- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
OR
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-53941

VIRTUAL MEDICAL INTERNATIONAL, INC.

(Formerly, QE Brushes, Inc.)

(Exact name of registrant as specified in its charter)

NEVADA

(State or other jurisdiction of incorporation or organization)

469 St. Pierre Road

Los Angeles, California 90077

(Address of principal executive offices, including zip code.)

(310) 470-2616

(Registrant’s telephone number, including area code)

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 last 90 days. YES [X] NO [ ]

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 (SS 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 [ ] NO [X]

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,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer	[ ]	Accelerated Filer	[ ]
Non-accelerated Filer	[ ]	Smaller Reporting Company	[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 [X] NO [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicated the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date 25,367,541 as of May 13, 2011 .

TABLE OF CONTENTS

			Page

	PART I.

Item 1.	Financial Statements.		3

		Balance Sheet (Unaudited)	F-1
		Statements of Expenses (Unaudited)	F-2
		Statements of Cash Flows (Unaudited)	F-3
		Notes to Financial Statements (Unaudited)	F-4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		9

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		10

Item 4.	Controls and Procedures.		10

	PART II.

Item 1A.	Risk Factors.		11

Item 6.	Exhibits.		11

Signatures			12

Exhibit Index			13

-2-

PART I. – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

VIRTUAL MEDICAL INTERNATIONAL, INC.
Formerly QE Brushes, Inc.
(A Development Stage Company)
Balance Sheet
(Unaudited)

		March 31,		December 31,
		2011		2010
ASSETS
CURRENT ASSETS
Cash	$	100	$	100
Total Current Assets		100		100
Other Assets
Investment in securities available for sale, (net of market
adjustment of $5,292,000)		504,000		1,176,000
Total Other Assets		504,000		1,176,000
Total Assets	$	504,100	$	1,176,100

LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable	$	6,860	$	21,661
Note payable - related parties		54,553		19,567
Total Current Liabilities		61,413		41,228

Stockholders' Deficit
Preferred stock, $.00001 par, 50,000,000 shares
authorized, 44,479,500 shares issued and outstanding		445		445
Common stock, $.00001 par, 250,000,000 shares authorized
25,367,541 and 11,140,000 shares issued and outstanding,
respectively		254		254
Additional paid-in capital		83,291,570		83,291,570
Accumulated other comprehensive (loss)		(5,292,000)		(4,620,000)
Deficit accumulated during the development stage		(77,557,582)		(77,537,397)

Total Stockholders’ Deficit		442,687		1,134,872

Total Liabilities and Stockholders' Deficit	$	504,100	$	1,176,100

The accompanying notes are an integral part of these unaudited financial statements.

F-1

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VIRTUAL MEDICAL INTERNATIONAL, INC.
Formerly QE Brushes, Inc.
(A Development Stage Company)
Statements of Expenses
(Unaudited)


						From Inception
						(July 19, 2007)
		Three Months Ended				Through
		March 31,				March 31,
		2011		2010		2011
OPERATING EXPENSES:
Legal fees	$	4,614	$	1,110	$	81,470
Accounting fees		8,555		3,500		53,931
Office expense				666		6,108
License and fees		7,016		2,003		12,924
Consulting				-		42,259,049
Travel				-		2,315
Product development costs				175		25,271
Loss on disposal of inventory				-		14,114
Total operating expenses		20,185		7,454		42,455,182

OPERATING LOSS		(20,185)		(7,454)		(42,455,182)

IMPAIRMENT ON LONG LIVED ASSET				-		(35,102,400)

NET LOSS BEFORE OTHER
COMPREHENSIVE LOSS		(20,185)		(7,454)		(77,557,582)

OTHER COMPREHENSIVE LOSS
Unrealized loss in investments
available for sale		(672,000)		-		(5,292,000)
Total comprehensive loss		(672,000)		-		(5,292,000)

NET COMPREHENSIVE LOSS	$	(692,185)	$	(7,454)	$	(82,849,582)

Weighted average number of shares		25,367,541		11,140,000

Basic net loss per share	$	-	$	-

The accompanying notes are an integral part of these unaudited financial statements.

F-2

-4-

VIRTUAL MEDICAL INTERNATIONAL, INC.
Formerly QE Brushes, Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)

									From Inception
									(July 19, 2007)
					Three Months Ended				Through
					March 31,				March 31,
					2011		2010		2011
Cash Flows From Operating Activities
	Net Loss			$	(20,185)	$	(7,454)	$	(77,557,582)
	Adjustments to reconcile net loss to net cash
		used in operating activities:
		Common stock issued for services			-		-		42,261,094
		Impairment of long lived asset			-		-		35,102,400
	Changes in assets and liabilities:
		Prepaid expenses			-				142
		Accounts payable			(14,802)		938		6,718
			Total Cash Used in Operating Activities		(34,986)		(6,516)		(187,228)

Cash Flows From Financing Activities
	Sale of common stock to founder				-		-		3,775
	Notes payable - related parties				34,986		-		54,553
	Proceeds from sale of common stock				-		-		129,000
			Total Cash Provided by Financing Activities		34,986		-		187,328

	Net Increase (Decrease) in Cash				-		(6,516)		100

	Cash at Beginning of Period				100		48,253		-

	Cash at End of Period			$	100	$	41,737	$	100

Supplemental Disclosure of Cash Flow Information
		Interest paid		$	-	$	-	$	31
		Income taxes paid		$	-	$	-	$	-

NON-CASH TRANSACTIONS
Asset purchase agreement				$	-	$	-	$	5,796,000
Mark to market AFSS				$	-	$	-	$	5,292,000
Acquisition of subsidiary				$	-	$	-	$	35,102,165

The accompanying notes are an integral part of these unaudited financial statements.

F-3

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VIRTUAL MEDICAL, INTERNATIONAL

(FORMERLY QE BRUSHES, INC.)

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

The unaudited financial statements of Virtual Medical International, Inc. (hereafter referred to as “VMI” or the“Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Although certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended December 31, 2010, included in the Company’s Form 10-K.

The financial statements included herein reflect all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation. The results for interim periods are not necessarily indicative of trends or of results to be expected for the full year ended December 31, 2010.

Summary of Significant Accounting Policies:

Investments

The Company’s investments are considered available for sale instruments. The cost of securities sold is determined by the specific identification method. Net unrealized holding gains and losses are reported as accumulated other comprehensive income, a separate component of stockholders’ equity. Declines in the fair value of individual available-for-sale securities below their cost that are other than temporary, result in a write-down of the individual security to its fair market value. These write-downs are reflected in earnings as a realized loss on available-for-sale securities. Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or that management would not have the intent or ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value.

Reclassifications

Certain reclassifications have been made to prior period’s balances to conform to classifications used in 2011.

NOTE 2 — DESCRIPTION OF BUSINESS

Virtual Medical International, Inc., formerly known as QE Brushes, Inc. (the predecessor name of the corporation) was incorporated in Nevada on July 19, 2007, for the purpose of developing, manufacturing and selling toothbrushes designed specifically for dogs and cats. Subsequently, the board of directors and shareholders decided to change the business direction and the name of the company. On August 26, 2010, the name was officially changed to Virtual Medical International, Inc.

The Company plans to be in the business of medical education through the internet, and will seek to develop and or acquire websites that are designed to convey to patients the risks and benefits of medical treatments in an easy to understand, yet comprehensive fashion. By using these services, patients will be able to make more informed decisions regarding their care and treatment thereby decreasing risk of a misinformed malpractice suit against a physician or a hospital.

F-4

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VIRTUAL MEDICAL, INTERNATIONAL

(FORMERLY QE BRUSHES, INC.)

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

This decrease in risk will result in a decrease in the overall cost to malpractice liability insurance companies, which represent our primary compensation targets. The company also plans to create virtual waiting rooms where patients will be able to see physicians online twenty four hours a day.

NOTE 3 — GOING CONCERN

The company has incurred net losses from the date of inception (July 19, 2007) through March 31, 2011, and has not generated any revenue. Currently the company has minimal cash and will have to raise additional capital through the sale of equity securities.

These conditions and uncertainties raise substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if VMI is unable to continue as a going concern.

NOTE 4 — STOCKHOLDERS’ EQUITY

On March 18, 2010, the Company adopted a two-for-one forward stock dividend, which increased the outstanding common stock from 6,695,000 shares as of December 31, 2009 to 13,390,000 shares. Immediately after, or in conjunction with the forward stock dividend, four directors and a consultant returned a total of 2,250,000 shares to the company for cancellation. The return of these shares resulted in a new balance of 11,140,000 common shares outstanding as of March 31, 2010.

On July 7, 2010, management approved a one-for-two reverse stock split which decreased the outstanding common stock from 11,140,000 shares as of March 31, 2010 to 5,532,500 shares.

On September 30, 2010, the Company issued 7,000,000 common shares and 2,000,000 shares of voting preferred, convertible (on a one to one basis), and restricted stock in exchange for 1,680,000 common shares of Entertainment Arts Research, Inc.(“EAR”), a Nevada corporation that trades on the over-the counter pink sheet market. This transaction was valued at $5,796,000 which was the fair value of the EAR shares received in the transaction.

On July 7, 2010, management approved the issuance of 5,000,000 common shares valued at $.40 per share to two individuals for consulting services.

On October, 2010, the Company issued 7,760,041 shares of common stock and 15,641,559 shares of voting preferred stock to Entertainment Arts Research, Inc. for 23,401,600 shares of common stock of Explain My Surgery, Inc. The transaction was recorded at a value of $35,102,400, which was at $1.50 per share.

On October 19, 2010, the Company also issued 26,837,941 shares of preferred stock for consulting services at a value of $1.50 per share.

F-5

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VIRTUAL MEDICAL, INTERNATIONAL

(FORMERLY QE BRUSHES, INC.)

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

The accumulated other comprehensive loss account was charged $672,000 for the decrease in value of the investment in securities available for sale (1,680,000 shares of common stock of Entertainment Arts Research, Inc.).

NOTE 5 — RELATED PARTY

The current CEO of VMI, Frank D’ Ambrosio owns a corporation (Explain My Surgery, Inc.) which has advanced VMI $19,567 through March 31, 2011. This amount bears no interest, is unsecured and due on demand. There was not a cash advance to VMI, rather Explain My Surgery, Inc. paid various invoices on behalf of VMI.

As of March 31, 2010, VMI borrowed $34,986 from two shareholders of the Company; Michael Stein advanced $4,000 and Nicholas D’Ambrosio advanced $30,986. These advances are unsecured, due on demand, and at 2% interest.

F-6

-8-

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This section of the quarterly report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results of our predictions.

We are a start-up corporation and have not yet generated or realized any revenues from our business operations. Our auditors have issued a going concern opinion on the financial statements for the year ended December 31, 2009. The Company cannot anticipate the commencement of revenue generation.

Results of Operations

During the three months ended March 31,2011, the company had no revenues and incurred operating expenses of $20,185, which were primarily legal, accounting and license fees. During the comparable three month period ended March 31, 2010, the Company also had no revenues and incurred operating expenses of $7,454, which primarily consisted of legal, accounting and license fees.

For the period ending March 31, 2011, the Company experienced an unrealized loss in investments available for sale in the amount of $672,000 as a result of a decline in the market value of the investment. There were no unrealized losses from investments for the period ending March 31, 2010.

Prior to December 2010, we were engaged in the business of manufacturing and selling toothbrushes specifically for use by pet owners to clean canine and feline mouths. We never generated any revenues from the sale of toothbrushes.

Financial Condition

Cash remained unchanged from December 31, 2010 to March 31, 2011 and has a balance of $100. Current operating expenses are paid through borrowings from a related party. Accounts payable decreased from $21,661 as of December 31, 2010 to $6,860 as of March 31, 2011. In order to pay current operating expenses, the Company borrowed $34,986 from a related party; shareholders of the Company. The Company also owns 1,680,000 shares of common stock of Entertainment Arts, Inc., which trades on the over-the-counter pink sheets. The market price of the stock was $.30 per share on March 31, 2011, which resulted in a market value of $504,000. The common stock of Entertainment Arts, Inc. is thinly traded and Virtual medical does not intend to sell this stock in the short-term.

Liquidity

The Company has limited capital resources and may have to rely upon the additional sale of equity securities in order to continue in business. There is no assurance that financing, whether debt or equity, will be available to the Company at any particular time, or could be obtained on terms satisfactory to the Company.

Our common stock is thinly traded on the Bulletin Board operated by the Financial Industry Regulatory Authority (FINRA).

Capital Resources

The Company owns no property or assets other than 1,680,000 restricted shares of common stock with a current market price of $504,000

-9-

Contractual Obligations

	Payments due by periods

Obligations	Total	Less than	1-3 Years	3-5 Years	More than
		1 year			5 years

Long-Term Debt Obligations	-0-	-0-	-0-	-0-	-0-
Capital (Finance) Lease Obligations	-0-	-0-	-0-	-0-	-0-
Operating Lease Obligations	-0-	-0-	-0-	-0-	-0-
Purchase Obligations	-0-	-0-	-0-	-0-	-0-
Other Long Term Liabilities	-0-	-0-	-0-	-0-	-0-
Total	-0-	-0-	-0-	-0-	-0-

Changes in Accounting Policies

We did not change our accounting policies during 2011 or 2010.

Off-Balance Sheet Arrangements

During the three months ended March 31, 2011, we did not have any off-balance sheet arrangements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 4. CONTROLS AND PROCEDURES.

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the 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. We conducted an evaluation (the “Evaluation”), under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) as of the end of the period covered by this report pursuant to Rule 13a-15 of the Exchange Act. Based on this Evaluation, our CEO and CFO concluded that our Disclosure Controls were not effective because of the identification of a material weakness in our internal control over financial reporting which is identified below, which we view as an integral part of our disclosure controls and procedures.

The material weakness relates to the monitoring and review of work performed by our limited accounting staff in the preparation of financial statements, footnotes and financial data provided to our independent registered public accounting firm in connection with the annual audit. More specifically, the material weakness in our internal control over financial reporting is due to the fact that:

-	The Company lacks proper segregation of duties. We believe that the lack of proper segregation of duties is due to our limited resources.

-	The Company does not have a comprehensive and formalized accounting and procedures manual.

-10-

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1A. RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 6. EXHIBITS

		Incorporated by reference
Exhibit	Document Description	Form	Date	Number	Filed herewith
3.1	Articles of Incorporation.	S-1	3/16/09	3.1

3.2	Bylaws.	S-1	3/16/09	3.2

4.1	Specimen Stock Certificate.	S-1	3/16/09	4.1

10.1	Consulting Agreement – Greg Ruff	8-K	9/16/10	10.1

10.2	Consulting Agreement – Robert Tassinari	8-K	9/16/10	10.2

10.3	Agreement with Entertainment Arts Research	8-K	9/16/10	10.1

10.4	Agreement with Entertainment Arts Research	8-K	12/10/10	10.1

31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X

31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X

32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X

32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X

99.1	Audit Committee Charter.	10-K	4/12/10	99.1

99.2	Disclosure Committee Charter.	10-K	4/12/10	99.2

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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities and Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 13 th day of May, 2011.

	VIRTUAL MEDICAL INTERNATIONAL, INC.
	(Formerly, QE Brushes, Inc.)
	(the “Registrant”)

	BY:	FRANCIS D’AMBROSIO
		Francis D’Ambrosio
		Principal Executive Officer

	BY:	DAVID HOSTELLEY
		David Hostelley
		Principal Financial Officer

-12-

EXHIBIT INDEX

		Incorporated by reference
Exhibit	Document Description	Form	Date	Number	Filed herewith
3.1	Articles of Incorporation.	S-1	3/16/09	3.1

3.2	Bylaws.	S-1	3/16/09	3.2

4.1	Specimen Stock Certificate.	S-1	3/16/09	4.1

10.1	Consulting Agreement – Greg Ruff	8-K	9/16/10	10.1

10.2	Consulting Agreement – Robert Tassinari	8-K	9/16/10	10.2

10.3	Agreement with Entertainment Arts Research	8-K	9/16/10	10.1

10.4	Agreement with Entertainment Arts Research	8-K	12/10/10	10.1

31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X

31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X

32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X

32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X

99.1	Audit Committee Charter.	10-K	4/12/10	99.1

99.2	Disclosure Committee Charter.	10-K	4/12/10	99.2