314 750,882 1,316,905

Fair value of bifurcated embedded derivative instrument liabilities carry forward

$12,149,037

$22,902,929

F-22

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 5 Derivative Financial Instrument Liabilities (cont’d)

	Issue Date	Due Date	Note Amount	Instrument	Exercise Price Per Share	Value - Issue Date	Value - April 30, 2010
Carry Forward	05/15/09 06/30/09 08/04/06 05/27/09 08/20/09 12/07/09 08/19/09	05/15/12 06/30/12 08/04/09 05/27/12 08/20/11 12/07/12 08/19/12	$ 79,500 551,565 270,500 575,000 70,000 50,000 921,/846	Convertible Notes Convertible Notes Convertible Notes Convertible Notes Convertible Notes Convertible Notes Convertible Notes	Various Various Various Various Various Various Various	$12,149,037 79,500 551,565 270,500 575,000 70,000 177,486 921,846	$22,902,929 455,684 3,173,103 0 1,774,586 105,740 291,320 3,982,322

Fair value of bifurcated embedded derivative instrument liabilities

$14,794,934

$32,685,684

Total derivative financial instruments

$15,950,669

$32,685,807

F-23

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 6 Accrued Expenses

The following are the components of Accrued Expenses:

	Apr. 30, 2010		July 31, 2009

Penalties - Registrations	$	1,476,874	$	1,150,174
Interest on Debt		1,078,264		495,313
Payroll and Payroll Taxes		1,099,189		1,222,486
Professional Fees		8,600		10,000
Accrued Trade Payables		489		1,754
	$	3,663,416	$	2,879,727

NOTE 7 Stockholders’ Equity (Deficit)

The following resolutions were duly adopted by the Board of Directors of the Corporation by unanimous written consent on September 10, 2009:

WHEREAS, the Board of Directors is authorized within the limitations and restrictions stated in the Articles of Incorporation of the Corporation, to provide by resolution or resolutions for the issuance of 10,000,000 shares of Preferred Stock of the Corporation, in such series and with such designations and such powers, preferences, rights, qualifications, limitations and restrictions thereof as the Corporation’s Board of Directors shall fix by resolution or resolutions providing for the issuance thereof duly adopted by the Board of Directors; and

WHEREAS, it is the desire of the Board of Directors of the Corporation, pursuant to its authority as aforesaid, to designate the terms of the Series B Preferred Stock and the number of shares constituting such series;

NOW, THEREFORE, BE IT RESOLVED, that the certificate of designation for the Series B Preferred Stock of the Corporation be amended and restated in its entirety as follows:

(1)

Designation and Authorized Shares. The Corporation shall be authorized to issue 1,000,000 shares of Series B Preferred Stock, par value $.001 per share (the “Series B Preferred Stock”).

(2)

Stated Value. The stated value of each issued share of Series B Preferred Stock shall be deemed to be $1.00 (the “Stated Value”).

F-24

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 7 Stockholders’ Equity (Deficit) (cont’d)

(3)

Voting. Except as otherwise expressly required by law, each holder of Series B Preferred Stock shall be entitled to vote on all matters submitted to shareholder of the Corporation and shall be entitled to one hundred (100) votes for each share of Common Stock that each holder is entitled to receive upon conversion of the Series B Preferred Stock in full at the record date for the determination of shareholders entitled to vote on such matter or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited. The holders of shares of Series B Preferred Stock shall vote together with the holders of Common Stock on all matters.

(4)

Liquidation. The holders of Series B Preferred Stock shall not be entitled to receive any preference upon the liquidation, dissolution or winding up of the business of the Corporation, whether voluntary or involuntary, each holder of Series B Preferred Stock shall share ratably with the holders of the common stock of the Corporation.

(5)

Conversion. The holder of Series B Preferred Stock shall have the following conversion rights (the “Conversion Rights”):

5.1

Right to Convert. Each share of Series B Preferred Stock shall be convertible at the option of the Holder thereof, at any time and from time to time from and after the Original Issue Date into that number of shares of Common Stock determined by dividing the Stated Value by the Conversion Price. For purposes of this Section, the conversion price for the Series B Preferred Stock shall equal $0.001 (the “Conversion Price”).

On October 1, 2009, with the unanimous written consent of the Directors, the Chief Executive Officer John Antonio and the Vice President Ken McCopper, each converted $50,000 of accrued salary owed to them into shares of the Company’s Series B Preferred Stock. Each received 50,000 shares of Series B Preferred Stock, par value $.001 per share, $1.00 stated value.

On October 2, 2009, the Company amended its Certificate of Incorporation to increase its authorized shares of common stock from 10 billion to 20 billion. The increase amendment was approved by the Board of Directors as well as the Shareholders holding a majority of the issued and outstanding voting shares of the Company.

F-25

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 7 Stockholders’ Equity (Deficit) (cont’d)

The Board of Directors has adopted a resolution pursuant to NRS 78.209, of Nevada Regulations and have obtained required approval of the Stockholders. The number of shares of Common Stock authorized 20,000,000,000 par value .001 per share is changed to 200,000,000 shares of Common Stock, par value .001 per share. One share of Common Stock shall be issued after the exchange for each 100 shares of Common Stock issued. This is effective January 15, 2010.

Effective January 21, 2010, by a vote of a majority of the outstanding shares the Company is hereby authorized and directed to amend the Articles of Incorporation to increase the Company’s authorized shares of Common Stock from 200,000,000 shares to 5,000,000,000 shares. This was done and effective January 21, 2010.

On January 19, 2010, with the unanimous written consent of the Directors, the Chief Executive Officer, John Antonio, and the Vice President, Ken McCopper, each converted $50,000 of accrued salary owed to them into shares of the Company’s Series B Preferred Stock. Each received 50,000 shares of Series B Preferred Stock, par value $.001 per share, $1.00 stated value.

NOTE 8 Derivative Instruments Income, Net

Derivative instruments income of $11,388,572 represents the net unrealized (non-cash) change during the nine months ended April 30, 2010, 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 9 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 loss of $2,257,962 before derivative income of $11,388,572 and a negative cash flow from operations of $884,716 for the nine months ended April 30, 2010, negative working capital of $29,521,416, and a stockholders’ deficiency of $43,024,511 at April 30, 2010.

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.

F-26

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF APRIL 30, 2010

NOTE 9 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.

NOTE 10 Subsequent Events

AJW Partners, LLC and related entities converted a portion of their notes (See Note 2) into 267,704,800 shares of Common Stock during the period May 1, 2010 through June 15, 2010. During the same period, JMJ Financial converted a portion of their notes in 671,500,000 shares of Common Stock (see Note 4).

On May 5, 2010, the Company entered into a loan agreement with a different outside party and borrowed $50,000 with interest at 8% per annum, and a maturity date of February 5, 2011. The lender may convert principal and interest in shares of the Company’s Common Stock at any time up to the maturity date. The conversion price is the average of the three (3) lowest trading prices for the Common Stock in the ten (10) trading days prior to conversion X 60%.

F-27

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". 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 10-K and other SEC filings.

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 International Inc. (“Wellstar”), through its 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 TMI System and to bring the TMI System to market. The company will initially focus is efforts on Hospitals and long term care facilities.

TMI currently has had their study completed at Duke University and the results have been submitted for publication. TMI has also started a Beta Test at a nursing home. The purpose of the Beta Test is to show the ease of use of the TMI system within the work environment. TMI has expanded their Beta Test to have an installation in a Long Term Acute Care Center.

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, 2010 compared to Quarter Ended April 30, 2009 (all references are to the Quarter Ended April 30)

Revenue: We did not have revenue during the quarters ended April 30, 2010 and April 30, 2009.

Cost of Sales and Gross Profit: There was no Cost of Sales for the quarters ended April 30, 2010 and April 30, 2009 as we did not generate revenue during these periods.

Operating, Selling, General and Administrative Expenses: Operating, selling, general and administrative expenses decreased by $97,640, or 18% in the 2010 third fiscal quarter to $446,130 from $543,770 in 2009. This decrease reflects a decrease in stockholder relations expenses by $45,975. In addition, salaries decreased by $98,200 from $225,000 to $126,800.

Loss from Operations: Loss from operations for the quarter ended April 30, 2010 was $446,130, a decrease of $97,640 or 18% from the loss from operations in the same period in 2009 of $543,770 as a result of the aforementioned decreases in operating, sales and administrative expenses.

Other Income and Expense: Total other expenses of $17,022,080 in the quarter ended April 30, 2010 represent an increase in other expenses of $17,121,319 from the income of $99,239 in 2009 as a result of a greater expense from derivative instrument expense for the period related to a increase in derivative instrument liabilities caused by a change in our stock prices.

Net Loss: Net loss of $17,468,210 for the quarter ended April 30, 2010 was $17,023,679 greater than the net loss of $444,531 for the same period in 2009 due to the greater amount of derivative instrument expense.

Liquidity and Capital Resources

It is Management’s opinion that the current financial position of the company is in dire straits and the Company will need to obtain additional funding to continue operations. The Company expects that it will be able to continue operating through July 2010. If the Company does not obtain financing at this time, it will be required to cease operations.

As of April 30, 2010, we had a working capital deficit of approximately $29,521,416, and cash of $176,044. We do not have the funds necessary to maintain our operations for the coming 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%. In addition to the outstanding principal, we also owe accrued interest in the amount of $267,290. 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 $43,325. 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 of $50,000 was received in August 2006. The secured convertible notes issued pursuant to our October 2005 through June 2008 Securities Purchase Agreements bear interest originally at 8% but increasing to 13% effective September 8, 2009, 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 75% 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 May 20, 2010, 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 $ .0006 and, therefore, the conversion price for the secured convertible notes was $ .00015. Based on this conversion price, the $4,841,799 outstanding principal amount of the secured convertible notes, excluding interest, were convertible into approximately 32,278,660,000 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.

To obtain additional funding for our ongoing operations, we entered into a loan agreement with JMJ Financial a loan in the principal sum of $ 575,000, of which $ 75,000 is a loan acquisition cost. The note provides for a one time 12% interest charge on the principal sum. The convertible note is convertible into our common stock, at the selling stockholders' option, at 70% of 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 July 31, 2009 the principal balance of the loan is $ 750,000.

On May 15, 2009, the Company entered into a Securities Purchase Agreement with AJW Partners, LLC ("Partners"), AJW Partners II, LLC ("Partners II "), AJW Master Fund, Ltd. ("Master"), AJW Master Fund II, Ltd. ("Master II") and New Millennium Capital Partners, II, LLC ("Millennium" and collectively with Partners, Partners II, Master and Maser II, the “Purchasers”) for the sale of 13% secured convertible notes in an aggregate principal amount of up to $79,500 (the "Notes"). The Purchasers closed on $22,000 in Notes on May 18, 2009.

The Notes bear interest at the rate of 13% per annum. Interest is payable monthly, unless the Company's common stock is greater than $0.045 per share for each trading day of a month, in which event no interest is payable during such month. Any interest not paid when due shall bear interest of 15% per annum from the date due until the same is paid. The Notes mature three years from the date of issuance, and are convertible into common stock, at the Purchasers' option, at the lesser of (i) $0.12 or (ii) a 75% discount to the average of the three lowest trading prices of the common stock during the 20 trading day period prior to conversion. The Notes contain a call option whereby, if the Company's stock price is below $0.045, the Company may prepay the outstanding principal amount of the Notes, subject to the conditions set forth in the call option. The Notes also contain a partial call option whereby, if the Company's stock price is below $0.045, the Company may prepay a portion of the outstanding principal amount of the Note, subject to the conditions set forth in the partial call option.

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

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

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

JMJ Financing

On May 22, 2009, the Company issued a Convertible Promissory Note to JMJ Financial (“JMJ”) in aggregate principal amounts of $575,000 (the “Initial JMJ Note”). In consideration for Wellstar’s issuing of the Initial JMJ Note, JMJ issued Wellstar a Secured and Collateralized Promissory Note in the principle amount of $500,000 (the “Initial Wellstar Note”).

In addition, on August 19, 2009 Wellstar issued a Convertible Promissory Note to JMJ in aggregate principal amounts of $1,150,000 (the “Second JMJ Note” and together with the Initial JMJ Note, the “JMJ Notes”). In consideration for Wellstar’s issuing of the Second JMJ Note, JMJ issued Wellstar a Secured and Collateralized Promissory Note in the principle amouns of $1,000,000 (the “Second Wellstar Note” and together with the Initial Wellstar Note, the “Wellstar Notes”).

The JMJ Notes bear interest at 12%, mature three years from the date of issuance, and are convertible into our common stock, at JMJ’s option, at a conversion price, equal to 70% of the lowest trade for our common stock during the 20 trading days prior to the conversion. Prior to the conversion of the JMJ Notes, JMJ must make a payment to Wellstar reducing the amount owed to Wellstar under the Wellstar Notes. As of May 20, 2010, the lowest trade for our common stock during the 20 trading days as reported on the Over-The-Counter Bulletin Board was $.0006 and, therefore, the conversion price for the JMJ Notes was $.00047. Based on this conversion price, the JMJ Notes in the aggregate amount of $1,3321,789, excluding interest, are convertible into 2,833,593,617 shares of our common stock.

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

The Wellstar Notes bear interest at the rate of 13.8% per annum and mature three years from the date of issuance. No interest or principal payments are required until the maturity date, but both principal and interest may be prepaid prior to Maturity Date. The Wellstar Notes are secured by units of STIC AIM Liquidity Portfolio Select Investment Select Investment Fund (the “JMJ Collateral”). On each of the Wellstar Notes, JMJ has agreed to pay down the principal of the Wellstar Notes commencing 210 days after the original issuance of the Wellstar Notes, however, JMJ may adjust the payment schedule within its sole discretion. In the event that JMJ defaults on the Wellstar Notes, Wellstar may take possession of the JMJ Collateral.

We presently do not have any additional 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

	Nine Months Ended April 30,
(In thousands)	2010			2009
Cash flow data:
Net cash (used in) operating activities		(885	)		(469	)
Net cash (used in) investing activities		(25	)		(0	)
Net cash provided (used) by financing activities		1056			444
Net increase (decrease) in cash and cash equivalents		146			(26	)
Cash and cash equivalents, beginning of period		30			26
Cash and cash equivalents, end of period		176			0

Operating Activities

Net cash used in operating activities for the nine months ended April 30, 2010 was $884,716, an increase of $415,957 from the same period in 2009 reflecting the change in operating expenses.

Investing Activities

Cash used in investing activities for the nine months ended April 30, 2010 was $24,804, an increase of $24,460 from the same period in 2009 representing an increase in the purchase of office equipment.

Financing Activities

Net cash provided by financing activities for the nine months ended April 30, 2010 was $1,056,000 as compared with $443,612 for the same period last year. The increase is attributed to the proceeds from the issuance of convertible notes.

As of April 30, 2010 the Company had cash and cash equivalents in the amount of $176,044 as compared with $69 at April 30, 2009.

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. On August 1, 2008, the company adopted SFAS 157, which did not have a material impact on its financial statements.

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 securities 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.

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of April 30, 2010, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported, within the time periods specified for each report and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls.

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

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

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.

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On May 5, 2010, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. ("Asher"), for the sale of an 8% convertible note in the principal amount of $50,000 (the "Note"). The financing closed on May 5, 2010.

The Note bears interest at the rate of 8% per annum. All interest and principal must be repaid on February 5, 2011. The Note is convertible into common stock, at Asher’s option, at a 40% discount to the average of the three lowest trading prices of the common stock during the 10 trading day period prior to conversion. The Note contains a prepayment option whereby the Company may make a payment to Asher equal to 150% of all amounts owed under the Note. The Company is required to provide Asher with 30 days notice of such prepayment.

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

Item 3. Defaults Upon Senior Securities.

None.

Item 4.Removed and Reserved

Not Applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

31.1	Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, promulgated pursuant to the Section 302 of the Sarbanes Oxley Act of 2002
31.2	Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as amended, promulgated pursuant to the Section 302 of the Sarbanes Oxley Act of 2002
32.1	Certificate of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certificate of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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 INTERNATIONAL, INC.

Date: June 21, 2010	By:	/s/ John Antonio
		John Antonio
		Chief Executive Officer


Date: June 21, 2010	By:	/s/ Howard Bielski
		Howard Bielski
		Chief Financial Officer

Wellstar International, Inc. - FORM 10-Q - June 21, 2010

Attached files

Wellstar International, Inc. Reports