Attached files
file | filename |
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EX-10.19 - MedPro Safety Products, Inc. | v178504_ex10-19.htm |
EX-10.18 - MedPro Safety Products, Inc. | v178504_ex10-18.htm |
EX-10.12 - MedPro Safety Products, Inc. | v178504_ex10-12.htm |
EX-10.17 - MedPro Safety Products, Inc. | v178504_ex10-17.htm |
EX-31.2 - MedPro Safety Products, Inc. | v178504_ex31-2.htm |
EX-32.1 - MedPro Safety Products, Inc. | v178504_ex32-1.htm |
EX-32.2 - MedPro Safety Products, Inc. | v178504_ex32-2.htm |
EX-31.1 - MedPro Safety Products, Inc. | v178504_ex31-1.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the Fiscal Year Ended December 31, 2009
Commission
File Number 000-49768
MEDPRO
SAFETY PRODUCTS, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
91-2015980
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
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817
Winchester Road, Suite 200, Lexington, KY
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40505
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
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(859)
225-5375
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
None.
Securities
registered pursuant to section 12(g) of the Act:
Common
Stock, par value $0.001 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes ¨ No x
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 ¨
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 ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller
reporting company x
(Do not
check if a smaller reporting company.)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). Yes ¨ No x
As of
December 31, 2009, the aggregate market value of the registrant’s outstanding
common stock held by non-affiliates of the registrant was approximately $48,895,651.
As of
February 26, 2010, 13,215,311 shares of the
registrant’s common stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
PART
I
Preliminary
Note Regarding Forward-Looking Statements
This
report contains statements about future expectations, activities and events that
constitute forward-looking statements. Forward-looking statements are based on
our beliefs, assumptions and expectations of our future financial and operating
performance and growth plans, taking into account the information currently
available to us. These statements are not statements of historical fact. The
words “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,” “intend,”
“objective,” “seek,” “plan,” “strive” or similar words, or the negatives of
these words, identify forward-looking statements.
Forward-looking
statements involve risks and uncertainties that may cause our actual results to
differ materially from the expectations of future results we express or imply in
any forward-looking statements. In addition to the other factors discussed in
the “Risk Factors”
section of this report, factors that could contribute to those differences
include, but are not limited to:
|
§
|
Our
ability to fund development of our products and operations from third
party financing and cash flow from
operations.
|
|
§
|
A
highly competitive environment. New product introductions by our current
or future competitors could adversely affect our ability to compete in the
global market.
|
|
§
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The ability
of our competitors with greater financial resources to develop and
introduce products and services that enable them to compete more
successfully than us.
|
|
§
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The
continued service of key management
personnel.
|
|
§
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Our
ability to attract, motivate and retain qualified
employees.
|
|
§
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Changes
in government laws and regulations affecting the medical device industry,
sales practices, price controls, licensing and regulatory approval of new
products, or changes in enforcement practices with respect to any such
laws and regulations.
|
|
§
|
Difficulties
inherent in product development, including the potential inability to
successfully continue technological innovation, complete clinical trials,
obtain regulatory approvals in the United States and abroad, or gain and
maintain market approval of products, as well as the possibility of
encountering infringement claims by competitors with respect to patent or
other intellectual property rights, all of which can preclude or delay
commercialization of a product.
|
|
§
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Potential
litigation or other proceedings, including product liability and patent
infringement claims adverse to us.
|
|
§
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The
effects, if any, of adverse media exposure or other publicity regarding
our business, products or
operations.
|
|
§
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Product
efficacy or safety concerns resulting in product recalls, regulatory
action on the part of the FDA (or foreign counterparts) or declining
sales.
|
|
§
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Our
ability to maintain favorable supplier arrangements and relationships with
manufacturers and distributors of our
products.
|
Forward-looking
statements are not guarantees of performance or results. A forward-looking
statement may include a statement of the assumptions or bases underlying the
forward-looking statement. We believe we have chosen these assumptions or bases
in good faith and that they are reasonable. We caution you, however, that
assumptions or bases almost always vary from actual results, and the differences
between assumptions or bases and actual results can be material. When
considering forward-looking statements, you should keep in mind the risk factors
and other cautionary statements in this report. These statements speak only as
of the date of this report (or an earlier date to the extent applicable). We do
not intend to update these statements unless applicable laws require us to do
so.
1
Item
1. Business.
Overview
MedPro
Safety Products, Inc. has developed and acquired a portfolio of medical device
safety products incorporating proprietary needlestick prevention technologies
that deploy with minimal or no user activation. Our strategy focuses on
developing and commercializing our family of products in three related product
sectors: blood collection devices, syringes for the clinical healthcare market,
and intravenous devices. Our objective for each of our products is to enter into
a strategic agreement with one or more major medical product distribution firms.
We plan to continue to outsource the production of many of our products to
established medical safety device manufacturers while we pursue a strategy of
either developing or acquiring our own manufacturing capabilities.
One of
the most potentially deadly risks to health care workers is the transfer of
blood-borne pathogens such as hepatitis and HIV because of accidental
needlesticks. The International Sharps Injury Prevention Society reports that
one million needlesticks to health care workers are reported annually, a number
that may account for only one-third of the actual number of needlesticks
occurring each year. Put another way, each year there are 30 needlesticks for
every 100 beds in a U.S. hospital, according to the National Institute for
Occupational Safety and Health (NIOSH). An OSHA report estimates that 83% of
needlesticks would be preventable with effective safety technology.
The
Federal Needlestick Safety and Prevention Act of 2001 modified blood-borne
pathogen standards to require that occupational exposure control plans identify,
evaluate and make use of needle devices with built-in safety features and
needleless systems for withdrawing body fluids, accessing a vein or artery and
administering medications. Existing needle technology often either included no
safety features or required active safety activation by the health care worker.
The passage of this legislation spurred the development of more effective
needlestick prevention technology for use in clinical and other healthcare
settings.
Currently,
we have entered into two minimum volume distribution agreements for three blood
collection products. Our customer expects to commence delivery of the first of
these products during the second quarter of 2010. The automated assembly line
has been tested at the plant of the third party contractor who built the line,
and our quality personnel have visited the plant in Europe and have seen the
line in operation. The line is being disassembled and moved to the newly
completed manufacturing facility for reassembly, testing and validation. When
assembled, it will produce product for a verification and validation build for
final testing before the product is released to the market.
Our
offices are located at 817 Winchester Road, Lexington, Kentucky 40505 and our
telephone number is (859) 225-5375. Our website is http://www.medprosafety.com.
History
and Recent Reorganization
Our
company was originally incorporated in Kentucky in 1995 and changed its domicile
to Delaware in 1999. On December 28, 2007, in connection with a financing in
which we sold securities to institutional investors for $13 million, we
completed a business combination with Dentalserv.com (“DSRV” or “Dentalserv”), a
Nevada corporation with nominal assets and no active business, whose shares were
registered under the Securities Exchange Act of 1934, as amended. On that date,
the following transactions occurred concurrently:
|
·
|
The
5,625,550 shares of DSRV common stock then outstanding were combined into
approximately 1,406,400 common shares in a 1-for-4 reverse stock
split.
|
|
·
|
Our
predecessor MedPro Safety Products, Inc., a Delaware corporation, merged
into DSRV. The combined company issued 11,284,754 of its common shares to
former shareholders of our predecessor corporation in the merger and
593,931 common shares as a financial advisory
fee.
|
|
·
|
The
combined company, a Nevada corporation, changed its name from
“Dentalserv.com” to "MedPro Safety Products,
Inc."
|
|
·
|
Vision
Opportunity Master Fund, Ltd. (“VOMF”), a Cayman Island investment fund
that owned approximately 89.4% of the DSRV common stock before the merger,
and three other accredited investors purchased $13 million of newly issued
shares of a new series of Series A Convertible Preferred Stock (“Series A
Stock”) and warrants to purchase our common stock. We received
approximately $11.6 million in net offering proceeds from the sale of
these securities.
|
2
As a
result of these transactions:
|
·
|
The
combined company continues our historical business, which is developing
and marketing medical safety devices incorporating proprietary needlestick
prevention technology, as described in this
section.
|
|
·
|
The
management of our predecessor company became the management of the
combined company, and four persons designated by our predecessor company
became the board of directors of the combined
company.
|
On August
18, 2008, we amended the then outstanding Series J warrant to give VOMF the
right to purchase 1,493,779 shares of newly designated Series B Convertible
Preferred Stock ("Series B Stock") at a purchase price of $8.72. The original
Series J warrant had given VOMF the right to purchase 5,975,116 shares of common
stock at a purchase price of $2.18 no later than December 31, 2008. VOMF and its
affiliate Vision Capital Advantage Fund, LP ("VCAF", to whom VOMF transferred a
portion of its holdings in September 2008) exercised the J warrants in full in
September and October 2008, and we received $13,025,000 in cash for our issuance
of 1,493,779 shares of Series B Stock.
Each
share of Series B Stock converts into 4 shares of common stock, or 5,975,116
shares of common stock if all 1,493,779 shares of Series B Stock were converted.
The conversion ratio is subject to adjustment in the event of stock splits,
stock dividends, and similar changes to our common stock. The Series B Stock
ranks equal to our common stock, but ranks junior to the Series A Stock and to
our indebtedness. If we declare dividends, the Series B Stockholders will
receive dividends on a pro rata basis with the common stockholders. Upon
liquidation, dissolution or winding up of our company, the holder of Series B
Stock is entitled to an amount equal to the amount distributable per share of
common stock multiplied by the number of shares of common stock into which the
Series B Stock can be converted. The Series B Stock has no general voting
rights.
On March
27, 2009, we completed transactions in which VOMF and VCAF exercised a portion
of their Series C Warrants for cash totaling $3,000,000 and exchanged the
balance of their Series C Warrants plus all of their Series A and Series B
Warrants for shares of newly designated Series C Convertible Preferred Stock.
The two funds acquired 1,571,523 shares of Series C Stock as a result of the
warrant exercise and exchange.
Each
share of Series C Convertible Preferred Stock is convertible into 10 shares of
common stock, which ratio is subject to adjustment in the event of stock splits,
stock dividends, and similar changes to our common stock. The Series C Stock
ranks equal to our Series B Stock and common stock, but junior to the Series A
Stock and to our indebtedness. If we declare dividends, the Series C
Stockholders will receive dividends on a pro rata basis with the Series B
Stockholders and the common stockholders. Upon liquidation, dissolution or
winding up of our company, the holder of Series C Stock is entitled to an amount
equal to the amount distributable per share of common stock multiplied by the
number of shares of common stock into which the Series C Stock can be converted.
The Series C Stock has no general voting rights.
The
exchange of warrants for Series C Stock was the equivalent of a cashless
exercise of the warrants at an assumed market value of $13.00 per common share.
This transaction was intended to remove the uncertainty of the large overhang of
18,285,692 common shares issuable upon the exercise of the warrants. The warrant
exercise and exchange reduced the total common share equivalents issuable upon
the exercise of the warrants held by the two Vision Funds from 18,285,692 common
shares to 15,715,230 common shares. In addition, we received cash proceeds of
$3,000,000 from the exercise of a portion of the Series C warrants.
The
following table shows as of February 26, 2010, the ownership of our common stock
by our directors and officers as a group, the Series A Stockholders, and our
non-affiliate shareholders upon completion of the merger with DRSV and assuming
the conversion of all of the Series A Stock and the exercise of all warrants and
options for cash.
3
Shareholder
|
Common
Shares
|
Price
Per
Share
(1)
|
Aggregate
Exercise Price
|
Percentage
of
Common
Stock
|
||||||||||||
As
of February 26, 2010
|
||||||||||||||||
Directors
and executive officers of MedPro
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6,105,415 | 46.2 | % | |||||||||||||
Other
non-affiliate shareholders
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5,170,127 | 39.1 | % | |||||||||||||
Preferred
shareholders
|
1,939,769 | 14.7 | % | |||||||||||||
TOTAL
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13,215,311 | 100.0 | % | |||||||||||||
Assuming
conversion of all preferred stock and exercise of all warrants and stock
options for cash
|
||||||||||||||||
Directors
and executive officers of MedPro
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||||||||||||||||
Common
stock
|
6,105,415 | 12.9 | % | |||||||||||||
Other
warrants
|
130,023 | $ | 1.81 | $ | 235,342 | 0.3 | % | |||||||||
Options
(2)
|
2,827,922 | $ | 1.86 | 5,287,500 | 6.0 | % | ||||||||||
SGPF
earnout shares (3)
|
690,608 | 1.4 | % | |||||||||||||
20.6 | % | |||||||||||||||
Non-affiliate
shareholders
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||||||||||||||||
Common
stock
|
5,170,127 | 10.9 | % | |||||||||||||
Other
warrants
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578,435 | $ | 2.09 | 1,210,467 | 1.2 | % | ||||||||||
Employee
options (2)
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505,049 | $ | 2.42 | 1,220,987 | 1.1 | % | ||||||||||
13.2 | % | |||||||||||||||
Preferred
shareholders
|
||||||||||||||||
Common
stock
|
1,939,769 | 4.1 | % | |||||||||||||
Series
A Stock
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6,668,229 | 14.1 | % | |||||||||||||
Series
B Stock (4)
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5,975,116 | 12.6 | % | |||||||||||||
Series
C Stock (5)
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15,715,230 | 33.2 | % | |||||||||||||
A
Warrants
|
512,941 | $ | 1.81 | 928,423 | 1.1 | % | ||||||||||
B
Warrants
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512,941 | $ | 1.99 | 1,020,753 | 1.1 | % | ||||||||||
66.2 | % | |||||||||||||||
TOTALS
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47,331,805 | $ | 9,903,472 | 100.0 | % |
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(1)
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Represents
either the conversion price of the preferred stock, or the exercise price
of the warrants or options, as applicable on an average
basis.
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(2)
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Weighted
average exercise price of options awarded in 2008 and 2009. See
Item 11 Executive Compensation – Stock Option Awards and Note
12 of Notes to Financial
Statements.
|
|
(3)
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Issuable
if revenue received on products based on acquired technology exceeds
$5,000,000.
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(4)
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Represents
the common shares issuable upon the conversion of the 1,493,779 shares of
Series B Stock
|
|
(5)
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Represents
the common shares issuable upon the conversion of the 1,571,523 Series C
Stock.
|
4
Market
for Needlestick Prevention Products
Injectable
Drug Delivery
According
to Greystone Associates (‘Pre-filled Syringes February
2008’), there were a total of 19.3 billion injections worldwide in 2006.
Of these 27% are from safety syringes, 56% for the traditional syringe, 14% are
from pen injectors (the predominant insulin delivery system in most of the
world) and 3% other devices. The injectable drug market represents an
increasingly significant percentage of the pharmaceutical market, valued in
excess of $100 billion annually. It is one of the fastest-growing sectors of the
market, which pharmaceutical companies expect to generate an increasingly larger
percentage of revenues over the coming decade. Traditionally, injectable drugs
are supplied in vials that are administered via an IV or a standard syringe and
hypodermic needle. There has been a strong trend over the past two decades
towards the use of pre-filled syringes as a drug delivery device for therapeutic
drugs and vaccines.
The
Transition to Safety Products
The US
market for needle-based medical devices has been undergoing a widespread
transition to safety syringes over the past two decades. Currently 87% of the
acute care market for hypodermic syringes, 92% of specimen collection sets, and
94% of IV catheters include a safety feature. In the alternate care market,
two-thirds of the syringe market is safety syringes with even higher penetration
rates among the other devices. Europe is transitioning as well. Recent
legislation in the UK and Germany is likely the precursor to a rapid transition
to safety devices throughout the European Union, similar to the transition that
occurred in the US in the past 10 to 15 years. .
Several
factors have driven increased usage of safety syringes in the US. The
transmission of blood-borne diseases such as HIV-AIDS and Hepatitis C to
healthcare workers precipitated federal regulation that have spurred the
development of more effective needlestick prevention technology. Center for
Disease Control (“CDC“) guidelines led to Occupational Safety and Health
Administration (“OSHA”) regulations during the 1990’s. The Federal Needlestick
Safety and Prevention Act of 2001 further modified the OSHA blood-borne pathogen
(“BBP”) standards. The BBP standard required that occupational exposure control
plans identify, evaluate and make use of needle devices with built-in safety
features and/or needleless systems for withdrawing body fluids, accessing a vein
or artery and administering medications. Prior needle-based devices at the time
often included no safety feature or required active safety activation by the
healthcare worker. Together with the American Nursing Association (ANA) and
other organizations, MedPro lobbied for the introduction of the legislation
which also required healthcare providers to engage frontline healthcare workers
in the device evaluation process in order to better protect nurses from harm.
OSHA is now enforcing these standards with the threat of inspections and fines
for non-compliance.
Although
there has been widespread adoption of safety products, the technologies utilized
have not significantly eliminated sharp object injuries to healthcare workers.
The International Healthcare Worker Safety Center at the University of Virginia
has collected data on occupational exposures to blood borne pathogens from a
cumulative total of 84 hospitals in the U.S. since September 1992. Exposure data
from these healthcare facilities was collected on an annual basis, merged into
an aggregate database, and analyzed using Exposure Prevention Information
Network (“EPINet™”) reporting software. Although participating hospitals vary in
size, geographic location, and teaching status, the exposure patterns are
similar, suggesting a high degree of standardization among medical devices and
procedures. The number of injuries attributable to a specific type of device and
the aggregate census of the reporting facilities is published annually. The 2007
EPINet data shows 289 needlestick injuries from disposable syringes in survey
hospitals totaling a census of 3400 (30+% of the incidents). Grossing up the
reported incident rates for the national census of about 700,000 (a 60-80%
occupancy rate on 1MM licensed beds) equates to 51,000 to 68,000 injuries from
syringe use in hospitals. At an average cost of $3,000, that equates to $153 to
$204 million of
post-exposure testing and treatment expense, not to mention the personal and
emotional ramifications. The chart below shows the trend over time. Significant
improvement has been realized in IV catheters and specimen collection, beginning
around 2001, but other devices have had much less dramatic
progress.
5
Historic
Needlestick Injuries
($ in
millions)
1993-1998
|
1997
|
1999
|
2001
|
2003
|
2005
|
2007
|
||||||||||||||||||||||
Syringe
|
64,497 | 58,223 | 69,207 | 52,844 | 51,250 | 56,937 | 59,500 | |||||||||||||||||||||
IV
Catheter
|
13,213 | 11,520 | 12,857 | 5,309 | 6,866 | 5,946 | 5,559 | |||||||||||||||||||||
Blood
Collection Set
|
11,672 | 12,422 | 11,078 | 6,113 | 6,189 | 2,522 | 3,294 | |||||||||||||||||||||
Pre-filled
Syringe/Cartridge
|
6,551 | 6,731 | 4,513 | 4,102 | 2,417 | 3,964 | 5,559 | |||||||||||||||||||||
Winged
Needle Set
|
13,074 | 14,087 | 23,798 | 9,732 | 12,281 | 12,072 | 10,706 | |||||||||||||||||||||
5
Category Total
|
109,007 | 102,983 | 21,453 | 78,100 | 79,003 | 81,441 | 84,618 | |||||||||||||||||||||
Testing/Treatment
@$3,000
|
$ | 327 | $ | 309 | $ | 364 | $ | 234 | $ | 237 | $ | 244 | $ | 254 | ||||||||||||||
EPINet
Census Sample Size
|
10,087 | 5,118 | 8,703 | 7,239 | 3,885 | 3,900 |
* 12 yr
CAGR, 2.1% annual decline. US Hospital based injuries based upon per census bed
data, 700,000 national, extrapolated from International Healthcare Worker Safety
Center, University of Virginia. U.S. EPINet Needlestick and Sharps Injury
Surveillance Network.
Passive
Technology Evolution
Passive
technology shows significant promise in providing risk reduction in locations
where health care worker injuries and exposures continue to occur. Passive
safety technology requires no activation by the clinical user. Legacy safety
technologies integrate a safety accessory that acts as an engineering control to
prevent a needlestick injury after use, but they are only effective if activated
by the user.
In
addition to protecting caregivers from harm, infection practitioners are also
focusing on patient safety due to changes in reimbursement policies and
reporting requirements relating to as hospital acquired infections.
Historically, adoption of a safety device required trade-offs between providing
safety, requiring direct practitioner interaction and changing established
technique. To eliminate the need for these trade-offs, MedPro has established
functionality requirements including full passivity, very limited or no change
in user technique, and core feature equivalence (barrel clarity, needle
sharpness, breadth of line, etc.). We also position the pricing for our products
to be comparable to that of current safety devices and at expected margins for
strategic partners.
Targeted
Market Segments
MedPro
has assembled a broad portfolio of medical safety devices based on its patented
passive safety technology. Our plan over the next two to three years is to
commercialize eight products in our intellectual property portfolio in five
defined medication delivery and specimen collection product categories. We
estimate the targeted market for our products to be approximately 7 billion
units, with an estimated annual revenue potential of $3.0 billion, as shown in
the following table.
Estimated
Market for Targeted Product Sectors
($ in
millions)
Device Category
|
Strategic Partnership Plan
|
U.S.
|
EU
|
Rest of
World
|
Total
|
|||||||||||||
IV
Catheter
|
US
partners targeted
|
$ | 633 | $ | - | $ | - | $ | 633 | |||||||||
Pre-filled
Safety Syringes
|
Joint
development agreement with global partner in place
|
213 | 339 | 304 | 856 | |||||||||||||
Hypodermic
Syringes
|
U.S.
partners targeted
|
359 | 285 | - | 644 | |||||||||||||
Blood
Collection Sets
|
Six
year contract with a global manufacturer for US and EU.
|
367 | 290 | 175 | 832 | |||||||||||||
Transfer/Access
Devices
|
Six
year contract with a global manufacturer for US and EU.
|
32 | 25 | 15 | 72 | |||||||||||||
Total
|
$ | 1,604 | $ | 939 | $ | 494 | $ | 3,037 |
6
The
MedPro product portfolio focuses on four distinct market segments:
Hypodermic Safety
Syringes. Hypodermic syringes are
ubiquitous in all clinical settings. The total hypodermic syringe market in the
US is estimated at $359.1 million. Of this $122.5 million is in acute care
settings that have largely converted to safety products. Roughly 87% of acute
care use and 67% of alternate care use deploys some manner of safety feature,
all of which still require user activation.
The
hypodermic safety syringe market includes allergy, insulin (minus home
self-injectors), and TB syringes. The United States market is estimated at $220
million annually. There are an additional 1.5 billion insulin syringes used for
self-injection in the home, but these are excluded from the initial targeting
analysis since the safety benefit is of limited value for
self-injectors.
Pharmaceutical Pre-filled
Syringes. The trend over past 20 years
has been toward use of pre-filled syringes for injectable drugs such as
vaccines, anticoagulants and therapeutic proteins. Pre-filled glass syringes
typically range in volume from 0.5 milliliters to 3.0 milliliters as a result of
the product’s single use intent. Pre-filled syringes are 99.7% glass because of
drug stability and the potential for incompatible drug interactions with
plastic. Approximately 70% of pre-filled glass syringes have a pre-attached or
staked needle, and the remaining 30%, a luer slip or lock (no pre-attached)
needles. In February 2008, Greystone Associates estimated the annual world-wide
market for pre-filled syringe at $660 million and 2.6 billion units, with a
forecasted average annual growth rate of 13.7%. The pre-filled segment now
represents 28% of the global pharmaceutical market in terms of revenue and is
the fastest growing segment.
Several
factors are contributing to the increased use of pre-filled syringes as a
preferred method to administer injectable drugs.
|
·
|
Of
the 250 drugs currently under development by pharmaceutical companies, 70%
are expected to be injectable, making them prospects for a pre-filled
delivery device.
|
|
·
|
Forecasted
growth in the development of vaccines over the next decade, which are well
suited for pre-filled delivery.
|
|
·
|
Growing
emphasis on the use of self-administered injectable medications in the
home setting. This trend is increasing demand for medical devices that are
patient-friendly, cost-effective and reduce the risk of needlestick injury
incurred by caregivers and others who may come in contact with the device,
such as waste haulers.
|
|
·
|
Advantages
over traditional medicament packaging in storage vials. Use of a
pre-filled syringe eliminates several required steps before use of a drug
in a vial, thereby reducing the risk of medicament contamination and
infection. Pre-filled cartridges and syringes contain the exact
deliverable dose desired , reducing the chance medication errors and
waste. Less time spent handling the medication also lessens exposure to
contamination and improves productivity for the
administrator.
|
|
·
|
Office-based
physicians express a preference for pre-filled syringes over vials,
particularly for vaccines, noting that pre-filled syringes save staff
preparation documentation time and increase accuracy and patient
safety.
|
IV Catheter. The IV catheter
market in the United States is growing about 3% annually and has largely
converted to some form of safety product. The needlestick injury incident rate
in the 21st century has decreased by approximately half from the rate in the
1990’s. There are retractable designs already in the market. Despite the
prevalence of IV catheters with a safety feature currently in the marketplace,
2007 data from the University of Virginia’s International Healthcare Worker
Safety Center revealed approximately one catheter needlestick per 125 census
beds, which would equate to 5,000 to 6,000 annual injuries in hospital settings
alone.
7
In
addition to improvements in healthcare worker safety, emphasis on patient safety
is increasing due to reimbursement and reporting policies relating to hospital
acquired infections. MedPro plans to introduce two devices, both with a fully
passive retractable needle design, to address this concern. MedPro also plans to
release a premium product incorporating a bloodless start feature with extended
in-dwell time for greater patient safety and less need to replace the catheter
during an episode of care. This feature will prevent leakage from the device
following venous access prior to the connection of the accessories, thus
enabling clinicians to improve patient care in accordance with the Infusion
Nurses Society (INS) recommended guidelines.
Products
We have
several products under development for the blood collection, clinical healthcare
syringe, and intravenous device markets that we anticipate launching during the
next 24 months.
Blood
Collection Safety Needle
Our
Vacuette®1 Premium
Safety Needle System is a blood collection device that is formatted in two
separate models: tube-activated and skin-activated. The distinction relates to
the method in which the safety system, a sleeve that covers the needle after the
completion of blood collection, is engaged. The operator cannot draw blood
without having engaged the safety system. Both models have received FDA 510(k)
approval.
The
safety system on the “tube-activated” model will engage when the first blood
collection tube is fully inserted into the device and blood collection activity
initiates. The “skin activated” system will engage as soon as the needle is
inserted into the patient and the sleeve has interacted with the patient. Our
skin-activated model is considered “fully passive,” and we are not aware of any
other comparable fully passive blood collection device on the market. If the
skin-activated model is perceived by the market to be a premium product, it may
generate higher volumes and margins.
Winged
Safety Blood Collection Set
Our
Vacuette® Premium Winged Safety Blood Collection Set is used for infusion and
blood collection in the healthcare setting where patient comfort and ease of
venous access are paramount. It is a single use, sterile device designed with a
fully passive safety system that engages upon completion of access when the user
grips the wings and pushes them up. When the wings close to approximately 20
degrees, the safety guard automatically releases over the needle. The user then
removes the device from the patient’s skin with the needle fully covered by the
guard. The guard secures itself over the needle into a fully extended and locked
position covering the needle, preventing the wings from reopening, and
preventing any exposure of the contaminated sharp to the user. The user then
discards the device without ever having actively deployed the guard or touched
the needle. We expect to receive FDA 510(k) clearance for the winged blood
collection set during the fourth quarter of 2010.
We are
developing a needleless intravenous winged valve line that incorporates our core
technology into a collection system that will be very similar to current
conventional systems in both appearance and operation. The product has the
potential of being the only passive safety system on the market. The use of our
blood collection safety engagement system employs an intravenous system that is
both fully passive and engages in a manner familiar to the
operator.
Safety
Syringe with Anti-Blunting Feature
This
family of products involves anti-blunting technology coupled with safety syringe
sheathing to avoid needlestick injury. The anti-blunting feature allows a user
to draw medicament into a fillable safety syringe with an outer cannula covering
that protects the actual injection cannula from becoming blunted (or dull)
during the filling activity. It also protects the actual injection cannula from
potential contamination from the medicament container. The syringe will be
offered in both a fixed and removable needle models, and also with or without
the anti-blunting option.
1 Vacuette®
is a registered trademark of Greiner Bio-One International AG.
8
The
passive feature for both the fillable and pre-filled safety syringe uses a
safety system that activates automatically as medicament is injected into the
patient. The feature, a sheath that will completely cover the cannula as it is
removed from the patient, is deployed by the plunger as it is depressed and the
injection is initiated. The sheath will rest against the patient until the
syringe is removed, thus preventing any exposure of the contaminated sharp to
the user.
Prefilled
Safety Syringes
Our line
of safety syringes includes a model that can accept prefilled cartridges of
commonly used medicaments or specified dosage of medicaments in pharmaceutical
prefilled applications. Unique and specialty medicaments can also be offered
with the pre-filled safety syringe. These applications represent low volume,
high value, delivery systems for prefilled products. Anticipated product
development may provide a model that will be attractive to companies offering
higher volume pre-filled medicaments.
Our
patent pending design allows filling at standard contract cartridge filling
companies and with existing pharmaceutical companies in their existing
factories. The cartridge will act as both a medicament reservoir and the plunger
for our pre-assembled safety syringe. This design is fully compatible with
existing pharmaceutical manufacturing lines, avoiding any need to change
assembly processes.
The
entire line of safety syringes can create applications for more than 15 related
products that fill out this product line. The family of products includes a
number of different sizes, “blunts,” plungers, and other combinations of the
core technology.
Key-Lok
Needleless IV Systems Market
The
majority of needles used in the healthcare industry are used not for penetrating
the skin, but to deliver or withdraw fluids or medications from bottles,
ampoules, bags, intravenous administration sets or access ports. These are
referred to as “transfer needles.” Several companies have developed a system of
products designed to eliminate the use of sharp transfer needles. Today, in
excess of 85% of health care facilities report using needleless IV delivery
systems. We are well advanced in developing what we believe is a better
solution, with wide application and well positioned to compete with the current
market leading system.
In 2006,
we acquired rights to the technology for the Key-Lok Needleless IV System (KLS),
a latex-free blunt-cannula needleless (or needle-free) injection system. The
system operates like a conventional needle-based system in that it provides a
secure connection for a needle-safe medication delivery system. Designed to be
cost competitive with needle-based products, KLS has very few components
compared to the more complex needleless systems currently marketed.
We
believe that KLS will offer significant market advantages. It will enable health
care providers to administer medications free of unprotected needles,
essentially eliminating the likelihood of many accidental needlestick injuries,
while reducing cross contamination dangers and minimizing the occurrence of
latex-induced hypersensitivities or allergic reactions.
Contracts
Vacuette®
Blood Collection Products
On July
15, 2008, we entered into two agreements with Greiner Bio-One GmbH, a division
of Greiner Bio-One International AG, an international manufacturer and supplier
of medical products with locations in Austria, Germany, Hungary, United States
and Brazil, as well as a worldwide distribution network. The two agreements
grant the distributor the right to manufacture, market and distribute our three
Vacuette® blood collection products. Each agreement has a six-year term
extending from the commencement of initial commercial manufacturing of the
applicable product. The distributor agreed to pay us a production royalty per
unit on a minimum volume of units of each product over the term of the
agreements.
9
The
distributor is expected to produce a designated minimum number of units each
year during the first five years of the agreement, totaling 275 million units
for the five-year period. The distributor is obligated to pay us a production
royalty per unit, which decreases after 275 million units have been
manufactured. The distributor has the right to continue to manufacture the
products and pay the production royalty in year six. There will be no minimum
annual production requirement for year six if the distributor has not sold 275
million units during the first five years. The distributor will not have to pay
the applicable production royalty on units produced during year six until the
aggregate number of units produced for years one through six exceeds 275 million
and the minimum royalty on 275 million units has been paid to MedPro by the end
of the fifth year.
The
distributor also entered into an agreement with us for the exclusive right to
manufacture, market and distribute our winged safety blood collection set on
similar terms. The distributor is expected to produce a designated minimum
number of units each year during the first five years of the agreement, totaling
75 million units for the five-year period. The distributor has agreed to pay a
production royalty per unit and has the right to continue to manufacture the
products and pay the production royalty in year six. There will be no minimum
annual production requirement for year six if the distributor has not sold 75
million units during the first five years. The distributor will not have to pay
the applicable production royalty on units produced during year six until the
aggregate number of units produced for years one through six exceeds 75 million
and the minimum royalty on 75 million units has been paid to us by the end of
the fifth year.
As of the
date of this filing, the distributor has completion of the automation lines for
all three of our products at its new manufacturing plant in Rainbach, Austria.
As the owner of the intellectual property underlying the technology, certain
ongoing product design and enhancements will remain our responsibility and be
performed at our expense. We may build production and automation lines in the
future, but these agreements have not been negotiated at this
point.
Pre-Filled
Safety Syringe System
On March
8, 2010, we entered into a Joint Development Agreement with Helvoet
Pharmaceutical N.V. relating to the development and distribution of our
pre-filled passive safety syringe system. Headquartered in Alken, Belgium,
Helvoet is a worldwide manufacturer of rubber closures and aluminum and plastic
caps for pharmaceutical packaging, drug delivery and diagnostics. With more than
1,250 employees and five plants for rubber components and four plants for
aluminum and plastic caps in Europe and the United States, Helvoet produces over
12 billion parts per year. Helvoet is the pharmaceutical packaging division of
the Daetwyler Holding, Altdorf, Switzerland.
The joint
development agreement formalizes the relationship between MedPro and Helvoet and
establishes their respective responsibilities and contributions to the project.
The agreement provides that we will develop the safety syringe portion of the
pre-filled passive safety syringe system, and Helvoet will develop rubber
components for the product including determining the appropriate chemical rubber
formulation and component design for use with the medicament cartridge. The
agreement also establishes a general framework for formalizing the role of
additional participants in the project, including the responsibilities and
contributions required as a minimum standard for participation.
Product
Development
Since the
passage of the 2001 Needlestick Safety and Prevention Act, we have focused on
developing safety solutions employing inherent passive safety needles or
needleless replacements that require minimal or no user activation of the safety
mechanism. Our research and development approach has been to identify and
acquire leading edge technology with a view to developing medical device safety
products with significant commercial potential. We have obtained all of our
proprietary intellectual property, research and development through either
acquisitions or technology agreements with third party inventors.
The most
significant of our relationships is with Hooman Asbaghi, an inventor and
designer who has developed intellectual property for needlestick reduction
solutions across a wide range of applications. Mr. Asbaghi controls his
inventions from inception through product design and market release. He has also
assisted us from time to time in developing customer relationships in the
medical device industry.
10
In 2004,
we acquired the interest of Visual Connections, Inc., a San Diego, California
design and development firm controlled by Hooman Asbaghi, in patents related to
the Vacuette® passive safety blood collection system. MedPro or its predecessor
paid Visual Connections a total of $2,525,425 and agreed to pay royalty fees of
6% of net sales on products developed from this technology until the patents
expire, or a minimum royalty fee of $250,000 for the third through eighth years
of production if this amount is greater than 6% of net sales.
In 2007,
Visual Connections and Mr. Asbaghi entered into a similar agreement with SGPF
LLC, a company created by W. Craig Turner, our Chairman, CEO and largest common
shareholder. SGPF was established to acquire technology that we believed had
potential for successful commercialization. At the time, MedPro did not have the
financial resources to assume the risk of acquiring and holding the technology
until development could be completed, and also risked losing the opportunity to
other interested parties. Under the agreement, SGPF acquired the interest of
Visual Connections in five inventions underlying our anti-blunting safety
syringe and prefilled pharmaceutical products, including rights to the related
patent and patent applications (the “Blunt Technology”). Visual Connections
transferred its interest to SGPF upon payment of an initial transfer payment of
$250,000. SGPF also agreed to pay transfer payments totaling $2,750,000 in
installments over three years beginning in 2007 and a royalty of 5% on the first
$250,000 of adjusted gross sales of products using the Blunt Technology in any
calendar year, and 4% of the adjusted gross sales of such products for remainder
of the year.
MedPro’s
August 2007 agreement with SGPF provided that we would manage and direct the
development of the Blunt Technology and pay up to $375,000 towards development
costs with the objective of fully commercializing the Blunt Technology as
quickly as possible. We also obtained an option to acquire the Blunt Technology
from SGPF, which we exercised in September 2008. See “Item 13. Certain
Relationships and Related Transactions, and Director Independence – Technology
Development and Option Agreement.”
In June
2008, MedPro entered into an agreement with Visual Connections and Mr. Asbaghi
to acquire the patents, patent applications and related rights to the technology
underlying the Vacuette® Premium Winged Safety Blood Collection Set. Visual
Connections transferred its interest to us upon execution of the agreement, and
we paid an initial transfer payment of $250,000 shortly after we entered into
our agreement for the production and distribution of the product. We also agreed
to pay transfer payments totaling $1,250,000 in five quarterly installments,
which began in October 2008, as
well as a royalty of 4% of the adjusted gross sales of the product. The
agreement also grants us a right of first refusal to negotiate an agreement for
the rights to commercialize any additional Visual Connections products in the
future.
In
December 2009, MedPro entered into a consulting agreement with Advanced Medical
Technologies, Inc. (“AMT”), a newly formed corporation owned by Mr. Asbaghi. The
agreement provides that Mr. Asbaghi will assist us in connection with the
development of our products and gives us a first right of refusal to acquire
future medical device inventions by Mr. Asbaghi and AMT. The retainer for AMT is
$15,000 per month plus certain reimbursable expenses.
In
January 2010, MedPro obtained the right to acquire product development rights
for a fully passive safety intravenous catheter from Millaghi Medical, a company
in which Hooman Asbaghi owns a substantial interest. The product features a
fully passive retractable needle design incorporating a bloodless start feature
with extended in-dwell time for greater patient safety and less need to replace
the catheter during an episode of care. This feature is intended to prevent
leakage from the device following venous access prior to the connection of the
accessories, thus enabling clinicians to improve patient care in accordance with
the Infusion Nurses Society (INS) recommended guidelines. The agreement provides
that MedPro will make ten quarterly technology transfer payment of cash and
stock contingent upon obtaining financing. MedPro also agreed to pay a royalty
equal to a portion of the purchase price on each unit sold.
In
January 2010, MedPro obtained the right to the Insulin Guard self-injector from
Visual Connections. The fully passive safety system on the Insulin Guard
automatically encloses the contaminated end of the needle immediately after use,
thus protecting the patient, the patient’s family, and caregivers.
11
We may
also engage directly in research and product development activities in the
future. Our winged intravenous valve is based on an internally developed design.
We have no present plans to build an internal research and development function,
and our future in-house capabilities will likely depend upon opportunities to
add product development personnel through acquisitions or
otherwise.
Intellectual
Property and Licenses
We own or
hold rights to acquire intellectual property, including patents, patent
applications, technology, trade secrets, know-how, copyrights and trademarks in
the United States and other countries. As the result of several acquisitions and
technology agreements, we own or control the rights to eight issued patents and
five patent applications that cover our products. We have rights in both
domestic and foreign intellectual property. In the aggregate, these intellectual
property assets are of material importance to our business. However, we believe
that no single patent, technology, trademark, or intellectual property asset is
material in relation to our business as a whole.
The
following table shows the domestic patents we currently hold, as well as those
products for which we have filed a patent application.
MedPro’s
Patent Portfolio
Product
Reference
|
|
Application
Number
|
|
Patent/Publication
Number
|
|
Title
|
|
Application,
Publication or Issue
Date
|
Key-Lok
|
09/136,478
|
6,146,362
|
Needleless
IV medical delivery system
|
11/14/2000
|
||||
Vacu-Mate
|
08/632,010
|
5,688,241
|
Automatic
non-reusable needle guard
|
11/18/1997
|
||||
Vacu-Mate
|
09/336,405
|
6,379,336
|
Protection
device for injection or aspiration needle
|
4/30/2002
|
||||
Vacu-Mate
|
10/289,508
|
6,869,415
|
Safety
device for blood collection
|
3/22/2005
|
||||
Vacu-Mate
|
10/621,973
|
7,357,783
|
Safety
system for a blood collection device
|
4/15/2008
|
||||
Syringe
Guard
|
10/983,108
|
7,198,617
|
Passively
guarded, fillable injection syringe
|
4/3/2007
|
||||
Syringe
Guard
|
11/055,415
|
2006/0111679
|
Syringe
guard with selected needle configuration
|
5/25/2006
|
||||
Syringe
Guard
|
11/211,336
|
2007/0078403
|
Syringe
guard for pre-filled medicament vial
|
4/5/2007
|
||||
Syringe
Guard
|
|
11/422,851
|
|
2007/0287964
|
|
Hypodermic
needle tip protector
|
|
12/13/2007
|
Butterfly
|
10/434,717
|
6,840,920
|
Butterfly
needle with passive guard
|
1/11/2005
|
||||
Butterfly
|
10/978,614
|
7,144,387
|
Butterfly
needle with passive guard
|
12/5/2006
|
||||
Insulin
Pen
|
11/267,830
|
2007/0106225
|
Automatic
Needle Guard for Medication Pen
|
05/10/2007
|
||||
IV
Catheter
|
12/494,108
|
N/A
|
Safety
Catheter
|
06/29/2009
|
We have
conducted searches and reviewed prior art relating to the safety IV winged
collection set, the tube-activated blood collector, the skin-activated blood
collector, and the pre-filled safety syringe and believe we are free to use and
do not infringe any issued United States patent.
12
Competition
We
operate in the increasingly complex and challenging medical device marketplace.
Technological advances, federal regulations in the United States and some
foreign markets, and scientific discoveries have accelerated the pace of change
in medical technology, and the regulation of increasingly more sophisticated and
complex medical products is increasing. Companies of varying sizes compete in
the global medical technology field. Some are more specialized than us with
respect to particular markets, and some have greater financial resources than
us. New companies have entered the field, particularly in the areas of
safety-engineered devices and in life sciences, and established companies have
diversified their business activities into the medical technology area. Other
firms engaged in the distribution of medical technology products have become
manufacturers of medical devices and instruments as well. Acquisitions and
collaborations by and among other companies seeking a competitive advantage also
affect the competitive environment.
Becton
Dickinson and Covidien collectively represent over 80% of the hypodermic safety
syringe market with Retractable Technologies representing approximately a 10%
share. In the pre-filled syringe market, Becton Dickinson is the market leader
with an estimated $500 million in sales worldwide and 1 billion in units in
2004. With pharmaceutical companies now seeking to specialize in the
commercialization of drugs, it is expected that contract manufacturers will be
increasingly engaged to develop and fill these pre-filled syringes. Currently,
major pharmaceutical companies such as Sanofi-Aventis operate their own filling
lines. Small to medium sized companies typically enter into contracts with large
medical device companies such as Baxter Healthcare, Cardinal Health or Hospira
that have extensive contract manufacturing facilities across the US and Europe.
The trend toward combining functionality and packaging in drug delivery systems
will continue as new therapeutic substances are introduced at an increasingly
rapid rate.
A
company’s ability to compete in the medical device market depends on many
factors, including price, quality, innovation, service, reputation,
distribution, and promotion. To increase revenue growth by focusing on products
that deliver greater benefits to patients and medical professionals, and to
maintain an advantage in the competitive environment in which we operate, we
must continue to invest in research and development, quality management, quality
improvement, product innovation and productivity improvement. We will compete
against companies with substantially more financial resources to invest for
these purposes.
Suppliers
MedPro
has received a Certificate of Registration from BSI Management Systems to ISO
13485:2003. The scope of the certificate is the design and manufacture of single
use, sterilized blood collection devices. We are in the process of obtaining CE
Marking certification under the European Medical Device Directive 93/42/EEC,
which is required to distribute products in Europe.
Our
production strategy is to outsource the manufacturing of all our products to
reputable medical device manufacturers with well-established reputations in the
industry. Each of our current and prospective suppliers comply with Good
Manufacturing Practice (“GMP”) requirements under the U.S. Food, Drug and
Cosmetic Act and are ISO certified or meet equivalent applicable standards. We
believe that if the manufacturers with whom we currently contract were no longer
able to produce our products for any reason, there are sufficient other
manufacturers to allow use to make alternative production
arrangements.
We have
engaged Interplex Medical, LLC, an independent medical design, development and
assembly service provider based in Milford, Ohio, to assemble, package,
sterilize and deliver initial quantities of our Vacuette® tube-activated and
skin-activated blood collection products under our distribution agreements until
high volume production equipment can be fabricated to meet the expected annual
demand. We also expect to engage Interplex to design and manufacture an
automatic assembly system that will be capable of consistently producing our
blood collection products in compliance with product specifications, the federal
Food, Drug and Cosmetic Act, and all FDA requirements. We expect the system to
be capable of producing 22 million pieces annually when the line is at full
capacity. We currently anticipate the production line will be built by Greiner
at its plant in Austria.
13
Government
Regulation
FDA
and Other Regulatory Bodies
Medical
devices are subject to regulation by the FDA, state agencies and, in varying
degrees, by foreign health agencies that perform similar functions as the FDA
does in the United States. These regulations, as well as various federal and
state laws, govern the manufacturing, labeling, record keeping, clinical testing
and marketing of these products. The majority of our medical device product
candidates must undergo rigorous testing and an extensive government regulatory
approval process prior to sale in the United States and other countries. The
lengthy process of seeking required approvals and the continuing need for
compliance with applicable laws and regulations require the expenditure of
financial resources. Regulatory approval, when and if obtained, may be limited
in scope, which may significantly limit the indicated uses for which a product
may be marketed. Approved products and their manufacturers are subject to
ongoing review, and discovery of previously unknown problems with products may
result in restriction on their manufacture, sale or use, or their withdrawal
from the market.
Regulation
of Medical Devices
All of
our current products are medical devices intended for human use and are subject
to FDA regulation. Unless an exemption applies, each medical device we market in
the United States must have a 510(k) clearance or a Pre Market Approval (“PMA”)
in accordance with the Federal Food, Drug, and Cosmetic Act (21 U.S.C. § 310).
The FDA regulations generally:
|
·
|
set
standards for medical devices;
|
|
·
|
require
proof of safety and effectiveness prior to
marketing;
|
|
·
|
require
safety data and clinical protocol approval prior to evaluation in
humans;
|
|
·
|
establish
FDA-mandated current good manufacturing practices, or GMPs;
and
|
|
·
|
permit
detailed inspection of manufacturing
facilities.
|
These
regulations also require reporting of product defects to the FDA and prohibit
export of devices that do not comply with FDA regulations, unless the devices
comply with established foreign regulations and the FDA and the health agency of
the importing country determine export is not contrary to public health. FDA
regulation divides medical devices into three classes. Class I devices are
subject to general controls to preclude mislabeling or adulteration and require
compliance with labeling and other general requirements. Class II devices are
subject to special controls and must also comply with general controls. Class
III devices are subject to the most extensive regulation and in most cases
require submission to the FDA of a PMA application that includes information on
the safety and effectiveness of the device.
Products
marketed in the European Community must comply with the requirements of the
European Medical Device Directive (“MDD”) and be CE-marked. The CE Mark is the
European equivalent of FDA approval to market. Medical device laws and
regulations similar to those described above are also in effect in some of the
other countries to which we intend to export our products. These range from
comprehensive device approval requirements for some or all of our medical device
products to requests for product data or certifications. Failure to comply with
these domestic and international regulatory standards and requirements could
affect our ability to market and sell our products in these
markets.
Other
Regulations
We are
subject to various federal and state laws pertaining to health care fraud and
abuse, including anti-kickback laws and false claims laws. Anti-kickback laws
make it illegal to solicit, offer, receive or pay any remuneration in exchange
for, or to induce, the referral of business, including the purchase or
prescription of a particular product. The United States has published
regulations that identify “safe harbors,” or exemptions for certain payment
arrangements that do not violate the anti-kickback statutes. We seek to comply
with the safe harbors where possible. Due to the breadth of the statutory
provisions and the absence of guidance in the form of regulations or court
decisions addressing some of our practices, it is possible that our practices
might be challenged under anti-kickback or similar laws. False claims laws
prohibit anyone from knowingly and willingly presenting, or causing to be
presented for payment to third party payers (including Medicare and Medicaid)
claims for reimbursed products or services that are false or fraudulent, claims
for items or services not provided as claimed, or claims for medically
unnecessary items or services. Our activities relating to the sale and marketing
of our products may be subject to scrutiny under these laws. Violations of fraud
and abuse laws may be punishable by criminal and/or civil sanctions, including
fines and civil monetary penalties, as well as the possibility of exclusion from
federal health care programs (including Medicare and Medicaid).
14
Our
business has been and will continue to be subject to various other laws and
regulations.
Information
Technology
In the
first quarter of 2008, we acquired a fully integrated IT platform that will
enable us to fully and efficiently satisfy our sales and ordering processes
while generating the appropriate level of internal control. We have also engaged
a full service vendor responsible to data integrity, IT security, managed
network services, disaster recovery, offsite encrypted data storage, and support
of all voice and data communications, both internally and externally. The system
provides a high level of security, backup, and risk management that management
believes will significantly reduce the risk of IT failure and resultant negative
impact on operations.
Dependence
on One or a Few Major Customers
We
currently do not depend on any individual source of raw materials or
suppliers.
The
initial commercial shipment of one of our blood collection products will
initiate the obligation of Greiner Bio-One to purchase substantial minimum
quantities of the product from us, and the revenues generated from our
distribution agreement would be our principal source of revenue.
Employees
As of
February 28, 2009, we had thirteen employees. None of our employees are subject
to a collective bargaining agreement.
Reports
to Security Holders
We file
reports with the SEC including our annual report on Form 10-K, quarterly reports
on Form 10-Q, current event reports on Form 8-K and proxy statements, as well as
any amendments to those reports. The public may read and copy any materials the
Registrant files with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC at http://www.sec.gov.
Investors also may access our periodic reports and ownership reports of our
directors and executive officers on our website www.medprosafety.com.
Shareholders may also request a copy of our SEC reports at no cost by
telephoning us at (859) 225-5375 or by writing us at the following
address:
MedPro
Safety Products, Inc.
817
Winchester Road, Suite 200
Lexington,
KY 40505
Attention:
Marc T. Ray
15
Item
1A.
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Risk
Factors.
|
An
investment in our common stock involves a number of risks. You should carefully
read and consider the following risks as well as the other information contained
in this report, including the financial statements and the notes to those
financial statements, before making an investment decision. The realization of
any of the risks described below could have a material adverse affect on our
business, financial condition, results of operations, cash flows and/or future
prospects. The trading price of our common stock could decline due to any of
these risks, and you could lose part or all of your investment. The order of
these risk factors does not reflect their relative importance or likelihood of
occurrence.
Risks
Relating to Our Business
MedPro
has incurred substantial losses since inception. We may incur net losses in the
foreseeable future and may never become profitable.
Since
MedPro’s inception in 1995, it has incurred significant losses and negative cash
flows from operations. We incurred net losses of $3,282,599 in 2007 and
$6,539,566 in 2008. In 2009 we had a loss from operations of ($13,022,235). Net
income in 2009 was $8,376,273 after taking into account other income which
included a non-cash $21,603,185 gain on the reduction of derivative liabilities.
As of December 31, 2009, we had an accumulated deficit of ($56,951,866), which
was ($26,704,842) larger than at the end of 2008. This is primarily due to the
opening adjustment to the deficit from derivative liabilities required to be
booked at January 1, 2009 of ($35,081,114).
We
anticipate incurring additional losses for at least several more fiscal quarters
through 2011. We expect to spend significant resources over the next few years
to fund the development of our pipeline of potential products. To date, we have
derived only limited revenue from the sale of two products, both of which have
been discontinued. Our ability to generate revenues and become profitable will
depend on our ability to timely, efficiently and successfully develop and
commercialize more products. We may not ever become profitable. If we sustain
losses over an extended period of time, we may be unable to continue our
business.
We
will need substantial additional funding to develop our products and for our
future operations. If we cannot obtain the funds necessary to do so, we may be
required to delay, scale back or eliminate our product development or may be
unable to continue our business.
The
development of our products will require substantial funds to obtain regulatory
approvals and bring our products to market. Net cash used in operations was
$5,309,709 in 2009. During 2009, our cash decreased by $7,558,439 to $4,078,404
at December 31, 2009. We will need financing in addition to our current cash on
hand to maintain our present operations. Our future capital requirements will
depend on many factors, including:
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·
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the
progress and costs of our research and development programs, including our
ability to develop our current portfolio of medical safety products, or to
identify, acquire and develop new
ones;
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·
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the
time and cost involved in obtaining regulatory
approvals;
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the
cost of manufacturing our products;
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competing
technological and market
developments;
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our
ability to establish and maintain arrangements with third parties to
assist in bringing our products to market and the cost of such
arrangements;
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costs
associated with the integration of any new operation, including costs
relating to future mergers and acquisitions with companies that have
complementary capabilities;
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expenses
related to the establishment of sales and marketing
capabilities;
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the
level of our sales and marketing expenses;
and
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our
ability to introduce and sell new
products.
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We
anticipate we will need to raise additional funds to support our current
operations and future expansion and growth plans, and we may need additional
capital sooner than currently anticipated. Our funding requirements may change
as a result of many factors, including underestimates of budget items,
unanticipated cash requirements, delays in bringing our products to market,
future product and service opportunities, and future business
combinations.
16
We cannot
be certain that additional financing will be available on acceptable terms, or
at all. To the extent we raise additional capital through the sale of equity
securities; the ownership position of our existing stockholders could be
substantially diluted. If additional funds are raised through the issuance of
preferred stock or debt securities, these securities are likely to have rights,
preferences and privileges senior to our common stock. Fluctuating interest
rates could also increase the costs of any debt financing we may obtain. To the
extent we raise additional funds through collaboration and licensing
arrangements, it may be necessary to relinquish some rights to our products, or
grant licenses on unfavorable terms.
Failure
to successfully address liquidity requirements will have a material adverse
effect on our business. If we are unable to obtain additional capital on
acceptable terms when needed, we may be required to take actions that harm our
business and our ability to achieve cash flow in the future, including possibly
the surrender of our rights to some technologies or product opportunities,
delaying our clinical trials or curtailing or ceasing operations.
Our
future growth depends upon our ability to develop new products.
A
significant element of our strategy is to increase revenue by focusing on
products that deliver greater benefits to patients, healthcare workers and
researchers. The development of these products requires significant research and
development, significant financial resources, clinical trials and regulatory
approvals. The results of our product development efforts may be affected by a
number of factors, including our ability to innovate, develop, acquire and
manufacture new products, complete clinical trials, obtain regulatory approvals
and reimbursement in the United States and abroad, or gain and maintain market
approval of our products. In addition, patents obtained by others could preclude
or delay our commercialization of a product. None of our products now in
development or that we may seek to develop in the future may achieve
technological feasibility, obtain regulatory approval, or gain market
acceptance.
Even
if we receive regulatory approval for our products, those products may never be
commercially successful.
Even if
we develop medical safety products that obtain the necessary regulatory
approval, and we have access to the necessary manufacturing, sales, marketing
and distribution capabilities that we need, our success depends to a significant
degree upon the commercial success of those products. If our products fail to
achieve or subsequently maintain market acceptance or commercial viability, our
business would be significantly harmed because our future royalty revenue or
other revenue would depend upon sales of these products. Many factors may affect
the market acceptance and commercial success of our products,
including:
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the
timing of market entry as compared to competitive
products;
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the
rate of adoption of new medical safety products by hospital, clinics and
medical practitioners;
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convenience
and ease of administration;
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pricing;
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marketing;
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availability
of alternative products; and
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activities
by our competitors.
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We
will rely on third parties to manufacture our medical safety
products.
Our
business strategy relies on third parties to manufacture and produce our medical
safety devices in accordance with good manufacturing practices established by
the FDA, or similar regulations in other countries. Our products may compete
with other products or companies for access to these facilities and may be
subject to delays in manufacture if third parties give other products greater
priority than our products. These third parties may not deliver sufficient
quantities of our products, manufacture our products in accordance with
specifications, or comply with applicable government regulations. In addition,
if the manufactured products fail to perform as specified, our business and
reputation could be significantly harmed.
17
The
manufacturers on whom we will depend may not be able to successfully produce our
products on acceptable terms, or on a timely or cost-effective basis. They may
not be able to manufacture our products in accordance with our product
specifications or will meet FDA or other requirements. We must have sufficient
and acceptable quantities of our products to conduct our clinical trials and to
market, if and when the products have been approved by the FDA for marketing. If
we are unable to obtain sufficient and acceptable quantities of our products, we
may be required to delay the marketing and distribution of our products, which
would further delay our receipt of revenue. If our contract manufacturers are
not satisfying our needs, it could be difficult and very expensive to change
suppliers or to establish our own manufacturing capabilities. Any change in the
location of manufacturing would require FDA inspection and approval, which could
interrupt the supply of products and may be time-consuming and expensive to
obtain. If we are unable to identify alternative contract manufacturers that are
qualified to produce our products, we may have to temporarily suspend the
production of products, and would be unable to generate revenue from the sale of
products.
If
we do not comply with applicable regulatory requirements in the manufacture and
distribution of our products,
we may incur penalties that may inhibit our ability to commercialize our
products and adversely affect our revenue.
Our
failure or the failure of our potential third party manufacturers to comply with
applicable FDA or other regulatory requirements including manufacturing, quality
control, labeling, safety surveillance, promoting and reporting may result in
criminal prosecution, civil penalties, recall or seizure of our products, total
or partial suspension of production or an injunction, as well as other
regulatory action against us. Discovery of previously unknown problems with a
product, supplier, manufacturer or facility may result in restrictions on the
sale of our products, including a withdrawal of such products from the market.
The occurrence of any of these events would negatively impact our business,
results of operations and financial condition.
Product
defects could adversely affect the results of our operations.
The
design, manufacture and marketing of medical devices involve certain inherent
risks. Manufacturing or design defects, unanticipated use of our products, or
inadequate disclosure of risks relating to the use of the product can lead to
injury or other adverse events. These events could lead to recalls or safety
alerts relating to our products (either voluntary or required by the FDA or
similar governmental authorities in other countries), and could result, in
certain cases, in the removal of a product from the market. Any recall could
result in significant costs, as well as negative publicity that could reduce
demand for our products. Personal injuries relating to the use of our products
can also result in product liability claims being brought against us. In some
circumstances, such adverse events could also cause delays in new product
approvals. Any of the foregoing circumstances could have a material adverse
effect on our, financial condition or cash flows.
The
medical device industry is very competitive.
The
medical device industry is subject to rapid technological changes, and we face
significant competition across our product lines and in each market in which our
products are sold. We face this competition from a wide range of companies.
These include large medical device companies, which have greater financial and
marketing resources than MedPro. We also face competition from firms that are
more specialized than we are with respect to particular markets. Non-medical
device companies, including pharmaceutical companies, also offer alternative
therapies for disease states that may be delivered without a medical device. In
addition, some competitors have established manufacturing sites or have
contracted with suppliers located in China and other low-cost manufacturing
locations as a means to lower their costs. New entrants may also appear,
particularly in these low-cost countries.
The
development of new or improved products, processes or technologies by other
companies may make our products or proposed products obsolete or less
competitive and may materially adversely affect our earnings, financial
condition or cash flows.
18
Many
potential competitors, including those who have greater resources and experience
than we do, may develop
products or technologies that make ours obsolete or noncompetitive.
Many
companies are engaged in developing medical safety devices. Our future success
will depend on our ability to maintain a competitive position with respect to
technological advances. Technological developments by others may result in our
products and technologies becoming obsolete. Significant competitors include
Baxter International and Becton Dickinson. Most of our current and potential
competitors have substantially greater research and development capabilities and
financial, regulatory, manufacturing, marketing, sales, human resources, and
experience than we do. Many of our competitors have several products that have
already been developed, approved and successfully commercialized, or are in the
process of obtaining regulatory approval for their products in the United States
and internationally. Many of these companies have substantially greater capital
resources, research and development resources and experience, manufacturing
capabilities, regulatory expertise, sales and marketing resources, and
production facilities. Our competitors may succeed in developing technologies or
products that are more effective, safer, more affordable or more easily
commercialized than ours, and our competitors may obtain intellectual property
protection or commercialize products sooner than we do. Developments by others
may render our product candidates or our technologies obsolete. Our failure to
compete effectively would have a significant adverse effect on our business,
financial condition and results of operations.
Our
operations are subject to governmental regulation associated with the medical
safety device industry, the operation and enforcement of which may restrict our
ability to carry on our business.
The
development, manufacture, and marketing of products sold by us will be subject
to extensive regulation by various government agencies, including the U.S. Food
and Drug Administration and the U.S. Federal Trade Commission, as well as
various state and local agencies. These agencies regulate production processes,
product attributes, packaging, labeling, advertising, storage, and distribution.
These agencies establish and enforce standards for safety, purity, and labeling.
In addition, other governmental agencies (including the U.S. Occupational Safety
and Health Administration), establish and enforce health and safety standards
and regulations in the workplace. We will seek to comply at all times with all
such laws and regulations. We will also seek to obtain and maintain all permits
and licenses relating to our operations that are necessary so that our
facilities and practices comply with applicable governmental laws and
regulations. Nevertheless, there is no guarantee that we will be able to comply
with any future laws and regulations. Our failure to comply with applicable laws
and regulations could subject us to civil remedies including fines, injunctions,
recalls or seizures as well as potential criminal sanctions. As a result of such
regulations, we may encounter a variety of difficulties or extensive costs,
which could delay or preclude us from marketing our products or continuing or
expanding our operations. We cannot predict if all necessary approvals will be
granted or that if granted, any approval will be received on a timely basis. If
we do not obtain required approvals, or if those approvals are delayed, it may
also preclude us from marketing our products, or continuing or expanding our
operations.
We
cannot guarantee that any of our strategic acquisitions, investments or
alliances will be successful.
While our
strategy to increase revenue growth is driven primarily by development of
products based on technology we own or control, we will seek to supplement our
growth through strategic acquisitions, investments and alliances. Such
transactions are inherently risky. Any number of factors may affect the success
of any acquisition, investment or alliance including our ability to properly
assess and value the potential business opportunity or to successfully integrate
it into our existing business. There can be no assurance that any past or future
transaction will be successful or that the transaction will not materially
adversely affect our earnings, financial condition or cash flows.
Our
operations depend in part on patents and other intellectual property
rights.
Our
business relies on patent, trademark and other intellectual property rights.
While we do not believe that the loss of any one patent or other intellectual
property asset would materially affect our operations, these intellectual
property assets, in the aggregate, are of material importance to our business.
We can lose the protection afforded by these intellectual property assets
through patent expirations, legal challenges or governmental action. Patents
attained by competitors, particularly as patents on our products expire, may
also adversely affect our competitive position. The loss of a significant
portion of our portfolio of intellectual property assets may have a material
adverse effect on our earnings, financial condition, or cash flows.
19
Our
ability to compete in the medical device market may decline if we do not
adequately protect our proprietary
technologies.
Our
success depends in part on our ability to obtain and maintain intellectual
property that protects our technologies and our products, including rights we
have licensed. Patent positions may be highly uncertain and may involve complex
legal and factual questions, and we cannot predict the extent to which we may
enforce these claims against our competitors. It may be necessary or useful for
us to participate in opposition proceedings to determine the validity of our
competitors’ patents or to defend the validity of any of our or our licensor’s
future patents, which could result in substantial costs and would divert our
efforts and attention from other aspects of our business. In addition, patent
law outside the United States is uncertain and in many countries intellectual
property laws are undergoing review and revision. The laws of some countries do
not protect intellectual property rights to the same extent as domestic laws.
Therefore, the degree of future protection for our proprietary rights is not
certain, which could have a significant adverse effect on our business,
financial condition and results of operations.
Technologies
we license from others, or in-licensed technologies, are important to our
business. The scope of our rights under our licenses may be subject to dispute
by our licensors or third parties. Our rights to use these technologies and to
practice the inventions claimed in the licensed patents are subject to our
licensors abiding by the terms of those licenses and not terminating them. In
particular, we have agreed to use commercially reasonable efforts to develop and
commercialize some of our significant licensed technology. If we fail to comply
with those obligations, we may lose some of the rights that enable us to utilize
this technology, and our ability to develop products could be seriously
hampered.
In
addition, we may in the future acquire rights to additional technologies by
licensing rights from existing licensors or from third parties. Such in-licenses
may be costly. Also, we generally do not control the patent prosecution,
maintenance or enforcement of in-licensed technologies. Accordingly, we may not
be able to exercise the same degree of control over this intellectual property
as we could over internally developed technologies.
Disputes
concerning the infringement or misappropriation of our proprietary rights or the
proprietary rights
of others could be time consuming and extremely costly and could delay our
research and development
efforts.
Our
commercial success, if any, will be significantly harmed if we infringe the
patent rights of third parties
or if we breach any license or other agreements that we have entered into with
regard to our technology or business. We are not currently a party to any
litigation or any potentially adverse proceeding with regard to our patent or
trademark positions.
If we
become involved in litigation, interference proceedings, oppositions,
reexamination, protest or other potentially adverse intellectual property
proceedings as a result of alleged infringement by us of the rights of others or
as a result of priority of invention disputes with third parties, we might have
to spend significant amounts of money, time and effort defending our position
and we may not be successful. In addition, any claims relating to the
infringement of third-party proprietary rights or proprietary determinations,
even if not meritorious, could result in costly litigation, lengthy governmental
proceedings, divert management’s attention and resources, or require us to enter
into royalty or license agreements that are not advantageous to us. If we do not
have the financial resources to support such litigation or appeals, we may
forfeit or lose certain commercial rights. Even if we have the financial
resources to continue such litigation or appeals, we may lose. If we lose, we
may be forced to pay very substantial damages; we may have to obtain costly
license rights, which may not be available to us on acceptable terms, if at all;
or we may be prohibited from selling products that are found to infringe the
patent rights of others.
Uncertainties
resulting from initiation and continuation of any patent proceeding or related
litigation could harm our ability to compete and could have a significant
adverse effect on our business, financial condition and results of operations.
An adverse ruling arising out of any intellectual property dispute could
undercut or invalidate our intellectual property position. An adverse ruling
could also subject us to significant liability for damages, including possible
treble damages, prevent us from using technologies or developing products, or
require us to negotiate licenses to disputed rights from third parties. Although
patent and intellectual property disputes in the technology area are often
settled through licensing or similar arrangements, costs associated with these
arrangements may be substantial and could include license fees and ongoing
royalties. Furthermore, necessary licenses may not be available to us on
satisfactory terms, if at all. Failure to obtain a license in such a case could
have a significant adverse effect on our business, financial condition and
results of operations.
20
If
we acquire products, technologies or other businesses, we will incur a variety
of costs, may have integration
difficulties and may experience numerous other risks that could adversely affect
our business.
To remain
competitive, we may decide to acquire additional businesses, products and
technologies. We have limited experience in identifying acquisition targets,
successfully acquiring them and integrating them into our current
infrastructure. We may not be able to successfully integrate any businesses,
products, technologies or personnel that we might acquire in the future without
a significant expenditure of operating, financial and management resources, if
at all. In addition, future acquisitions could require significant capital
infusions and could involve many risks, including, but not limited
to:
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we
may have to issue convertible debt or equity securities to complete an
acquisition, which would dilute our stockholders and could adversely
affect the market price of our common
stock;
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an
acquisition may adversely affect our results of operations because it may
require us to incur large one-time charges to earnings, amortize or write
down amounts related to goodwill and other intangible assets, or incur or
assume substantial debt or liabilities, or it may cause adverse tax
consequences, substantial depreciation or deferred compensation
charges;
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we
may encounter difficulties in assimilating and integrating the business,
technologies, products, personnel or operations of companies that we
acquire;
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certain
acquisitions may disrupt our relationship with existing customers,
distributers or suppliers who compete with the acquired
business;
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acquisitions
may require significant capital infusions and the acquired businesses,
products or technologies may not generate sufficient revenue to offset
acquisition costs;
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an
acquisition may disrupt our ongoing business, divert resources, increase
our expenses and distract our
management;
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acquisitions
may involve the entry into a geographic or business market in which we
have little or no prior experience;
and
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key
personnel of an acquired company may decide not to work for
us.
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Any of
the foregoing risks could have a significant adverse effect on our business,
financial condition and results
of operations.
To
the extent we enter markets outside of the United States, our business will be
subject to political, economic,
legal and social risks in those markets, which could adversely affect our
business.
There are
significant regulatory and legal barriers in markets outside the United States
that we must overcome to the extent we enter or attempt to enter markets in
countries other than the United States. We will be subject to the burden of
complying with a wide variety of national and local laws, including multiple and
possibly overlapping and conflicting laws. We also may experience difficulties
adapting to new cultures, business customs and legal systems. Any sales and
operations outside the United States would be subject to political, economic and
social uncertainties including, among others:
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changes
and limits in import and export
controls;
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increases
in custom duties and tariffs;
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changes
in currency exchange rates;
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economic
and political instability;
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changes
in government regulations and laws;
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absence
in some jurisdictions of effective laws to protect our intellectual
property rights; and
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currency
transfer and other restrictions and regulations that may limit our ability
to sell certain products or repatriate profits to the United
States.
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Any
changes related to these and other factors could adversely affect our business
to the extent we enter markets
outside the United States.
21
We
may encounter difficulties managing our growth, which could adversely affect our
business.
Our
success will depend on the ability of our officers and key employees to continue
to improve our operational capabilities and our management information and
financial control systems, and to expand, train and manage our work force. We
are required to comply with Section 404(b) of the Sarbanes-Oxley Act of 2002
(“S-Ox”) for the first time in 2010. We are providing a management report in
compliance with S-Ox 404(a) on internal control over financial reporting in
connection with our annual report on this Form 10-K for the year ending December
31, 2009. If we are unable to successfully implement improvements to our
management information and financial control systems in an efficient and timely
manner, or if we encounter deficiencies in existing systems and controls, our
management may not have adequate information to manage our day-to-day operations
and our inability to manage our growth effectively could increase our
losses.
We
depend on our key personnel, and the loss of their services may adversely affect
our business.
We are
highly dependent upon the efforts of our senior management team. The death or
departure of any of our key personnel could have a material adverse effect on
our business. In particular, the loss of W. Craig Turner, our Chairman and Chief
Executive Officer, could significantly impact our ability to operate and grow
the business and could cause performance to differ materially from projected
results.
We
could face labor shortages which could slow our growth.
Our
success depends in part upon our ability to attract, motivate and retain a
sufficient number of qualified employees necessary to keep pace with our
expansion plans. Qualified individuals of the requisite caliber and number
needed to fill these positions are in short supply in some areas. Any material
increases in employee turnover rates could have a material adverse effect on our
business, financial condition, operating results or cash flows. Additionally,
competition for qualified employees could require us to pay higher wages to
attract sufficient employees, which could result in higher labor
costs.
We
may be sued for product liability, which could adversely affect our
business.
Because
our business strategy involves the development of commercial products and sale
of those products by us or our distribution partners, we may be sued for product
liability. We may be held liable if any product we develop and commercialize
causes injury or is found otherwise unsuitable during product testing,
manufacturing, marketing, sale or consumer use. In addition, the safety studies
we must perform and the regulatory approvals required to commercialize our
medical safety products, will not protect us from any such liability. We carry
product liability insurance. Currently, our coverage limits are $1 million per
event, $2 million annual aggregate coverage for both our products liability
policy. We also intend to seek product liability insurance for any approved
products that we may develop or acquire. However, if there are product liability
claims against us, our insurance may be insufficient to cover the expense of
defending against such claims, or may be insufficient to pay or settle such
claims. Furthermore, we may be unable to obtain adequate product liability
insurance coverage for commercial sales of any of our approved products. If our
insurance coverage is insufficient to protect us, our results of operations will
suffer. If any product liability claim is made against us, our reputation and
future sales will be damaged, even if we have adequate insurance
coverage.
Risks
Relating to Ownership of Our Common Stock
Our future operating results may
fluctuate and cause the price of our common stock to
decline.
We expect
that our sales and operating results will continue to fluctuate significantly
from quarter to quarter due to various factors, many of which are beyond our
control. The factors that could cause our operating results to fluctuate
include, but are not limited to:
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Our
ability to identify and acquire medical safety device safety technologies
with commercialization potential;
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22
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Our
ability to successfully develop and bring products to market, including
our success in obtaining regulatory approvals, outsourcing production to
reputable and capable manufacturers, and entering into profitable
distribution arrangements;
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Our
ability to generate and successfully increase sales of our products and
expand into new markets;
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Marketplace
acceptance of our products and the impact of
competition;
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Our
ability to obtain additional financing on satisfactory
terms;
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Our
ability to attract and retain qualified
employees;
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Changes
in the costs we pay; and
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Governmental
regulation associated with the medical safety products
industry.
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If our
sales or operating results fall below the expectations of investors or
securities analysts, the price of our common stock could significantly
decline.
The
price of our common stock is expected to be volatile and an investment in our
common stock could decline
in value.
We expect
the market price of our common stock to be highly volatile. The following
factors, in addition to other risk factors described in this report, and the
potentially low volume of trades in our common stock, may have a significant
impact on the market price of our common stock, some of which are beyond our
control:
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the
announcement of new products or services by us or our
competitors;
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quarterly
variations in our and our competitors’ results of
operations;
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changes
in earnings estimates or recommendations by securities
analysts;
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developments
in our industry;
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general
market conditions; and
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other
factors, including factors unrelated to our own operating performance or
the condition or prospects of our
industry.
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Further,
the stock market in general, and securities of small-cap companies in
particular, can experience extreme price and volume fluctuations. Continued
market fluctuations could result in extreme volatility in the price of our
common stock, which could cause a decline in the value of our common stock. You
should also be aware that price volatility might be worse if the trading volume
of our common stock is low.
We
cannot assure you that an active trading market for our common stock will
develop.
Since our
common stock is eligible for trading on the OTC Bulletin Board, our shareholders
may find it difficult to obtain accurate quotations of our common stock and may
experience a lack of buyers to purchase such stock or a lack of market makers to
support the stock price. We cannot assure you that an active trading market for
our common stock will develop. Accordingly, trades may occur very infrequently,
and holders of our common stock must assume they may have to bear the economic
risk of an investment in our common stock for an indefinite period of
time.
Our
common stock may be considered a “penny stock” and may be difficult to
sell.
The SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market or exercise price of less than $5.00 per share,
subject to specific exemptions. The market price of our common stock may drop
below $5.00 per share and therefore may be designated as a “penny stock”
according to SEC rules. This designation requires any broker or dealer selling
these securities to disclose certain information concerning the transaction,
obtain a written agreement from the purchaser and determine that the purchaser
is reasonably suitable to purchase the securities. These rules may restrict the
ability of brokers or dealers to sell our common stock and may affect the
ability of our stockholders to sell their shares.
23
A
significant number of the shares of our common stock have become eligible for
sale since January 4, 2009, and the sale of those shares could depress the
market price of our common stock.
The sale
of a significant number of shares of our common stock in the public market could
harm the market price of our common stock. On December 28, 2007, we issued
11,878,685 shares of common stock in connection with our merger with
Dentalserv.com. On that date we also completed a private placement to accredited
investors in which we issued convertible preferred stock and common stock
purchase warrants which could result in the issuance of up to an additional
32,488,380 shares of common stock in the future. As a result of warrant
exercises in 2008, we issued Series B Stock convertible into 5,975,116 shares of
our common stock. In March 2009, warrant holders exchanged their warrants to
purchase 19,311,547 shares of our common stock and $3,000,000 in cash for newly
issued Series C Stock convertible into 15,715,230 shares of our common stock. As
of February 26, 2010, our outstanding stock purchase warrants could be exercised
for up to an additional 1,734,340 shares of common stock in the
future.
Some or
all of the shares of common stock issued in connection with the merger or that
may be issued (in certain circumstances) upon the conversion of the preferred
stock or the exercise of the warrants may be offered from time to time in the
open market pursuant to Rule 144. As additional shares of our common stock
become available for resale in the public market pursuant to Rule 144 under the
Securities Act of 1933, this registration of the shares, and releases of lock-up
agreements, the supply of our common stock will increase, which could decrease
its market price. In addition, the holders of our preferred stock and stock
purchase warrants may offer the shares of common stock issuable upon the
conversion of the preferred stock or the exercise of the warrants. We also
completed a registration of 2,402,029 of our shares for resale by our preferred
stockholders on August 12, 2009. Sales by either of these means may have a
depressive effect on the market for the shares of common stock.
In
general, a person who has held shares of restricted common stock for a period of
six months and is not an affiliate of the issuer of those securities, may sell
those shares into the market. An initial twelve month holding period applied to
shareholders who received their shares in our merger. An affiliate who has held
restricted shares for the applicable holding period, upon filing of a
notification on Form 144 with the SEC, may sell shares of restricted common
stock into the market in an amount up to the greater of 1% of the outstanding
shares of common stock or the average weekly number of shares sold in the last
four weeks before such sale. An affiliate may sell this number of shares once
each three months.
Our
stockholders may experience future dilution.
Our
articles of incorporation permit our board of directors, without shareholder
approval, to authorize shares of preferred stock, which may also be issued by
the board of directors without shareholder approval. The board of directors may
classify or reclassify any preferred stock to set the preferences, rights and
other terms of the classified or reclassified shares, including the issuance of
shares of preferred stock that have preference rights over the common stock with
respect to dividends, liquidation, voting and other matters or shares of common
stock having special voting rights. The issuance of additional shares of our
capital stock could be substantially dilutive to your shares and may negatively
affect the market price of our common stock.
Substantial
future issuances of our common stock could depress our stock price.
The
market price for our common stock could decline, perhaps significantly, as a
result of issuances of a large number of shares of our common stock in the
public market or even the perception that such issuances could occur. As of
February 26, 2010, the total number of shares of common stock issuable upon the
conversion of preferred stock and the exercise of stock purchase warrants then
outstanding was 30,092,915 additional shares of our common stock. Sales of a
substantial number of these shares of our common stock, or the perception that
holders of a large number of shares intend to sell their shares, could depress
the market price of our common stock. In addition, the registration rights of
the holders of our preferred stock and stock purchase warrants could make it
more difficult for us to raise funds through future offerings of our equity
securities.
Our
stockholders may experience additional dilution upon the exercise of
warrants.
On
December 28, 2007, we issued warrants to purchase our common stock in connection
with a private placement to accredited investors. As of February 26, 2010,
warrants to purchase up to 1,734,340 shares of our common stock were issued and
outstanding. The exercise of the warrants could decrease the net tangible book
value of our common stock.
24
We
do not intend to pay dividends in the foreseeable future.
For the
foreseeable future, we intend to retain any earnings to finance the development
of our business, and we do not anticipate paying any cash dividends on our
common stock. Any future determination to pay dividends will be at the
discretion of our board of directors and will be dependent upon then-existing
conditions, including our financial condition and results of operations, capital
requirements, contractual restrictions, business prospects and other factors
that our board of directors considers relevant. Accordingly, investors must rely
on sales of their common stock after price appreciation, which may never occur,
as the only way to realize their investment.
As
a public company, we will be subject to extensive corporate governance and
disclosure regulations that will result in additional operating
expenses.
We expect
to incur significant ongoing legal, accounting and other expenses as a result of
becoming a public company in December 2007. Corporate governance requirements,
requirements under the Sarbanes-Oxley Act of 2002, as well as new rules
implemented by the SEC will significantly increase our legal and financial
compliance costs and make some administrative functions more time-consuming and
costly. Like many smaller public companies, we face a significant impact from
required compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Section
404 requires the management of public companies to evaluate the effectiveness of
internal control over financial reporting. The SEC has adopted rules
implementing Section 404 for public companies as well as disclosure
requirements. The Public Company Accounting Oversight Board has adopted
documentation and attestation standards that the independent auditors must
follow in conducting its attestation under Section 404. We are currently
preparing for compliance with Section 404(b); however, there can be no assurance
that we can effectively meet all of the requirements of Section 404 as currently
known to us in the currently mandated timeframe. Any failure to implement
effectively new or improved internal controls, or to resolve difficulties
encountered in their implementation, could harm our operating results, cause it
to fail to meet reporting obligations or result in management being required to
give a qualified assessment of our internal controls over financial reporting or
our independent auditors providing an adverse opinion regarding management’s
assessment. Any such result could cause investors to lose confidence in our
reported financial information, which could have a material adverse effect on
its stock price.
We also
expect these new rules and regulations may make it more difficult and more
expensive for us to obtain director and officer liability insurance. We may be
required to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. As a result, it may be more
difficult for us to attract and retain qualified individuals to serve on our
board of directors or as executive officers. We cannot predict or estimate the
amount of additional costs we may incur or the timing of such
costs.
If
we fail to maintain the adequacy of our internal controls, our ability to
provide accurate financial statements and comply with the requirements of the
Sarbanes-Oxley Act of 2002 could be impaired, which could cause our stock price
to decrease substantially.
Because
we operated as a private company without public reporting obligations before the
merger, we had limited personnel and resources to assist the development of the
external reporting and compliance obligations that would be required of a public
company. We have taken and will continue to take measures to address and improve
our financial reporting and compliance capabilities and we are in the process of
instituting changes to satisfy our reporting obligations. We plan to obtain
additional financial and accounting resources to support and enhance our ability
to meet the requirements of being a public company. We will need to continue to
improve our financial and managerial controls, reporting systems and procedures,
and documentation thereof. If our financial and managerial controls, reporting
systems or procedures fail, we may not be able to provide accurate financial
statements on a timely basis or comply with the Sarbanes-Oxley Act of 2002 as it
applies to us. Any failure of our internal controls or our ability to provide
accurate financial statements could cause the trading price of our common stock
to decrease substantially.
25
Item
lB.
|
Unresolved
Staff Comments.
|
Not
applicable.
Item
2. Properties.
We lease
our office and storage facility in Lexington, Kentucky, under a operating lease
from a firm in which our Chairman and CEO is a partner. The lease runs through
2012, with an option for two five-year extension options. Monthly lease payments
are $6,975 though the end of the lease term.
Item
3. Legal Proceedings.
We are
not a party to any pending legal proceedings as of this date.
Item
4. Reserved.
PART
II
Item
5. Market for Registrant’s Common Equity and Related Stockholder
Matters.
Market
Information
Since
December 31, 2007, our common stock has traded on the OTC Bulletin Board under
the symbol “MPSP.BB”. Dentalserv.com’s common stock traded on the OTCBB under
the symbol “DSRV.BB” beginning in April 2006 and through December 28, 2007.
There is no established trading market for our convertible preferred
stock.
The
following table sets forth, for the periods indicated, the reported high and low
closing bid quotations for our common stock as reported on the OTC Bulletin
Board. The bid prices reflect inter-dealer quotations, do not include retail
markups, markdowns or commissions and do not necessarily reflect actual
transactions.
Period
|
Bid Price
|
|||||||||
Year
|
Quarter
|
High
|
Low
|
|||||||
2009
|
||||||||||
Fourth
|
$ | 4.44 | $ | 3.00 | ||||||
Third
|
$ | 4.50 | $ | 3.50 | ||||||
Second
|
$ | 5.75 | $ | 3.50 | ||||||
First
|
$ | 10.00 | $ | 3.90 | ||||||
2008
|
||||||||||
Fourth
|
$ | 12.00 | $ | 7.00 | ||||||
Third
|
$ | 11.50 | $ | 4.35 | ||||||
Second
|
$ | 4.90 | $ | 3.30 | ||||||
First
|
$ | 6.00 | $ | 2.00 |
Holders
As of
December 31, 2009, we had approximately 330 holders of our common
stock.
26
Dividends
We do not
anticipate declaring or paying any dividends in the foreseeable future. We
anticipate that for the foreseeable future we will follow a policy of retaining
earnings, if any, in order to finance the expansion and development of our
business. Payment of dividends is within the discretion of MedPro’s board of
directors and will depend upon earnings, capital requirements, and operating and
financial condition, among other factors.
Item
6. Selected Financial Data.
Not
Applicable.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operation.
The
following discussion and analysis of the results of operations and financial
condition of MedPro Safety Products, Inc. for the fiscal years ended December
31, 2009 and 2008 should be read in conjunction with our audited financial
statements and the notes to those financial statements that are included
elsewhere in this report. References in this Management’s Discussion and
Analysis or Plan of Operations to “us,” “we,” “our,” and similar terms refers to
MedPro Safety Products, Inc. This discussion includes forward-looking statements
based upon current expectations that involve risks and uncertainties, such as
plans, objectives, expectations and intentions. Actual results and the timing of
events could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors. Words such as “anticipate,”
“estimate,” “plan,” “continuing,” “ongoing,” “expect,” “believe,” “intend,”
“may,” “will,” “should,” “could,” and similar expressions are used to identify
forward-looking statements.
Overview
MedPro
Safety Products, Inc. has developed and acquired a portfolio of medical device
safety products incorporating proprietary needlestick prevention technologies
that deploy with minimal or no user activation. Our present strategy focuses on
developing and commercializing multiple products in four related product
segments: clinical, phlebotomy, pharmaceutical, and intravenous.
Our
strategy for the next 6 to 9 months focuses on completing the steps necessary to
attain pre-market product development milestones and to commence the
distribution of three products (two Blood Collectors and a Winged Safety Blood
Collection Set) in these sectors. Our objective is to enter into strategic
partnership agreements with major medical products distribution partners, which
whenever possible would be fixed minimum volume contracts. We have entered into
two such agreements for three of our products. In addition, we are discussing
the terms of a similar distribution arrangement with potential partners for a
proprietary safety syringe product with an “anti-blunting” feature and a
prefilled pharmaceutical safety syringe. Our product development plans also
include a needleless intravenous line based on patents and designs we control.
As of this date, we have entered into a joint development agreement with a
global manufacturer involved in stopper design and manufacture in the prefilled
syringe industry segment. We will jointly exploit our prefilled and fillable
safety syringes.
On
December 28, 2007, we completed a reverse takeover merger with Dentalserv.com, a
Nevada corporation (DRSV) with nominal assets and no active business whose
shares were registered under the Securities Exchange Act. The reverse takeover
merger was a condition to the purchase of our preferred stock and stock purchase
warrants by four institutional investors for $13 million under the terms of our
stock purchase agreement with them. On that date, the following transactions
occurred concurrently:
|
·
|
The
5,625,550 shares of DSRV common stock then outstanding were combined into
approximately 1,406,400 common shares in a 1-for-4 reverse stock
split.
|
|
·
|
Our
predecessor, a Delaware corporation, merged into DSRV. The combined
company issued 11,284,754 of its common shares to former shareholders of
our predecessor corporation in the merger and 593,931 common shares as a
financial advisory fee. The combined company, a Nevada corporation,
changed its name from “Dentalserv.com” to “MedPro Safety Products,
Inc.”
|
27
|
·
|
Four
investment funds purchased $13 million of newly issued shares of Series A
Convertible Preferred Stock and warrants to purchase our common stock. We
received approximately $11.6 million in proceeds from the sale of these
securities, net of offering fees and
expenses.
|
We
accounted for these transactions as capital transactions in which we
issued:
|
·
|
Approximately
1,406,400 shares of common stock to the DRSV shareholders for the net
monetary assets of the shell
corporation;
|
|
·
|
6,668,229
shares of convertible preferred stock and warrants to purchase 25,820,150
common shares to the investors for $13,000,000;
and
|
|
·
|
593,931
shares of common stock and warrants to purchase 533,458 shares of common
stock and also paid $1,040,000 in cash as an advisory
fee.
|
We valued
the warrants according to the Black-Scholes method, based on the assumptions
described in Note 12 of the Notes to Financial Statements as of December 31,
2008. We also increased the retained deficit by $3,975,120 and increased
additional paid in capital by the same amount effective on December 28, 2007 to
reflect the intrinsic value of the right to convert the Series A Stock into
common stock. The $3,975,120 was determined based on the relative estimated fair
value of the embedded conversion feature in the preferred shares and the
detachable warrants. This amount would normally be amortized over the period
between the issue date and the conversion date, but because the Series A Stock
was convertible immediately upon issuance, the entire amount was charged to
retained earnings as a deemed dividend and an increase to additional paid in
capital.
In 2008,
our principal investors exercised the Series “J” warrants for $13,025,000 cash,
for which we issued 1,493,779 shares of newly issued Series “B” Preferred Stock.
Each share of Series B Stock is convertible into 4 shares of our common stock.
In March 2009, the same investors exchanged their remaining warrants for
1,571,523 shares of newly issued Series “C” Preferred Stock and $3,000,000 cash.
We incurred a $240,000 advisory fee in connection with the transaction. Each
share of Series C Stock is convertible into 10 shares of our common
stock.
In prior
years, we generated revenues from sales of two legacy products — the Safe-Mate
Dental Safety Needle and the Needlyzer, a needle disposal device. We
discontinued marketing the Needlyzer in 2004, and have subsequently been
liquidating our inventory through sales from time to time to a distributor in
Africa. We ceased marketing Safe-Mate effective as of the end of the first
quarter of 2008. All of the products that MedPro currently has under development
or is planning for the future incorporate passive safety designs. As a result of
Safe-Mate’s non-passive design and limited sales, we decided to focus on what we
now view as our core technology and technological distinction in the sharps risk
reduction marketplace.
Our
financial results and operations in future periods will depend upon our ability
to enter into sales and distribution agreements for our products currently under
development so we can generate sustained revenues from our portfolio of products
and technologies. Our operations are currently funded from the proceeds from
sales of securities, revenue from operations and borrowing from commercial
lenders and related parties. The Company is currently involved in an effort to
raise additional equity and debt to fully exploit our intellectual property and
expand our ability to get products manufactured and delivered to commercial
markets.
Critical
Accounting Estimates and Judgments
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”). The preparation of our
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues, expenses and
related disclosures. We base our estimates on historical experience and various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates. The significant
accounting policies that are believed to be the most critical to fully
understanding and evaluating the reported financial results include revenue
recognition, inventory valuations for slow moving items, recoverability of
intangible assets and the recovery of deferred income tax assets.
28
We
recognize sales and associated cost of sales when delivery has occurred and
collectability is probable. There have been minimal returns for credit, so no
reserve for product returns has been established. We provide for probable
uncollected amounts through a charge to earnings and a credit to the allowance
for doubtful accounts based on our assessment of the current status of
individual accounts. We have fully reserved our only receivable from the sale of
the Needlyzer devices to a customer in Africa. We continue to have ongoing
discussions with this customer about selling our remaining inventory in a single
transaction if they can get funding to pay old invoices (approximately $21,225)
and cover the cost of shipping these devices to Ghana on
consignment.
We
determine our inventory value at the lower of cost (first-in, first-out method)
or market value. In the case of slow moving items, we may write down or
calculate a reserve to reflect a reduced marketability for the item. The actual
percentage reserved depends on the total quantity on hand, its sales history,
and expected near term sales prospects. When we discontinue sales of a product,
we will write down the value of inventory to an amount equal to its estimated
net realizable value less all applicable disposition costs. In 2008, we took an
additional write down on our Needlyzer inventory to net realizable value. This
charge was $252,432.
Our
intangible assets consist principally of intellectual properties such as
regulatory product approvals and patents. We currently are amortizing certain of
our intangible assets using the straight line method based on an estimated
economic life, after the products are introduced into the market, of five years.
We began amortization of the Vacumate patents in December 2009 since products
were first introduced for human use in December. Because our products that
incorporate our Winged Safety Blood Collection Set, our Key-Lok proprietary
technology and our Syringe Guard family of products are currently not in
production for distribution, we have not begun to amortize these patents. We
expect to use the straight line method to amortize these intellectual properties
over their estimated period of benefit, ranging from one to ten years, when our
products are placed in full production and we can better evaluate market demand
for our technology.
We
evaluate the recoverability of intangible assets periodically and take into
account events or circumstances that warrant revised estimates of useful lives
or indicate that impairment exists. Once our intellectual property has been
placed into productive service, we expect to utilize a net present value of
future cash flows analysis to calculate carrying value after an impairment
determination. Our forecasted revenue on our current portfolio of intellectual
property over the next five years, discounted to the balance sheet date based on
our current borrowing rate, is in excess of our cost of our patents and expected
development costs ($58 million) by approximately 644%.
As part
of the process of preparing our financial statements, we must estimate our
actual current tax liabilities together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within the balance sheet. We must assess the likelihood that the
deferred tax assets will be recovered from future taxable income and, to the
extent we believe that recovery is not likely, a valuation allowance must be
established. To the extent we establish a valuation allowance or increase or
decrease this allowance in a period, the impact will be included in the tax
provision in the statement of operations.
Results
of Operations for the Years Ended December 31, 2009 and 2008
MedPro
recorded net income of $8,376,273 for the year ended December 31, 2009, as
compared to a loss of $(6,539,566) for year ended December 31, 2008. Losses from
operations were $(13,022,235) for 2009 and $(5,920,099) for 2008.
In 2009,
we recorded net other income of $21,398,508 compared to net other (expense) of
$(619,467) in 2008. Other income in 2009 included $21,603,185 of gain associated
with derivative liabilities recorded on January 1, 2009. The gain was primarily
due to the decline in the carrying value of the derivative liability as a result
of the decrease in our share price during the year.
29
Net other
expense included interest expense of $250,546 for 2009 and $795,083 for 2008.
Interest income was $45,869 for 2009 and $62,547 for 2008. Income from the
settlement of long outstanding debt of $113,069 was included in net other
expense for 2008.
Sales for
2009 were $5,388 compared to $19,128 for 2008. The decline in sales was
principally due to the discontinuance of sales of the Safe-Mate device and
limited sales of the Needlyzer device to a company in Ghana. The Company
received fees for services and automation activity totaling $12,045 in 2009
versus $2,235,100 of such revenue in 2008.
In 2008
we earned $2,000,000 under agreements with the distributor of our Vacumate
safety needles and the winged blood collection set. We recorded program fees of
$1,000,000 on each of the safety needle and the winged blood collection set
projects in September 2008 when we delivered the automation plan for producing
the safety needle and the design plan for the winged blood collection set.
In
October 2008 we received an advance of $700,000 for costs associated with
automation and other product development activities requested by our
distributor. At December 31, 2008 we had spent $687,955 of the advance. In 2008
we recorded $235,100 of the advance as income from the reimbursement of
automation expenses. We had also used the advance to purchase packaging
equipment for $452,855, which cost was deferred, along with the associated
revenue from our customer for its purchase, during 2008. After we reached an
oral understanding with the customer during 2009 that we would retain the
packaging equipment, we applied $452,855 of deferred revenue from the 2008
advance against the purchase price. We will retain the equipment at a zero
dollar carrying value. The remaining $12,045 of deferred revenue from the 2008
advance was recognized in 2009.
The most
substantial difference between the losses from operations in 2009 and 2008 was
the $5,320,123 increase in compensation expense. The charge for stock option
expense went from $2,693,250 in 2008 to $7,374,450 in 2009, an increase of
$4,681,200. The balance of the change in compensation represents new employee
compensation, the impact of full-year salaries in 2009 versus partial-year
salaries for employees hired in 2008, bonuses and raises during 2009.
Payroll
costs, excluding share-based compensation and payroll taxes, increased by
$611,105 in 2009 compared to 2008. The Company added two engineers late in 2008
and a quality assistant in early 2009. We also added an accounting manager and
an administrative assistant in the fourth quarter of 2008. This increased our
full time equivalent salaries for 2009. The number of our full-time employees
increased from seven in August 2008 to thirteen for most of 2009. We ended the
2009 year with twelve employees. In addition, compensation expense increased as
a result of our adoption in 2008 of both a share-based incentive compensation
plan and a qualified defined contribution 401(k) and profit sharing plan to
attract and retain quality employees. The costs associated with the profit
sharing plan in 2009 were $195,656 in 2009 and $151,131 in 2008.
On August
18, 2008, we adopted our stock incentive compensation plan and granted options
to purchase 3,000,000 shares of common stock to seven employees and two
directors. The options may be exercised only during a thirty-day period ending
on January 1, 2013. If before that date either the recipient terminates service
with us or a change of control occurs, then the recipient must exercise the
options 30 days after the event. Because the exercise price was less than market
price of our common stock on the date of grant, we set a date certain for the
exercise of the options in order to qualify for exemptions from excise taxes
under IRS deferred compensation rules.
Total
compensation for the August 2008 grants will be $14,580,000, $4.86 per share
underlying the options. The Black-Scholes model was used to value the options.
The valuation methodology and underlying assumptions are described in Note 12 of
the notes to the financial statements. The compensation expense is being charged
to earnings over 24 months, which period coincides with the term of a
non-competition covenant included in the option agreement. The Company recorded
$7,290,000 of compensation expense in 2009 and $2,693,250 of compensation
expense for the period from August 18 through December 31, 2008. The balance of
the unearned compensation was $4,596,750 at year-end.
In 2009,
we granted incentive stock options for 185,715 shares in May and for 47,256
shares in October. The May options were valued at $355,106 and the October
options were valued at $91,944 utilizing the Black-Scholes valuation
methodology. Total share-based compensation expense on these awards totaled
$45,031 in 2009.
30
The
Company also granted 50,000 options to our two newest Directors, Kiely and
Fletcher, under the same terms and conditions in the options granted to our
Directors in 2008. They are each exercisable for one share of common stock at
$1.81 per share and they may only be exercised from January 1, 2013 to January
31, 2013. The total expense associated with these options was $224,373. Through
2009, $39,419 has been earned and recorded as an expense and $184,954 remains
unearned.
Professional
and insurance costs decreased $282,480 over the same period in 2008. Consulting
fees, accounting fees, insurance and other related expenses increased $356,920
during 2009 while legal fees declined $639,400. The decline in legal fees
represents the one-time fee in 2008 of $700,000 paid to a former supplier to
settle a claim for legal fees and costs and a modest increase in other legal of
$60,600.
Travel
expenses were $85,436 higher in 2009 versus 2008, reflecting increased directors
travel costs, heightened activity with customers and suppliers, and associated
developmental engineering expenses. Airfare increased $37,966, representing both
more international travel and travel in general, as well as, fuel cost pressures
on ticket prices. Hotels, meals, and non-air travel increased $47,470 in
2009.
We
recorded inventory adjustments of $294,877 in 2008 in connection with our legacy
products. We wrote off and destroyed our remaining Safe-Mate inventory for a
charge of $42,445 and we wrote down the Needlyzer inventory by an additional
$252,432.
Other
significant differences between 2009 and 2008 included:
|
·
|
Advertising
and promotion costs were $386,480 in 2009. In accordance with the
September 2007 stock purchase agreement, we engaged an investor relations
firm in September 2008. We paid a monthly retainer of $13,500 for the
first 12 months and issued 35,294 shares of common stock at $9.50 per
share, or $335,293 in total. We terminated our contract with the initial
public relations firm and engaged a new firm in October of 2009. Monthly
retainer for the new firm ranges from $3,500 to $5,000 per month.
Advertising and promotion costs were $204,286 for
2008.
|
|
·
|
Product
development costs increased by $450,708 from 2008 levels. These costs
reflect the increased costs of developing multiple products as opposed to
focusing on one device in 2008. We have had better results with U.S.
contract manufacturers and have significantly shortened our time from
drawing to first shots out of proof of concept and initial small
cavitational production molds. These successes have resulted in our
progress on new devices moving along much more quickly. As a result we
have incurred additional costs for later phases of the product development
cycle.
|
|
·
|
Depreciation
and amortization expenses (associated with intellectual property)
increased by $73,947, reflecting the depreciation of additional testing
equipment and manufacturing equipment acquired in 2009. Intangible asset
amortization of $42,090 was recorded in 2009, along with amortization of
finance costs of $41,772. This is $42,090 higher than 2008. Depreciation
in 2009 was $107,250 versus $75.393 in 2008. Fixed asset additions were
$480,865 in 2009. They consisted primarily of manufacturing molds, jigs
and fixtures.
|
|
·
|
We
recorded $202,494 of loss in 2008 on the abandonment of assets, molds,
jigs and fixtures in China. We transferred one asset to a customer in 2009
with a net book value of $2,892. It was a third set of testing fixtures
associated with the blood collection
product.
|
|
·
|
Other
income includes gains on the write down of third party payables in
settlement of long outstanding accounts payable. We were able to negotiate
reductions of amounts due third parties for bills relating to legal costs
incurred working with the FDA in connection with our legacy products.
These fees were incurred several years ago. Other fees for general
corporate work were also written down before being paid in full. The fees
totaled $378,628 at December 31, 2007 and were settled for $283,865, a
savings of $94,763. The balance of the other income includes fee for
service income of $11,200 and misc income of $7,106. As mentioned above,
besides interest income and expense, other income in 2009 was $21,603,185
from the change in fair value of derivative
liabilities.
|
|
·
|
Interest
income was $45,869 in 2009 as compared to $62,547 in 2008. The change
reflected the decline in temporary cash investments due to the decline in
cash available for overnight sweep
investments.
|
31
Liquidity
and Capital Resources
Total
assets were $14,789,555 as of December 31, 2009 and $22,757,649 as of December
31, 2008. The $7,968,094 decline in total assets reflects the impact of the
negative cash flow from operations, as well as investing and financing
activities of $7,564,400. The decline was partly offset by the net new equity of
$2,760,000. We spent $480,865 on the purchase of new leasehold improvements,
equipment and other assets and paid $4,145,244 toward the net repayments of
debt. We also spent $386,476 on open market repurchases of shares. These factors
roughly approximate the decline in total assets. During 2009, our cash decreased
by $7,564,400 to $4,072,443 at December 31, 2009.
In
September and October 2008, our principal investors exercised warrants and
purchased Series B Stock for a total purchase price of $13,025,000, which
increased our equity and available cash. In March 2009, we completed
transactions in which our principal investors exercised a portion of their
warrants for cash totaling $3,000,000 and exchanged all of their remaining
warrants for shares of newly designated Series C Stock. As a result of the
warrant exercise and exchange, these investors acquired 1,571,523 shares of
Series C Stock, each of which is convertible into 10 shares of our common
stock.
On
January 1, 2009 we recorded a derivative liability of $41,402,196 in connection
with our warrants that contained certain down round protection features,
registration rights, as well as, cashless exercise provisions. Many of the
conversion features expired in August 2009 when the registration statement for
the common stock underlying convertible preferred stock and warrants became
effective. Other terms expired at the end of 2009. By year end, all of the
derivative liability had been written off or recognized as gain.
Our
credit agreement originally included a $5,000,000 term loan and a $1,500,000
revolving line of credit. During 2009, we paid off the $1,498,475 balance of the
line of credit. At December 31, 2009, the outstanding balance of the term loan
was $ 2,361,111. The term loan matures on August 1, 2011. Our monthly payment
under the term loan is approximately $138,889 of principal plus interest at the
prime rate plus 2%.
Our term
loan agreement was modified in June 2009 to release our Chairman and Chief
Executive Officer W. Craig Turner from his personal guarantee. In return, we
agreed to maintain a compensating cash balance with the lender equal to the
declining balance of the term note. We met the loan covenant at the end of 2009
and at the end of each subsequent month.
We also
incurred a new $1,500,000 loan at another bank. That loan has been renewed
through June 29, 2010 and is secured by a compensating cash balance
held in an account with the lender.
In July
2008, we entered into two new agreements with a worldwide medical products
company to manufacture and distribute three of our medical safety products,
replacing an earlier agreement for the distribution of our tube-activated blood
collection system. Both agreements continue for five years from the date we make
an initial commercial shipment of the product. The distributor has agreed to
purchase minimum annual quantities of both models of the safety needles and our
winged blood collection set over the five-year term of the contract, for
royalties totaling over $43 million under both agreements.
Although
we expect to realize significant revenue from the launch of the first of two
models of our blood collection product, the amount of revenue realized in the
next several fiscal quarters depends on how soon our distribution partner can
complete manufacturing arrangements and commence product delivery. We expect
product assembly and delivery to begin in the second quarter of 2010. Delays
associated with product reliability problems with the tube activated blood
collector as a result of imperfect semi-automated assembly techniques and some
product design related issues have deferred the projected date of initial
revenue until second quarter of 2010.
Despite
our expectation of receiving revenue from the sale of our products in 2010, we
may be required to obtain additional funding to maintain our current level
of operations, as well as to fund the development and launch of all of the
safety products for which we currently own intellectual property rights and new
devices currently under contract. We have borrowed $850,000 from our principal
investor, who has agreed to lend us $375,000 more before April 1, 2010. See Note
15 of Notes to Financial Statements -Subsequent Events. If we seek additional
funds from our principal investor, we may have to issue additional warrants,
which could further dilute existing shareholders. We will monitor our cash flow
carefully and will maintain only the employment levels necessary to sustain
operations. If we cannot find sources of additional funds on reasonable terms,
we may be forced to limit or even suspend our operations and product development
plans, which would adversely affect our efforts to achieve profitability and to
continue our business.
32
We
believe there is a well defined market for our products, encouraged by Federal
Needlestick Safety and Prevention Act, which requires the use of products
similar to those we are developing. We are optimistic about the prospects for
our blood collection products based upon our pre-marketing activities over the
past three years, general interest in the skin activated product, and our
existing minimum volume distribution contracts. In addition, in March 2010, we
entered into a joint development agreement with Helvoet Pharmaceutical N.V. for
the development and distribution of our pre-filled passive safety syringe
system. The agreement provides that we will develop the safety syringe portion
of the pre-filled passive safety syringe system, and Helvoet will develop rubber
components for use with the medicament cartridge. The agreement also establishes
a general framework for formalizing the role of additional participants in the
project. Headquartered in Alken, Belgium, Helvoet is a worldwide manufacturer of
rubber closures and aluminum and plastic caps for pharmaceutical packaging, drug
delivery and diagnostics.
We
estimate that funding our continued development and launches of our planned
products, meeting current capital support requirements, and pursuing other areas
of corporate interest as may be determined by the Board of Directors for the
next twelve months will require substantial additional funding. Whether we
commit resources to optional projects will depend upon our cash position from
time to time. Our primary cash requirements will be to fund (a) launching our
blood collection products for distribution, (b) continuing development of our
safety syringe products and other medical device safety products based on the
technology for which we hold rights, and (c) increasing our administrative
capability as needed to support expanded day-to-day operations.
Our
current sales estimates are exclusively for product sales in the United States.
We do not anticipate revenue from the marketing of the tube-activated blood
collection device in Europe, although its distributor has received preliminary
favorable interest from pre-launch marketing and demonstration activities. Our
ability to generate future European and other foreign sales will depend upon
applicable regulatory approvals for our products in Europe.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
We are
not party to any forwards and futures, options, swaps, or other instruments that
would expose us to market risk associated with activities in derivative
financial instruments, other financial instruments, and derivative commodity
instruments. Our bank indebtedness is priced at interest rates geared to the
lender’s prime rate. Therefore, our interest expense may increase or decrease
due to changes in the interest rate environment.
Item
8. Financial Statements and Supplementary Data.
The
following financial statements of the company are included at the end of this
report:
|
·
|
Report
of Independent Registered Public Accounting
Firm
|
|
·
|
Balance
Sheets as of December 31, 2009 and
2008
|
|
·
|
Statements
of Operations for the Years Ended December 31, 2009 and
2008
|
|
·
|
Statements
of Shareholders' Equity/(Deficiency) for the Years Ended December 31, 2009
and 2008
|
|
·
|
Statements
of Cash Flows for the Years Ended December 31, 2009 and
2008
|
|
·
|
Notes
to Financial Statements
|
Item
9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.
Not
applicable.
Item
9A. Controls and Procedures.
Not
applicable
33
Item
9A(T). Controls and Procedures.
MedPro’s
management, under the supervision and with the participation of the Chief
Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2009. Based on that evaluation, the CEO and CFO
concluded that MedPro’s disclosure controls and procedures are effective in
timely making known to them material information required to be disclosed in the
reports filed or submitted under the Securities Exchange Act. There were no
changes in MedPro’s internal control over financial reporting during the fourth
quarter of 2009 that have materially affected, or are reasonably likely to
materially affect, the internal control over financial reporting.
Limitations
on the Effectiveness of Controls
A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, with our company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, that breakdowns can occur because of simple errors or mistakes, and
that controls can be circumvented by the acts of individuals or groups. Because
of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f). Under the supervision and with the participation of our management,
including our CEO and CFO, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated
Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2009.
This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report.
Item
9B. Other Information.
2010
VOMF Bridge Loan
On
February 8, 2010, we borrowed $500,000 from VOMF. The loan provides MedPro with
additional financial flexibility. The outstanding principal balance bears
interest at an annual rate of 6%, and all principal and interest was originally
due and payable on March 31, 2010.
Under the
terms of the note purchase agreement, we agreed to add a representative of VOMF
to our board of directors upon VOMF’s request. Other covenants of the note
purchase agreement provide that without the written consent of VOMF, we will not
guarantee or incur additional indebtedness in excess of $100,000, other than
trade accounts payable incurred in the ordinary course of business, refinancing
of current indebtedness, and financing secured by purchase money liens, liens on
equipment and other permitted liens. We also agreed not to sell any of our
properties, assets and rights including, without limitation, its software and
intellectual property, to any person except for sales to customers in the
ordinary course of business; or with the prior written consent of
VOMF.
On
February 26, 2010, we increased the outstanding principal balance of the bridge
loan to $850,000 and extended the date on which all principal and interest is
due and payable to June 30, 2010. In consideration, we issued to VOMF a warrant
to purchase 212,500 shares of our common stock at $4.00 per share. The warrant
has a five-year term. The warrant provides that the warrant price will adjust if
specified corporate transactions occur, including a provision that if we issue
any additional shares of common stock at a price per share less than $4.00 (or
the adjusted warrant price then in effect) or without consideration, then the
warrant price will adjust to the price per share paid for the additional shares
of common stock upon each such issuance.
34
Joint
Development Agreement
On March
8, 2010, we entered into a Joint Development Agreement with Helvoet
Pharmaceutical N.V. relating to the development and distribution of our
pre-filled passive safety syringe system. The joint development agreement
formalizes the relationship between MedPro and Helvoet and establishes their
respective responsibilities and contributions to the project.
The
agreement provides that we will develop the safety syringe portion of the
pre-filled passive safety syringe system, and Helvoet will develop rubber
components for the product including determining the appropriate chemical rubber
formulation and component design for use with the medicament cartridge. The
agreement also establishes a general framework for formalizing the role of
additional participants in the project, including the responsibilities and
contributions required as a minimum standard for participation.
Headquartered
in Alken, Belgium, Helvoet is a worldwide manufacturer of rubber closures and
aluminum and plastic caps for pharmaceutical packaging, drug delivery and
diagnostics. With more than 1,250 employees and five plants for rubber
components and four plants for aluminum and plastic caps in Europe and the
United States, Helvoet produces over 12 billion parts per year. Helvoet is the
pharmaceutical packaging division of the Daetwyler Holding, Altdorf,
Switzerland.
PART
III
Item
10. Directors,
Executive Officers and Corporate Governance.
Directors
and Executive Officers
The
following table shows information regarding our current directors and executive
officers. The directors are elected by the stockholders. The executive officers
serve at the pleasure of the Board of Directors.
Name
|
Age
|
Title
|
||
W.
Craig Turner
|
56
|
Chief
Executive Officer and Chairman of the Board of
Directors
|
||
Walter
W. Weller
|
57
|
President,
Chief Operating Officer, Director
|
||
Marc
T. Ray
|
56
|
Vice
President Finance, Chief Financial Officer
|
||
Gary
A. Peterson
|
58
|
Director
|
||
Warren
Rustand
|
66
|
Director
|
||
Ernest
L. Fletcher
|
56
|
Director
|
||
W.
Leo Kiely III
|
62
|
Director
|
W. Craig Turner
is the founder of MedPro and has been Chairman of the board of directors
of our predecessor since its inception. He was appointed Chairman of our Board
of Directors when our merger took effect in December 2007. Mr. Turner is also
the President and Chairman of the Board of Directors of CRM Companies, Inc., a
real estate development company specializing in the development of commercial
and industrial properties with more than 450 employees. At CRM Properties, Mr.
Turner has been responsible for the development of over $250 million in
commercial and industrial properties. Previously, Mr. Turner served as Director
of Industrial Development for the Commonwealth of Kentucky under then Governors
John Y. Brown and Martha Layne Collins.
35
Walter W. Weller
has been President of MedPro since 2003 and the Chief Operating Officer
of our predecessor since its inception in 1993. Mr. Weller was appointed our
President, Chief Operating Officer, and Director of MedPro when our merger took
effect in December 2007. He has been responsible for MedPro’s product strategy,
building customer relationships with key channel partners, and coordinating day
to day activities for the Company. Before joining MedPro, Mr. Weller spent
approximately ten years working in manufacturing, seven years in financial and
operational management, and five years working with financial software design
and implementation services. He participated in developing legislation that
subsequently was enacted as the federal Needlestick Prevention Act.
Marc T. Ray
was appointed Vice President Finance and Chief Financial Officer of our
predecessor in October 2007 and continued in the same capacity when our merger
took effect in December 2007. Mr. Ray served as the Treasurer and as a member of
the Board of Directors of MedPro from July 1994 to August 2007. Mr. Ray is a
Certified Public Accountant with 33 years of experience. From November 2004 to
October 2007 Mr. Ray has served as the managing member of Ray, Foley, Hensley
& Company, PLLC, a public accounting firm that he founded in Lexington,
Kentucky. From February 1994 to October 2004, Mr. Ray was President of the
Lexington, Kentucky based public accounting firm Ray, Hager & Henderson,
PSC. In addition, from November 1997 until November 2005, Mr. Ray served at
various times as treasurer, director, executive committee member and
compensation committee member of Prevent Child Abuse America, a national
charitable organization headquartered in Chicago, Illinois. From 1976 through
1978 and 1982 through January 1994, Mr. Ray was employed or was a partner (1986)
with Coopers & Lybrand, a predecessor of PriceWaterhouseCoopers. In the
intervening years Mr. Ray was employed as a financial analyst with a fortune 500
company and was a partner in a local accounting firm.
Gary A. Peterson
was appointed as a Director when our merger took effect in December 2007.
He also served as a director of our predecessor since 1998 and as its President
and Chief Executive Officer from 1998 to 2003. Mr. Peterson is President and
Chief Executive Officer of BATON Development Inc., a virtual incubator for new
medical products and has been the Managing Member of BATON Ventures LLC and PSF
Health Care LLC, and a Venture Partner in Affinity Ventures II LLC, all venture
capital funds. Mr. Peterson has spent over 35 years in the medical device and
health services business and has served as a director of numerous public and
private companies. He was co-founder and Chief Operating Officer and Executive
Vice President of Angiomedics Incorporated, which was acquired by Pfizer, Inc.
in 1986 and renamed Schneider USA. Schneider has since been sold to Boston
Scientific for over $2 billion. Before starting Angiomedics, Mr. Peterson was
responsible for product management and long term planning for Cardiac
Pacemakers, Inc. (which became Guidant and was subsequently acquired by Boston
Scientific) and held various sales and marketing management positions with Renal
Systems, Inc. (now Minntech).
Warren Rustand
was appointed as a Director when our merger took effect in December 2007.
Mr. Rustand is currently managing partner for SC Capital Partners LLC. He has
served as a member of the Board of Directors for over 40 public, private, and
not-for-profit organizations, including as Chairman of more than half of those
organizations. In the medical field, Mr. Rustand has served as Chairman of
Tucson Medical Center, Chairman of Health Partners of Arizona, Chairman of TLC
Vision, Chairman of Medical Body Sculpting, and Chairman of Health Equity,
Incorporated. Mr. Rustand also served as Appointment Secretary and Cabinet
Secretary to former US President Gerald Ford.
Dr. Ernest L.
Fletcher, who served as Governor of the Commonwealth of Kentucky from
2003 to 2007, was appointed a director in October 2008. Governor Fletcher was
elected to the United States House of Representatives in 1998 from Kentucky’s
6th Congressional District. In Congress, he served as a member of the House
Committees on Energy and Commerce and was selected to chair the Policy
Subcommittee on Health. His legislative career began in 1995 as a State
Representative for Kentucky’s 78th District. He has also been an Air Force
fighter pilot, engineer, family doctor, lay minister, state legislator, and
United States Congressman. Governor Fletcher was a family practice physician in
Lexington for twelve years, including two years as CEO of the Saint Joseph
Medical Foundation. He is currently a business development and healthcare
consultant.
W. Leo Kiely
III was appointed a director in October 2008. He has been Chief Executive
Officer of MillerCoors, a joint venture combining the U.S. and Puerto Rico
operations of SABMiller plc and Molson Coors Brewing Company, since June 2008.
Mr. Kiely became President and Chief Executive Officer of Molson Coors
Brewing Company in February 2005. He was appointed Chief Executive Officer of
Adolph Coors Company in July 2002 and served as Chief Executive Officer of Coors
Brewing Company from May 2000 to March 2005. He served as President and Chief
Operating Officer of Coors Brewing Company from March 1993 to May 2000. Before
joining Coors Brewing Company, he held executive positions with Frito-Lay, Inc.,
a subsidiary of PepsiCo and Ventura Coastal Corporation, a division of Seven Up
Inc.
36
Committees
of the Board of Directors
The
standing committees of MedPro's board of directors are its audit committee,
executive compensation committee and nominating committee. These standing
committees were established in 2008. The board of directors appoints the members
of each committee for a term beginning after the first regular meeting of the
board following the annual shareholders meeting and until their respective
successors are elected and qualified. The charters of each of the standing
committees of our board of directors are available on our corporate website at
www.medprosafety.com.
Audit
Committee
The audit
committee selects the auditing firm to be retained each year as independent
auditors of MedPro's financial statements and to perform services related to the
audit. It pre-approves any audit and non-audit services to be performed by the
independent auditors. It reviews the scope and results of the audit with the
independent auditors. It also reviews MedPro's financial statements and results
of operations, internal accounting and control procedures, financial reporting
policies and practices, internal audit reports, and makes reports and
recommendations to the board as it deems appropriate. The audit committee
reviews and approves related party transactions and other transactions as
required by applicable rules and regulations.
The
current members of the audit committee are Messrs. Peterson, Rustand, Fletcher
and Kiely, which Mr. Rustand chairs. As described under “Item 13. Certain
Relationships and Related Transactions, and Director Independence” below, Dr.
Fletcher and Mr. Kiely are independent directors. Messrs. Rustand and Kiely each
qualifies as an audit committee financial expert.
Executive
Compensation Committee
The
executive compensation committee determines the cash and other incentive
compensation, if any, to be paid to MedPro's Chief Executive Officer, evaluates
the performance of the Chief Executive Officer, and administers MedPro's 2008
Stock and Incentive Compensation Plan. The Chief Executive Officer determines
the compensation of the other executives and employees under guidelines for
incentive compensation approved by the executive compensation committee. The
current members of the executive compensation committee are Messrs. Peterson,
Rustand, Fletcher and Kiely, which Mr. Peterson chairs.
Nominating
Committee
The
nominating committee exercises general oversight with respect to the governance
of the board of directors. It reviews and recommends candidates for director,
evaluates and recommends governance practices, leads the board performance
review, makes recommendations concerning the size and composition of the board,
reviews and recommends policies applicable to directors, including compensation
and retirement, assesses the independence of directors, recommends membership of
board committees, reviews shareholder proposals and makes recommendations of
changes to MedPro's Articles of Incorporation and Bylaws. The current members of
the executive compensation committee are Messrs. Peterson, Rustand, Fletcher and
Kiely, which Dr. Fletcher chairs.
Nomination
Policy
In
evaluating candidates for director, the corporate governance and nominating
committee considers experience, mix of skills and other qualities desired to
achieve appropriate board composition, taking into account the experience,
skills and qualities of current board members and needs of the board and MedPro
as identified by the committee from time to time. The committee has not
established specific minimum criteria or qualifications because from time to
time the needs of the board and Company may change. However, the committee will
generally look for people who have demonstrated high ethical standards,
integrity and sound business judgment.
37
Consideration
of new board nominee candidates typically involves a series of internal
discussions, review of information concerning candidates and interviews with
selected candidates. In general, candidates for nomination to the board are
suggested by board members or by officers of MedPro. MedPro did not employ a
search firm or pay fees to other third parties in connection with seeking or
evaluating board nominee candidates. The committee will consider candidate
proposals by shareholders that comply with the requirements of MedPro's bylaws
and will evaluate candidates proposed by shareholders using the same criteria as
for other candidates. A shareholder seeking to recommend a prospective nominee
for the committee's consideration should submit the candidate's name and
qualifications to the Company's Secretary by fax to (859) 225-5347 or by mail to
Walter W. Weller, Secretary, MedPro, Inc., 817 Winchester Road, Suite 200,
Lexington, Kentucky 40505.
Communications
with the Board of Directors
Shareholders
and other parties interested in communicating directly with the board of
directors or individual directors may do so by writing in care of MedPro's
Secretary, Walter W. Weller, at 817 Winchester Road, Suite 200, Lexington,
Kentucky 40505, or by fax to (859) 225-5347. The nominating committee is
considering procedures for handling correspondence received by MedPro and
addressed to the board of directors, or an individual director. The Secretary
reviews any correspondence received in this manner to filter advertisements,
solicitations, spam and other such items.
Code
of Ethics
We have
adopted a code of ethics applicable to directors, officers and employees, which
is included with our Code of Conduct and is posted on our website at http://www.medprosafetyproducts.com.
If we amend or waive any of the provisions of the Code of Conduct applicable to
our directors, executive officers or senior financial officers, we intend to
disclose the amendment or waiver on our website. We will provide to any person
without charge, upon request, a copy of the Code of Conduct. You can request a
copy by contacting MedPro's Secretary, Walter W. Weller, at 817 Winchester Road,
Suite 200, Lexington, Kentucky 40505, or by fax to (859) 225-5347.
Conflicts of
Interest
Certain
conflicts of interest may exist from time to time between MedPro and certain
officers and directors due to the fact that some of them may have other business
interests to which they devote their attention. Some of our officers and
directors may continue to do so notwithstanding the fact that management time
should be devoted to our business. MedPro has not established policies or
procedures for the resolution of current or potential conflicts of interest
between us, our officers and directors or affiliated entities. There can be no
assurance that our management will resolve all conflicts of interest in favor of
us, and conflicts of interest may arise that can be resolved only through the
exercise by management of their best judgment as may be consistent with their
fiduciary duties.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers and people who own more than 10 percent of our common shares
to file initial stock ownership reports and reports of changes in ownership with
the Securities and Exchange Commission. Based on a review of these reports,
there were no late filings other than by Mr. Turner and Mr. Peterson, each of
whom filed a report after February 14, 2010 to report gift transactions during
2009.
38
Item
11.
|
Executive
Compensation.
|
The
Summary Compensation Table below shows the compensation earned by our executive
officers for the last two fiscal years.
Summary
Compensation Table
Name and
principal
position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Non
Equity
Incentive
Plan
Compen-
sation
($)
|
Change
in
Pension
Value
and
NonQuali-
fied
Deferred
Compen-
sation
Earnings
($)
|
All Other
Compen-
sation ($)
(4)
|
Total
($)
|
||||||||||||||||||||||
W.
Craig Turner,
|
2009
|
$ | 292,745 | $ | 78,415 | $ | 31,507 | (1) | - | - | $ | 41,590 | (5) | $ | 444,257 | |||||||||||||||
Chairman
and
|
2008
|
251,206 | - | 5,103,000 | (1) | - | - | 285,413 | (5) | 5,639,619 | ||||||||||||||||||||
Chief
Executive Officer
|
2007
|
127,209 | - | 24,630 | (2) | - | - | 337,500 | (5) | 489,339 | ||||||||||||||||||||
Walter
W. Weller,
|
2009
|
$ | 264,408 | $ | 62,000 | $ | 49,407 | (1) | - | - | $ | 41,160 | (5) | $ | 416,975 | |||||||||||||||
President
and
|
2008
|
204,727 | - | 5,103,000 | (1) | - | - | 34,754 | (5) | 5,342,481 | ||||||||||||||||||||
Chief
Operating Officer
|
2007
|
158,462 | - | 24,630 | (2) | - | - | 45,833 | (5) | 228,925 | ||||||||||||||||||||
Marc
T. Ray,
|
2009
|
$ | 216,715 | $ | 42,000 | $ | 49,407 | (1) | - | - | $ | 38,339 | $ | 346,461 | ||||||||||||||||
Chief
Financial
|
2008
|
179,634 | - | 1,701,000 | (1) | - | - | 28,188 | 1,908,822 | |||||||||||||||||||||
Officer(3)
|
2007
|
40,385 | - | 24,630 | (2) | - | - | - | 65,015 |
(1)
|
Represents
the aggregate grant date fair value recorded under ASC 718 with respect to
stock options awarded to the named executive on August 18, 2008 and May
27, 2009. In 2008 Messrs. Turner and Weller were each awarded
options 1,050,000 shares, and Mr. Ray received options to purchase 350,000
shares. In 2009, each of them was awarded options for 25,974
shares. The terms of these awards are described under “Stock
Option Awards,” below.
|
(2)
|
Each
of the named officers received stock valued at $24,630 as compensation for
service as a director during 2007 before the merger with
Dentalserv.com.
|
(3)
|
Mr.
Ray joined MedPro as Chief Financial Officer in October 2007, after having
previously served as a director.
|
(4)
|
The
following table shows the various components of All Other Compensation
paid in 2009.
|
39
Name
|
Fee for Personal
Guarantee
|
Management
Fee
|
Profit
sharing
Amount
|
401(k) Match
|
Group Term
Life
|
Health
Savings
Account
Contribution
|
Totals
|
|||||||||||||||||||||
Mr.
Turner,
|
||||||||||||||||||||||||||||
2009
|
— | — | $ | 22,700 | $ | 13,600 | $ | 1,290 | $ | 4,000 | $ | 41,590 | ||||||||||||||||
2008
|
$ | 250,000 | — | 28,954 | 1,546 | 913 | 4,000 | 285,413 | ||||||||||||||||||||
2007
|
250,000 | $ | 87,500 | — | — | — | — | 337,500 | ||||||||||||||||||||
Mr.
Weller
|
||||||||||||||||||||||||||||
2009
|
— | — | $ | 22,700 | $ | 15,170 | $ | 1,290 | $ | 2,000 | $ | 41,160 | ||||||||||||||||
2008
|
— | — | 28,954 | 2,762 | 1,038 | 2,000 | 34,754 | |||||||||||||||||||||
2007
|
— | $ | 45,833 | — | — | — | — | 45,833 | ||||||||||||||||||||
Mr.
Ray
|
||||||||||||||||||||||||||||
2009
|
— | — | $ | 22,700 | $ | 10,349 | $ | 1,290 | $ | 4,000 | $ | 38,339 | ||||||||||||||||
2008
|
— | — | 21,781 | 1,494 | 913 | 4,000 | 28,188 | |||||||||||||||||||||
2007
|
— | — | — | — | — | — | — |
(5)
|
Mr.
Turner received a fee in 2007 and 2008 for his personal guarantee of our
bank indebtedness. In 2009, Mr. Turner and Mr. Weller each was paid for
management services accrued in 2007. The amounts shown were included in
the 2007 financial statements. Mr. Weller also received payments totaling
$66,576 (2009) and $50,417 (2008) for unpaid compensation for years before
2007. These amounts were not listed above since they were recorded in the
financial statements for 2006 and prior
years.
|
Stock
Option Awards
On August
18, 2008, our board of directors adopted the MedPro Safety Products, Inc. 2008
Stock and Incentive Compensation Plan (the “2008 Plan”) and awarded options to
purchase a total of 3,000,000 shares to directors, officers and employees at an
exercise price of $1.81 per share. The exercise price is equal to the per share
valuation of our common stock agreed upon with the holders of our Series A Stock
in connection with those holders’ purchase of preferred stock and warrants to
purchase common stock for $13 million on December 28, 2007. The options may be
exercised only during the 30-day period ending on January 31, 2013. If before
that date, either the recipient terminates service with us or a change of
control of our company (as defined in the 2008 Plan) occurs, then the recipient
must exercise the options 30 days after the event.
On May
27, 2009, we awarded incentive stock options to our employees. Our three
executive officers each received options to purchase 29,574 shares of common
stock. The options awarded to Messrs. Weller and Ray have an exercise price of
$3.85 per share, which was trading price of our common stock on the grant date,
and a ten-year term. The options awarded to Mr. Turner have an exercise price of
$4.24 per share, or 110% trading price of our common stock on the grant date,
and a five-year term. The options were exercisable upon grant.
Employment
Agreements
In 2009,
we entered into employment agreements with our three executive officers W. Craig
Turner, Walter W. Weller and Marc T. Ray. Each of the employment agreements
extends for an initial three-year term, subject to automatic one-year extensions
thereafter, unless we or the executive provide prior written notice of intent
not to renew. The initial terms of the employment agreements expire on the
following dates:
W.
Craig Turner
|
June
30, 2012
|
Walter
W. Weller
|
September
30, 2012
|
Marc
T. Ray
|
December
31, 2011
|
Each of
the employment agreements provides that the named executive officer will be paid
a base salary and is eligible for a bonus of up to a specific percentage of base
salary. The annual base salaries and maximum bonus percentages are as
follows:
40
Name
|
Annual Salary
|
Maximum Bonus
(% of annual salary)
|
||||||
W.
Craig Turner
|
$ | 340,000 | 100 | % | ||||
Walter
W. Weller
|
292,500 | 100 | % | |||||
Marc
T. Ray
|
215,500 | 70 | % |
The board
of directors has sole discretion to increase the base salary and determine the
amount of and criteria for any bonus for Messrs. Turner and Weller. Either the
board of directors or Mr. Turner can change the base salary and determine the
amount of and criteria for any bonus for Mr. Ray, subject to applicable
corporate governance requirements of any securities exchange on which our common
stock may be listed. Each of the executives is entitled to participate in our
stock option and incentive compensation arrangements for management and in our
employee benefit plans, policies and practices on the same terms and conditions
as other employees, including vacation and holiday time. The agreements for
Messrs. Turner and Weller provide for them to have the use of a personal
assistant.
Each
agreement contains confidentiality, non-solicitation and non-competition
covenants. The executive agrees not to encourage employees to leave the Company,
encourage customers to terminate their relationships with the Company, and
compete with the Company during his employment and during a restricted period.
For Messrs. Turner and Weller, the restricted period extends for six months
after terminating employment. For Mr. Ray, the restricted period ends on the
later of (i) the expiration of the term of his employment agreement or (ii) two
years after terminating employment. Each executive also agrees to maintain the
confidentiality of the Company’s information during and after employment with
the Company.
The
employment agreements provide that if the executive voluntarily terminates his
employment, or if we terminate the executive for cause (as defined in the
employment agreement), then we have no further obligations to the executive
after the date of termination. Should we terminate the executive other than for
cause, we must continue to pay the executive’s monthly base salary (but no other
amounts related to any employee benefit plans and no further accrual of
vacation, sick or holiday time) until the end of the term of the agreement,
subject to and in exchange for any written releases we deem
appropriate.
Our
agreements with Messrs. Turner and Weller provide that upon termination of
employment following a “change of control,” the executive will receive a single
sum payment in an amount equal to his monthly base salary for 36 months (less
any applicable social security, federal, state or local tax withholdings), based
on the monthly base salary in the month in which such termination
occurs.
The
employment agreements for Messrs. Turner and Weller define a "change of control"
as the occurrence of one of the following events:
|
·
|
any
person or group acquires ownership of our stock that, together with stock
held by that person or group, constitutes more than 50% of the total fair
market value or total voting power of our
stock.
|
|
·
|
any
person group acquires, during a 12-month period ending on the date of the
most recent acquisition by that person or group, ownership of stock
possessing 30% or more of the total voting power of the stock of our
Company,
|
|
·
|
a
majority of the members of our board of directors are replaced during any
12-month period by directors whose appointment or election is not endorsed
by a majority of the members of our board of directors before the date of
the appointment or election.
|
|
·
|
any
person or group, during a 12-month period ending on the date of the most
recent acquisition by that person or group, assets from our Company or a
parent entity that have a total gross fair market value equal to or more
than 40% of the total gross fair market value of all of our assets
immediately before the acquisition or
acquisitions.
|
There is
no change of control in the event of a transfer to an entity that is controlled
by the shareholders of our company immediately after the transfer. In addition,
the transfer of our assets to one of the following recipients will not
constitute a "change of control":
41
|
·
|
a
shareholder of our company (immediately before the asset transfer) in
exchange for or with respect to its
stock;
|
|
·
|
an
entity, 50% or more of the total value or voting power of which is owned,
directly or indirectly, by us;
|
|
·
|
a
person or group that owns, directly or indirectly, 50% or more of the
total value or voting power of all of our outstanding stock;
or
|
|
·
|
a
person, at least 50% of the total value or voting power of which is owned,
directly or indirectly, by a person described in the preceding
subparagraph.
|
We have
agreed to pay Messrs. Turner and Weller the amount of any state, local or
federal tax incurred as a result of payments made to him that would not have
been imposed but for the occurrence of a change of control.
Mr. Ray’s
employment agreement provides that upon a change of control any amounts he would
be due in connection with any unexpired term may be accelerated, without
discount, at his discretion. His employment agreement defines a “change of
control” as (1) a change in ownership of 50% or more within a 12 month period as
a result of a single transaction or a series of transactions with one or more
related buyers or a consortium of buyers, or (2) any sale, merger, consolidation
or leveraged buyout resulting in our company no longer being public as a
standalone company. We have agreed to indemnify Mr. Ray against any excise tax
(in connection with parachute payments) or additional taxes, other than ordinary
income taxes, due to the acceleration of payments as a result of a change of
control.
Outstanding
Equity Awards at Fiscal Year-End
The
following table shows the stock options currently held by the named executives.
We have not awarded restricted stock to our executives.
Option Awards
|
||||||||||||||||||
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
|||||||||||||
Name
and Grant Date
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Equity
Incentive
Plan Awards:
Number of
Shares,
Underlying
Unexercised
Unearned
Options(#)
|
Option
Exercise Price
($)
|
Option
Expiration
Date
|
|||||||||||||
W.
Craig Turner
|
||||||||||||||||||
8/19/08
|
- | 1,050,000 | n/a | $ | 1.81 | (1) |
1/31/13
|
(2)
|
||||||||||
5/27/09
|
25,974 | - | n/a | 4.24 |
5/27/14
|
|||||||||||||
Walter
W. Weller
|
||||||||||||||||||
8/19/08
|
- | 1,050,000 | n/a | 1.81 | (1) |
1/31/13
|
(2)
|
|||||||||||
5/27/09
|
25,974 | - | n/a | 3.85 |
5/27/19
|
|||||||||||||
Marc
T. Ray
|
||||||||||||||||||
8/19/08
|
- | 350,000 | n/a | 1.81 | (1) |
1/31/13
|
(2)
|
|||||||||||
5/27/09
|
25,974 | - | n/a | 3.85 |
5/24/19
|
|
(1)
|
The
exercise price is equal to the per share valuation of our common stock
agreed upon with the holders of our Series A Stock in connection with
those holders’ purchase of preferred stock and warrants for $13
million on December 28, 2007.
|
|
(2)
|
The
options may only be exercised during a 30-day period ending on January 31,
2013. If before that date either the recipient terminates
service with us or a change of control of our company occurs, then the
recipient must exercise the options within 30 days after the
event.
|
42
Option
Exercises and Stock Vested
No
options were exercised and no stock awards vested during 2009.
Director
Compensation
None of
MedPro’s directors other than executive officers received cash compensation for
service as a director during 2009. Messrs. Peterson and Rustand were each
awarded options to purchase 100,000 shares on August 18, 2008, on the terms
described under “Stock Option Awards,” above. Amounts paid to Messrs. Turner and
Weller are included in the Summary Compensation Table. On August 24, 2009,
Messrs. Fletcher and Kiely were each awarded 50,000 share options each at the
same exercise price and on the same terms as the options awarded to Messrs.
Peterson and Rustand on August 18, 2008.
The
following chart shows compensation paid or awarded to our non-employee directors
for the year ended December 31, 2009.
Name
|
Fees earned or
paid in cash
($)
|
Stock awards ($)
|
Option awards
($)
|
All other
compensation ($)
|
Total ($)
|
|||||||||||||||
Gary
A. Peterson
|
— | — | — | — | — | |||||||||||||||
Warren
Rustand
|
— | — | — | — | — | |||||||||||||||
Ernest
L. Fletcher (1)
|
— | — | $ | 112,186 | — | $ | 112,186 | |||||||||||||
W.
Leo Kiely III (1)
|
— | — | $ | 112,186 | — | $ | 112,186 |
|
(1)
|
Messrs.
Fletcher and Kiely joined the board of directors on October 21,
2008. On August 24, 2009, they were granted options at the same
exercise price as the options granted to our other directors in
2008.
|
2008
Stock and Incentive Compensation Plan
On August
18, 2001, our board of directors adopted the MedPro Safety Products, Inc. 2008
Stock and Incentive Compensation Plan. The 2008 Plan authorizes the issuance of
a maximum of 7,500,000 common shares for awards to employees and directors,
subject to adjustment as described below. If an award granted under the 2008
Plan expires or terminates without exercise, the shares no longer subject to
that award will again become available for issuance under the Plan. A maximum of
1,500,000 common shares subject to stock-based awards or $1,000,000 for
cash-based awards may be granted during any one fiscal year to any one
individual. A maximum of 300,000 shares may be issued upon the exercise of
incentive stock options. A maximum number of 50,000 shares may be issued without
consideration as restricted stock awards, restricted stock units or other
“full-value awards.” The 2008 Plan permits grants of stock options (including
incentive stock options and nonqualified stock options), stock appreciation
rights (“SARs”), restricted stock awards, restricted stock units, and cash
performance awards.
The 2008
Plan became effective upon adoption by the board of directors. The 2008 Plan was
subsequently approved by shareholders as required by the Internal Revenue Code
in order to award incentive stock options.
43
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
The
following table sets forth information known to us regarding beneficial
ownership of our common stock as of February 26, 2010, by:
|
·
|
each
person known by us to be the beneficial owner of more than 5% of either
class of our common stock;
|
|
·
|
each
of our executive officers and directors;
and
|
|
·
|
our
executive officers and directors as a
group.
|
The table
does not show the full potential effect of the conversion of Series A, Series B
or Series C Stock into our common stock or the exercise of warrants to purchase
our common stock. None of the Series A, Series B and Series C Stock may be
converted, nor may the related warrants be exercised, to the extent that such a
conversion or exercise would cause the holder to beneficially own more than 9.9%
of the outstanding common stock. The holder may terminate the
restriction 60 days after giving written notice to MedPro.
Shares Beneficially Owned (1)
|
||||||||
Name
|
Number
of Shares
|
Percentage
of class (2)
|
||||||
W.
Craig Turner (3)
|
4,690,462 | 34.9 | % | |||||
Vision
Opportunity Master Fund, Ltd. (4)
|
1,653,679 | 12.5 | ||||||
Vision
Capital Advantage Fund LLC (5)
|
1,443,090 | 9.9 | ||||||
Gary
A. Peterson (6)
|
1,098,569 | 8.3 | ||||||
Baton
Development (6)
|
1,037,041 | 7.8 | ||||||
Warren
Rustand (7)
|
242,658 | 1.8 | ||||||
Walter
W. Weller
|
195,047 | 1.5 | ||||||
Marc
T. Ray
|
72,624 | * | ||||||
Ernest
L. Fletcher
|
14,000 | * | ||||||
W.
Leo Kiely III
|
0 | 0 | ||||||
Executive
officers and directors as a group (7 persons)
|
6,313,360 | 47.0 |
*
Indicates less than
1%
(1) Unless
otherwise indicated, each of the listed shareholders has sole voting and
investment power with respect to the shares. Under SEC rules, each a person or
group is considered to be the beneficial owner of securities that the person may
acquire within 60 days through the exercise or conversion of convertible
securities, options, warrants and rights, if any. Those securities are included
in the total number of outstanding shares when computing the percentage
beneficially owned by the person or group. The securities are not included in
the total number of outstanding shares when computing the percentage of shares
beneficially owned by any other person or group.
(2) Percentages
are based upon 13,215,311 outstanding
shares. Shares underlying currently exercisable warrants and
convertible preferred shares are deemed outstanding for determining the
ownership percentage solely of the holder.
44
(3) Business
address is 817 Winchester Road, Lexington, Kentucky 40505.
(4) The
number of shares shown in the table is the number of outstanding common shares
VOMF owns. VOMF’s business address is 20 West 55th Street, New York,
New York 10019. Adam Benowitz, Managing Member of Vision Capital
Advisors LLC, has voting and investment power with respect to the securities
owned by VOMF.
(5) The
number of shares shown in the table is the number of outstanding common shares
VCAF owns plus the number of shares issuable upon conversion of preferred stock
or exercise of warrants that would increase VCAF’s beneficial ownership to
9.9%. VCAF’s business address is 615 South Dupont Highway, Dover,
Delaware 19901. Adam Benowitz, Managing Member of Vision Capital
Advisors LLC, has voting and investment power with respect to the securities
owned by VCAF.
(6) Mr.
Peterson is the CEO of Baton Development. Business address is 10040 East Happy
Valley Road # 37, Scottsdale, Arizona 85255.
(7) Includes
currently exercisable warrants for 130,023 shares.
Equity
Compensation Plan Information
The
following table provides information with respect to our equity compensation
plans as of December 31, 2009.
Plan category
|
Number of shares to be
issued upon the exercise of
outstanding options,
warrants and rights
|
Weighted-average exercise
price of outstanding
options, warrants and rights
|
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
|
|||||||||
Equity
compensation plans approved by security holders
|
3,332,971 | $ | 1.95 | 4,500,000 | ||||||||
Equity
compensation plans not approved by security holders
|
0 | 0 | 0 | |||||||||
Total
|
3,332,971 | $ | 1.95 | 4,500,000 |
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
Director
Independence
Our Board
of Directors is currently composed of six members. Two of our directors, Mr.
Kiely and Dr. Fletcher, are independent under the definition of the NASDAQ Stock
Exchange. Messrs Turner and Weller are officers and employees. SC Capital, for
which Mr. Rustand is a Managing Director, received cash and equity compensation
for financial services provided in connection with the merger and the private
placement and receives a fee under an advisory services agreement described
above. Mr. Peterson has provided consulting services to us, and Baton
Development, an entity controlled by Mr. Peterson, has been a party to
transactions with our predecessor described above. Mr. Turner currently serves
as Chairman of the Board of Directors.
Certain
Relationships and Related Transactions
The
following section describes transactions between MedPro and its directors,
executive officers and their affiliates since January 1, 2007. Transactions
before December 28, 2007, involved one of MedPro’s two predecessors —
Dentalserv.com (or DRSV), a Nevada public shell corporation, and MedPro, Inc., a
Delaware corporation.
45
|
·
|
Issuances
of shares by MedPro before January 10, 2007, in transactions have been
adjusted to reflect both its merger with Vacumate (described below) and
the merger with DRSV on December 28,
2007.
|
|
·
|
Issuances
of shares in transactions between January 10, 2007, and December 28, 2007,
have been adjusted to reflect the merger with
DRSV.
|
Pre-Merger
Transactions Involving MedPro
2007
VOMF Bridge Loan
In
anticipation of the closing of the merger and the private placement with our
Series A Stockholders, in 2007 we borrowed $1,000,000 from Vision Opportunity
Master Fund at an interest rate of 8% per year and paid an origination fee of
$50,000. VOMF also purchased $12 million of the $13 million of newly issued
Series A Stock and related warrants to purchase our common stock. The loan was
paid back in full with the proceeds from the sale of those securities. See “Item
1 – Business – History and Recent Reorganization.”
CRM
Financing
For
several years, CRM Companies, Inc., a company controlled by our CEO, Chairman
and largest shareholder, W. Craig Turner, has provided substantial financial
support to MedPro. The financial support provided from time to time by CRM and,
to a lesser degree, by other shareholders allowed our company to continue
operating. During 2005, 2006 and 2007 we began to settle and compromise debts in
order to improve our balance sheet with a view toward finding additional funding
or an investment partner.
On
September 1, 2006, MedPro issued a $2,000,000 promissory note to CRM as part of
a corporate debt restructuring in which CRM agreed to forgive amounts otherwise
owed or accruable to it under various agreements with MedPro. CRM’s financial
support to MedPro had included making short-term bridge loans, providing
services, paying various expenses directly, guaranteeing loans, and subsidizing
office lease expense. At the time, our obligations to CRM totaled more than $5
million. CRM and Mr. Turner waived these obligations, late fees due on
indebtedness and any rights to future grants of warrants that had been
contemplated as consideration for the loans and the services provided to MedPro
in exchange for a grant of 536,306 shares of common stock to Mr. Turner and the
issuance of the promissory note. The shares were valued at $1,822,805, or
approximately $3.40 per share, the price per share for which we had negotiated
to issue shares to repay similar obligations to non-affiliate shareholders
during 2006. The CRM note bore interest at an annual rate of 6% and provided for
additional interest of 5% every 60 days if all principal and accrued interest is
not repaid by December 31, 2007. As agreed under the terms of our stock purchase
agreement with the Series A Stockholders, in 2008, we used a portion of the net
proceeds from the sale of the securities to pay down all of the accrued interest
and $1,250,000 of principal of this note. Interest was then paid monthly in 2008
until the principal was repaid in full in August 2008.
As part
of the debt restructuring, Mr. Turner personally guaranteed the term loan and
revolving line of credit under our credit agreement. We paid Mr. Turner a
$250,000 fee for the personal guarantee for both 2007 and 2008. Mr. Turner
subsequently assigned the right to receive the 2007 guarantee fee to another
shareholder, and on December 28, 2007, the shareholder exchanged this right for
138,783 common shares, or $1.36 per share.
Vacumate
Merger
Vacumate
LLC was formed by an investor group comprised in part of our shareholders,
including our Chairman, to re-acquire the Vacu-Mate patents from Visual
Connections after MedPro defaulted on its financial obligations under an earlier
agreement to acquire the Vacu-Mate IP. To retain the opportunity to develop the
technology when it had limited capital resources, the Company entered into an
agreement to develop the Vacu-Mate IP in exchange for a 40% interest in Vacumate
LLC.
46
To
facilitate a financing in the future, Vacumate LLC and MedPro combined through a
merger in January 2007, in which the Vacumate LLC members received 60% of
MedPro’s shares. At the time, MedPro’s 40% ownership interest in Vacumate LLC
represented a substantial portion of MedPro’s total assets. The merger combined
Vacumate LLC and MedPro in a manner that gave the equity owners of each company
value in the combined company equivalent to the value held in each of the
predecessor companies. In the merger:
|
·
|
each
of the 60 ownership units of Vacumate LLC held by owners other than MedPro
converted automatically into approximately 103,651 shares of the common
stock of the combined company; and
|
|
·
|
each
of the shares of MedPro common stock issued and outstanding immediately
before the effective time was reduced to approximately 0.18 shares of the
common stock of the combined
company.
|
In the
Vacumate merger, MedPro’s Chairman, W. Craig Turner, and members of his family
received approximately 3.4 million shares of the common stock of the combined
company for the 33 units of Vacumate LLC they owned.
Technology
Development and Option Agreement
On August
24, 2007, we entered into a Technology Development and Option Agreement (the
“Technology Agreement”) with SGPF, LLC. W. Craig Turner, our Chairman and CEO,
owns 100% of the equity units of SGPF. SGPF was established to acquire
technology underlying a family of prefilled safety syringe products (the “Blunt
Technology”) that we believed had potential for successful commercialization, at
a time when MedPro did not have the financial resources to acquire the
technology and risked losing the opportunity to other interested
parties.
SGPF
acquired the Blunt Technology from Visual Connections and its founder in 2007.
SGPF paid an initial transfer payment of $250,000 and agreed to pay Visual
Connections transfer payments totaling $2,750,000 in installments over three
years beginning in 2007. SGPF also agreed to pay a royalty of 5% of on the first
$250,000 of adjusted gross sales of products using the Blunt Technology in any
calendar year, and 4% of the adjusted gross sales of such products for the
remainder of the year.
The
Technology Agreement requires SGPF to acquire the Blunt Technology. MedPro
agreed to direct the development of the Blunt Technology with the objective of
fully commercializing it as quickly as possible, and to pay up to $375,000
towards the cost of development. MedPro also acquired the option to purchase the
Blunt Technology from SGPF. The Technology Agreement originally provided that
MedPro would pay the following amounts upon exercise of the option:
|
·
|
$2,500,000
payable in cash to SGPF;
|
|
·
|
assumption
of the $2,750,000 in patent transfer payments payable to Visual
Connections, including reimbursement of any installments previously paid
by SGPF; and
|
|
·
|
$2,500,000
payable in common stock to SGPF, based on a value of $1.81 per common
share, which was the value agreed upon in our agreement with the Series A
Stockholders.
|
MedPro
also agreed to assume the obligation to pay the royalties to Visual Connections
on sales of any products based on the Blunt Technology.
On
September 8, 2008, we agreed to amend the Technology Agreement, which was a
condition to our receiving a commitment from the holders of our Series J
warrants to exercise those warrants in full for cash by November 1, 2008. The
amendment:
|
·
|
increased
the portion of the exercise price to be paid in cash from $2,500,000 to
$3,345,000, which amount included all amounts SGPF had paid to date under
its agreement with the original holders of the technology;
and
|
|
·
|
reduced
the portion of the exercise price payable in shares of newly issued shares
of our common stock from $2,500,000 to $1,250,000, based on a value of
$1.81 per common share.
|
47
The
amendment took effect on September 30, 2008, when the following events occurred
(a) the holders of our Series J Warrants had exercised them for at least $6.5
million in cash by that date, and (b) we exercised our option to purchase the
Blunt Technology. The purchase closed in October 2008, at which time MedPro paid
the cash portion of the purchase price, and the parties further amended the
Technology Agreement to provide that the stock portion of the purchase price
would be issued to SGPF only upon the occurrence of one of the following
events:
|
·
|
Within
30 days of MedPro’s realization, on a cumulative basis, of $5,000,000 of
gross sales revenue from the Blunt Technology,
or
|
|
·
|
A
‘change of control’ of MedPro, defined as any event or set of
circumstances, including but not limited to the termination of his
employment, whereby W. Craig Turner ceases to possess, directly or
indirectly, the power to direct or cause the direction of the management
and policies of MedPro; or
|
|
·
|
The
sale or licensing of any part of the Blunt Technology intellectual
property to another entity.
|
As a
result of its exercise of the option, MedPro assumed the obligation to pay the
six quarterly patent transfer payments of $250,000 then remaining, or a total of
$1,500,000. During 2009 $1,250,000 of these payments were made. The final
payment of $250,000 was made in 2010.
2007
Stock Sale
On May
10, 2007, MedPro issued a total of 516,474 shares to three shareholders for
$500,000, or approximately $0.97 per share, to raise cash to retire a
convertible note. The price per share was negotiated with the shareholders. One
of the shareholders involved in these transaction was William Turner, the father
of our Chairman and CEO, who paid $250,000 in cash to purchase 258,237
shares.
Ongoing
Relationships
Lease
We lease
our office and storage facility in Lexington, Kentucky, under a non-cancelable
operating lease. The lease runs through 2012 at a monthly rent of $6,975, with
an option for two five-year extension options. The lessor is a partnership in
which MedPro’s Chairman and CEO holds an interest.
Advisory
Agreements with SC Capital Partners
SC
Capital Partners, LLC served as a financial advisor in connection with the
December 2007 private placement to VOMF and other investors. For those services,
SC Capital received a total of $1,040,000 in cash, 593,931 newly issued shares
of common stock and warrants to purchase 533,458 shares of common stock. The
warrants, which SC Capital assigned, are exercisable at an exercise price of
$1.81 and have substantially the same terms as our Series A warrants. Upon
completion of the merger, Warren Rustand, Managing Partner of SC Capital, became
a MedPro Director.
In March
2008, we entered into a financial advisory agreement with SC Capital. SC Capital
has agreed to provide us with advisory services, finder services, merger and
acquisition services and strategic alliances services. The agreement will last
for a minimum term of six months and will continue on a month-to-month basis
until it is terminated by either party in writing with 30 days
notice.
We pay SC
Capital a consulting fee of $15,000 per month until the agreement is terminated.
We agreed to pay additional compensation to SC Capital in connection with any
definitive agreements we enter into with parties specifically identified by SC
Capital during and within 24 months after termination of the agreement. For an
equity financing transaction, we must pay SC Capital a consulting fee equal to
8% of the principal cash amount of all securities and institutional and
secondary financings introduced by SC Capital and provide SC Capital with
warrants to purchase a number of shares or units equal to 8% of the number of
shares or units sold under the equity financing. In a debt financing
transaction, we must pay SC Capital a consulting fee equal to 3% of any gross
proceeds received by MedPro in connection with a debt financing. In a committed
debt facility, the fee owed to SC Capital is to be calculated on the gross
available amount committed to us. In connection with any merger and acquisition
transaction occurring during the term of the agreement, SC Capital would be
entitled to 2.5% of the total transaction consideration for the first $20
million and 2.0% for any amount over $20 million. For strategic alliances or
other business realignments resulting from SC Capital’s services, we must pay a
consulting fee equal to 8% of the value of the transaction.
48
During
2009 we paid SC Capital a financing fee of $240,000, equal to 8% of the
$3,000,000 received in connection with the March 24, 2009 exchange of warrants
for Series “C” Preferred Stock with VCAF and VMOF.
Other
Transactions in Which Related Parties Have an Interest
In 2009,
we paid Mr. Turner $87,500 and Mr. Weller $45,833 for management services, which
amounts had been accrued and recorded in our 2007 financial statements. Mr.
Weller also received payments totaling $66,576 in 2009 and $50,417 in 2008 for
unpaid compensation owed for years before 2007.
C. Garyen
Denning, MedPro’s Vice President of Sales and Marketing, is the son-in-law of W.
Craig Turner, our Chairman. Mr. Denning was paid an aggregate salary, bonus and
taxable perquisites of approximately $147,972 during 2009.
Bethany
Denning, MedPro’s Director of Human Resources, is the daughter of W. Craig
Turner, our Chairman. Ms. Denning was paid an aggregate salary, bonus and
taxable perquisites of approximately $100,153 during 2009.
2010
VOMF Bridge Loan
On
February 8, 2010, MedPro borrowed $500,000 from VOMF. The loan provides MedPro
with additional financial flexibility. The outstanding principal balance bears
interest at an annual rate of 6%, and all principal and interest was originally
due and payable on March 31, 2010.
Under the
terms of the note purchase agreement, we agreed to add a representative of VOMF
to our board of directors upon VOMF’s request. Other covenants of the note
purchase agreement provide that without the written consent of VOMF, we will not
guarantee or incur additional indebtedness in excess of $100,000, other than
trade accounts payable incurred in the ordinary course of business, refinancing
of current indebtedness, and financing secured by purchase money liens, liens on
equipment and other permitted liens. We also agreed not to sell any of our
properties, assets and rights including, without limitation, its software and
intellectual property, to any person except for sales to customers in the
ordinary course of business; or with the prior written consent of
VOMF.
On
February 26, 2010, we increased the outstanding principal balance of the bridge
loan to $850,000 and extended the date on which all principal and interest is
due and payable to June 30, 2010. In consideration, we issued to VOMF a warrant
to purchase 212,500 shares of our common stock at $4.00 per share. The warrant
has a five-year term. The warrant provides that the warrant price will adjust if
specified corporate transactions occur, including a provision that if we issue
any additional shares of common stock at a price per share less than $4.00 (or
the adjusted warrant price then in effect) or without consideration, then the
warrant price will adjust to the price per share paid for the additional shares
of common stock upon each such issuance.
Item
14. Principal Accountant Fees and Services.
The
following table presents fees for professional services rendered by Rodefer Moss
& Co, PLLC for the audit of the company’s annual financial statements for
2009 and 2008 and fees billed for other services rendered by Rodefer Moss &
Co, PLLC.
2009
|
2008
|
|||||||
Audit
fees
|
$ | 88,000 | $ | 93,368 | ||||
Audit-related
fees
|
32,211 | 43,717 | ||||||
Audit
and audit-related fees
|
120,211 | 137,085 | ||||||
Tax
fees
|
— | — | ||||||
All
other fees
|
— | — | ||||||
Total
fees
|
$ | 120,211 | $ | 137,085 |
49
Audit
fees include fees for the audit of the annual financial statements and reviews
of the condensed financial statements included in our quarterly reports.
Audit-related fees relate principally to audit-related and review services
associated with registration statements filed with the Securities and Exchange
Commission.
PART
IV
Item 15.
|
Exhibits
and Financial Statement Schedules.
|
(a)
|
Financial
Statements
|
The
following financial statements of the company are included at the end of this
report:
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Balance
Sheets as of December 31, 2009 and 2008
|
F-3
|
Statements
of Operations for the Years Ended December 31, 2009 and
2008
|
F-5
|
Statements
of Shareholders' Equity/(Deficiency) for the Years Ended
December 31, 2009 and 2008
|
F-6
|
Statements
of Cash Flows for the Years Ended December 31, 2009 and
2008
|
F-7
|
Notes
to Financial Statements
|
F-8
|
(b)
|
Financial
Statement Schedules
|
Not
applicable.
(c)
|
Exhibits
|
Exhibit
No.
|
Description
|
||
3.1
|
Amended
and Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to Form 8-K filed on January 4,
2008).
|
||
3.2
|
Bylaws
(incorporated by reference to Exhibit 3.2 to Form 8-K filed on
January 4, 2008).
|
||
3.3
|
Bylaw
amendment dated August 10, 2009 (incorporated herein by reference to Form
8-K filed on August 17, 2008).
|
||
4.1
|
Certificate
of Designations, Series A Convertible Preferred Stock Turner (incorporated
by reference to Exhibit 4.1 to Amendment No. 1 on Form S-1/A (Reg. No.
333-149163) filed on July 3, 2008).
|
||
4.2
|
Form
of Series A Common Stock Purchase Warrant (incorporated by reference to
Exhibit 4.3 to Form 8-K/A filed on September 10, 2007).
|
||
4.3
|
Form
of Series B Common Stock Purchase Warrant (incorporated by reference to
Exhibit 4.4 to Form 8-K/A filed on September 10, 2007).
|
||
4.4
|
Series
A Convertible Stock Purchase Agreement dated as of September 5, 2007
(incorporated by reference to Exhibit 4.6 to Form 10-K filed on April 18,
2008).
|
||
4.5
|
Amendment
to Certificate of Designations, Series A Convertible Preferred Stock
(incorporated by reference to Exhibit 4.6 to Form 10-K filed on March 30,
2009)
|
||
4.6
|
Certificate
of Designations, Series B Convertible Preferred Stock (incorporated herein
by reference to Exhibit 4.9 to Form 8-K filed on August 22,
2008).
|
50
4.7
|
Omnibus
Amendment to Series A, B, and C Warrants held by Vision Opportunity Master
Fund, Ltd. (incorporated herein by reference to Exhibit 4.10 to Form 8-K
filed on August 22, 2008).
|
||
4.8
|
Certificate
of Designations, Series C Convertible Preferred Stock (incorporated herein
by reference to Exhibit 4.1 to Form 8-K filed on March 30,
2009).
|
||
10.1
|
Technology
Acquisition Agreement, dated February 19, 2007, by and among SGPF, LLC,
Hooman Asbaghi and Visual Connections, Inc (incorporated by reference to
Exhibit 10.1 to Form 10-K filed on April 18, 2008)
|
||
10.2
|
Technology
Development and Option Agreement, between SGPF, LLC and MedPro Safety
Products, Inc. (incorporated by reference to Exhibit 10.2 to Form 10-K
filed on April 18, 2008).
|
||
10.3
|
Loan
Agreement and Amendments, between Fifth Third Bank and MedPro Safety
Products, Inc. (incorporated by reference to Exhibit 10.3 to Form 10-K
filed on April 18, 2008)
|
||
10.4
|
Promissory
Note dated September 1, 2006, between MedPro Safety Products, Inc. and CRM
Development Company (incorporated by reference to Exhibit 10.4 to Form
10-K filed on April 18, 2008)
|
||
10.5
|
Fourth
Amendment to Loan Agreement between Fifth Third Bank and MedPro Safety
Products, Inc. Company (incorporated by reference to
Exhibit to Form 10-K filed on March ,
2009)
|
||
10.6
|
Financial
Advisory Agreement, between MedPro Safety Products, Inc and SC Capital
Partners LLC (incorporated by reference to Exhibit 10.5 to Form 10-K filed
on April 18, 2008).
|
||
10.7
|
Medical
Supply Manufacturing Agreement as of July 15, 2008 between MedPro Safety
Products, Inc. and Greiner Bio-One GmbH (blood collection products) (incorporated by
reference to Exhibit 10.1 to Form 8-K filed on July 21,
2008).
|
||
10.8
|
Medical
Supply Manufacturing Agreement as of July 15, 2008 between MedPro Safety
Products, Inc. and Greiner Bio-One GmbH (winged butterfly product) (incorporated by
reference to Exhibit 10.2 to Form 8-K filed on July 21,
2008).
|
||
10.9
|
Amendment
to Technology Development and Option Agreement, between SGPF, LLC and
MedPro Safety Products, Inc. (incorporated by reference to Exhibit 10.1 to
Form 8-K filed on October 6, 2008).
|
||
10.10
|
MedPro
Safety Products, Inc. 2008 Stock and Incentive Compensation Plan
(incorporated by reference to Exhibit 10.9 to Form 8-K filed on August 22,
2008).
|
||
10.11
|
Form
of Nonqualified Stock Option Award Agreement (incorporated by reference to
Exhibit 10.10 to Form 8-K filed on August 22, 2008).
|
||
*
|
10.12
|
Form
of Incentive Stock Option Award Agreement.
|
|
10.13
|
Employment
Agreement with Marc T. Ray (incorporated by reference to Exhibit 10.1 to
Form 8-K filed on April 7, 2009).
|
||
10.14
|
Employment
Agreement with W. Craig Turner (incorporated by reference to Exhibit 10.1
to Form 8-K filed on July 22, 2009).
|
||
10.15
|
Employment
Agreement with Agreement with Walter W. Weller (incorporated by reference
to Exhibit 10.1 to Form 8-K filed on October 21, 2009)
|
||
10.16
|
Note Purchase Agreement between
MedPro Safety Products, Inc. and Vision Opportunity Master Fund, Ltd.
dated as of February 8, 2010 (incorporated by reference to Exhibit
10.1 to Form 8-K filed on February 11,
2009).
|
51
*
|
10.17
|
Note Purchase Agreement between
MedPro Safety Products, Inc. and Vision Opportunity Master Fund, Ltd.
dated as of February 26, 2010.
|
|
*
|
10.18
|
6%
Promissory Note dated February 26, 2010
|
|
*
|
10.19
|
Common
Stock Purchase Warrant dated February 26. 2010.
|
|
*
|
31.1
|
Certification
of Chief Executive Officer pursuant to SEC Rule
13(a)-14(a)
|
|
*
|
31.2
|
Certification
of Chief Financial Officer pursuant to SEC Rule
13(a)-14(a)
|
|
*
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title
18 of the U.S. Code
|
|
*
|
32.2
|
Certifications
of Chief Financial Officer, pursuant to Section 1350 of Chapter 63 of
Title 18 of the U.S. Code
|
|
* Filed
herewith
|
52
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, in Lexington, Kentucky on March 29,
2010.
MEDPRO
SAFETY PRODUCTS, INC.
|
|
By:
|
/s/ W. Craig Turner
|
W.
Craig Turner
|
|
Chief
Executive Officer,
|
|
Chairman
of the Board of Directors
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed by the following
persons in the capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
/s/
W. Craig Turner
|
Chief
Executive Officer, Chairman of the Board of Directors
|
March 29, 2010
|
||
W.
Craig Turner
|
(Principal
Executive Officer)
|
|
||
/s/
Marc T. Ray
|
Vice
President Finance, Chief Financial Officer
|
March 29, 2010
|
||
Marc
T. Ray
|
(Principal
Financial and Accounting Officer)
|
|||
/s/
Walter W. Weller
|
President,
Chief Operating Officer, Director
|
March 29, 2010
|
||
Walter
W. Weller
|
||||
/s/
Gary A. Peterson
|
Director
|
March 29, 2010
|
||
Gary
A. Peterson
|
||||
/s/
Walter Rustand
|
Director
|
March 29, 2010
|
||
Warren
Rustand
|
||||
/s/
Ernest L. Fletcher
|
Director
|
March 29, 2010
|
||
Ernest
L. Fletcher
|
||||
/s/
W. Leo Kiely III
|
Director
|
March 29, 2010
|
||
W.
Leo Kiely III
|
|
53
INDEX
TO FINANCIAL STATEMENTS
MedPro
Safety Products, Inc.
Page
|
||
Opinion
of Registered Public Accounting Firm
|
F-2
|
|
Balance
Sheets as of December 31, 2009 and 2008
|
F-3
|
|
Statements
of Operations for the Years Ended December 31, 2009 and
2008
|
F-5
|
|
Statements
of Shareholders' Equity/Deficiency for the Years Ended December
31, 2009 and 2008
|
F-6
|
|
Statements
of Cash Flows for the Years Ended December 31, 2009 and
2008
|
F-7
|
|
Notes
to Financial Statements
|
F-8
|
F-1
Report of
Independent Registered Public Accounting Firm
To the
Board of Directors and
Shareholders
of MedPro Safety Products, Inc.
We have
audited the accompanying balance sheets of MedPro Safety Products, Inc. as of
December 31, 2009 and 2008, and the related statements of operations,
shareholders’ equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of MedPro Safety Products, Inc. as of
December 31, 2009 and 2008, and the results of its operations and cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America.
/s/ Rodefer Moss & Co.,
PLLC
Knoxville,
Tennessee
|
|
March
29, 2010
|
F-2
MedPro
Safety Products, Inc.
Balance
Sheets
December
31, 2009 and 2008
December 31, 2009
|
December 31, 2008
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
|
$ | 4,072,443 | $ | 11,636,843 | ||||
Accounts
receivable, net of allowance of $21,225 and $15,837
|
- | - | ||||||
Inventory
|
247,981 | 288,414 | ||||||
Accrued
interest income
|
18,694 | - | ||||||
Prepaid
expenses and other current assets
|
20,414 | 9,350 | ||||||
Prepaid
investor relations costs
|
1,634 | 228,660 | ||||||
Prepaid
costs of automation equipment
|
- | 452,855 | ||||||
Total
current assets
|
4,361,166 | 12,616,122 | ||||||
Property
and Equipment
|
||||||||
Equipment
and tooling
|
1,042,869 | 751,725 | ||||||
Leasehold
improvements
|
192,377 | 114,831 | ||||||
Computers,
network and phones
|
197,574 | 126,061 | ||||||
Furniture
and fixtures
|
118,019 | 81,213 | ||||||
Trade
show booth
|
7,341 | 7,341 | ||||||
1,558,180 | 1,081,171 | |||||||
Less:
accumulated depreciation
|
252,966 | 146,680 | ||||||
Property
and equipment, net
|
1,305,214 | 934,491 | ||||||
Other
Assets
|
||||||||
Intangible
assets
|
9,067,457 | 9,109,547 | ||||||
Deferred
financing costs
|
55,718 | 97,489 | ||||||
Total
other assets
|
9,123,175 | 9,207,036 | ||||||
Total
assets
|
$ | 14,789,555 | $ | 22,757,649 |
See notes
to financial statements.
F-3
MedPro
Safety Products, Inc.
Balance
Sheets (Continued)
December
31, 2009 and 2008
December 31, 2009
|
December 31, 2008
|
|||||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable and accrued expenses
|
$ | 406,121 | $ | 261,325 | ||||
Accrued
interest payable
|
10,674 | 34,276 | ||||||
Current
portion of long term debt
|
3,413,533 | 3,262,660 | ||||||
Deferred
revenue
|
- | 464,900 | ||||||
Notes
payable to and advances from shareholders
|
- | 383,333 | ||||||
Current
portion of technology transfer payments - Visual Connections,
Inc.
|
250,000 | 2,000,000 | ||||||
Total
current liabilities
|
4,080,328 | 6,406,494 | ||||||
Long-Term
Liabilities
|
||||||||
Notes
payable - long term portion
|
694,444 | 2,607,435 | ||||||
Long-term
portion of technology transfer payments - Visual Connections,
Inc.
|
- | 250,000 | ||||||
694,444 | 2,857,435 | |||||||
Total
liabilities
|
4,774,772 | 9,263,929 | ||||||
Shareholders’
Equity
|
||||||||
Preferred
stock $.01 par value: 10,000,000 shares authorized:
|
||||||||
Series
A Preferred
|
||||||||
6,668,229
shares issued and outstanding. Liquidation preference
$1,215,544 and $610,260, respectively.
|
66,682 | 66,682 | ||||||
Series
B Preferred
|
||||||||
1,493,779
and 1,493,779 shares issued and outstanding, respectively.
|
14,937 | 14,938 | ||||||
Series
C Preferred
|
||||||||
1,571,523
and 0 shares issued and outstanding, respectively.
|
15,715 | - | ||||||
Common
stock
|
||||||||
$.001
par value; 90,000,000 shares authorized; 13,215,311 and 13,320,366 shares
issued and outstanding, respectively.
|
13,215 | 13,320 | ||||||
Additional
paid-in capital
|
67,410,070 | 43,667,689 | ||||||
Unearned
share-based compensation
|
(167,600 | ) | (21,885 | ) | ||||
Treasury
stock (105,080 common shares)
|
(386,370 | ) | ||||||
Accumulated
deficit
|
(56,951,866 | ) | (30,247,024 | ) | ||||
Total
shareholders’ equity
|
10,014,783 | 13,493,720 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 14,789,555 | $ | 22,757,649 |
See notes
to financial statements.
F-4
MedPro
Safety Products, Inc.
Statements
of Operations
For
the Years Ended December 31, 2009 and 2008
For the Year Ended
|
For the Year Ended
|
|||||||
December 31, 2009
|
December 31, 2008
|
|||||||
Sales
|
||||||||
Needlyzer
|
$ | 5,388 | $ | 1,180 | ||||
Safe-Mate
|
- | 17,948 | ||||||
Automation
Services and Equipment
|
12,045 | 2,235,100 | ||||||
Total
sales
|
17,433 | 2,254,228 | ||||||
Cost
of goods sold and automation
|
11,679 | 245,724 | ||||||
Gross
profit
|
5,754 | 2,008,504 | ||||||
Operating
Expenses
|
||||||||
Salaries,
wages, and payroll taxes
|
9,229,378 | 3,909,255 | ||||||
Qualified
profit sharing plan
|
195,656 | 151,131 | ||||||
Advertising
and promotion
|
386,480 | 204,286 | ||||||
Product
development costs
|
876,052 | 425,344 | ||||||
Professional
and insurance
|
1,333,774 | 1,616,254 | ||||||
General
and administrative
|
354,366 | 634,954 | ||||||
Travel
and entertainment
|
458,279 | 372,843 | ||||||
Inventory
write down
|
- | 294,877 | ||||||
Other
and loss on disposal of assets
|
2,892 | 202,494 | ||||||
Depreciation
and amortization
|
191,112 | 117,165 | ||||||
Total
operating expenses
|
13,027,989 | 7,928,603 | ||||||
Loss
from operations
|
(13,022,235 | ) | (5,920,099 | ) | ||||
Other
Income (Expenses)
|
||||||||
Interest
expense
|
(250,546 | ) | (795,083 | ) | ||||
Income
from debt forgiveness
|
- | 113,069 | ||||||
Interest
income
|
45,869 | 62,547 | ||||||
Change
in fair value of derivative liabilities
|
21,603,185 | - | ||||||
Total
other income (expenses)
|
21,398,508 | (619,467 | ) | |||||
Provision
for income taxes
|
- | - | ||||||
Net
income /(loss)
|
$ | 8,376,273 | $ | (6,539,566 | ) | |||
Net
earnings /(loss) per common share
|
||||||||
Basic
net earnings /(loss) per share
|
$ | 0.63 | $ | (0.49 | ) | |||
Fully
diluted net earnings /(loss) per share
|
$ | 0.20 | $ | - | ||||
Shares
used in computing earnings per share
|
||||||||
Weighted
average number of shares outstanding - basic
|
13,296,075 | 13,285,072 | ||||||
Weighted
average number of shares outstanding - diluted
|
42,170,030 | - |
See notes
to financial statements.
F-5
MedPro
Safety Products, Inc.
Statements
of Shareholders’ Equity
For
the Years Ended December 31, 2009 and 2008
Common Stock
|
Preferred Stock
|
Unearned
|
Paid-In
|
Treasury
|
Accumulated
|
|||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Compensation
|
Capital
|
Stock
|
Deficiency
|
Total
|
||||||||||||||||||||||||||||
Balance,
December 31, 2007
|
13,285,072 | $ | 13,285 | 6,668,229 | $ | 66,682 | $ | (21,885 | ) | $ | 27,628,366 | $ | - | $ | (23,707,458 | ) | $ | 3,978,990 | ||||||||||||||||||
Series
B convertible preferred shares issued for cash
|
- | - | 1,493,779 | 14,938 | - | 13,010,815 | - | - | 13,025,753 | |||||||||||||||||||||||||||
Options
granted to employees and Directors
|
- | - | - | - | (14,580,000 | ) | 14,580,000 | - | - | - | ||||||||||||||||||||||||||
Earned
portion of employee and director options
|
- | - | - | - | 2,693,250 | - | - | - | 2,693,250 | |||||||||||||||||||||||||||
Unearned
portion of share based compensation
|
- | - | - | - | 11,886,750 | (11,886,750 | ) | - | - | - | ||||||||||||||||||||||||||
Common
shares issued in exchange for services
|
35,294 | 35 | - | - | - | 335,258 | - | - | 335,293 | |||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (6,539,566 | ) | (6,539,566 | ) | |||||||||||||||||||||||||
Balance,
January 1, 2009
|
13,320,366 | 13,320 | 8,162,008 | 81,620 | (21,885 | ) | 43,667,689 | - | (30,247,024 | ) | 13,493,720 | |||||||||||||||||||||||||
Cumulative
effect of change in accounting principle
|
(6,321,081 | ) | - | (35,081,115 | ) | (41,402,196 | ) | |||||||||||||||||||||||||||||
Balance,
January 1, 2009, as adjusted
|
13,320,366 | 13,320 | 8,162,008 | 81,620 | (21,885 | ) | 37,346,608 | - | (65,328,139 | ) | (27,908,476 | ) | ||||||||||||||||||||||||
Series
C convertible preferred shares issued for cash and exchange of warrants,
net of issuance costs of $240,000 (fractional shares issued in common
stock)
|
25 | - | 1,571,523 | 15,715 | - | 20,645,414 | - | - | 20,661,129 | |||||||||||||||||||||||||||
Unearned
portion of share based compensation
|
- | - | - | - | (11,886,750 | ) | 11,886,750 | - | - | - | ||||||||||||||||||||||||||
Employee
share based compensation
|
- | - | - | - | (671,423 | ) | 671,423 | - | - | - | ||||||||||||||||||||||||||
Share
based vendor compensation
|
- | - | - | - | (145,715 | ) | 145,715 | - | - | - | ||||||||||||||||||||||||||
Earned
portion of employee and director options
|
- | - | - | - | 7,374,450 | - | - | - | 7,374,450 | |||||||||||||||||||||||||||
Unearned
portion of share based compensation
|
- | - | - | - | 5,183,723 | (5,183,723 | ) | - | - | - | ||||||||||||||||||||||||||
Write
off balance of derivative liability
|
- | - | - | - | - | 1,897,881 | - | - | 1,897,881 | |||||||||||||||||||||||||||
Purchase
of treasury stock
|
(105,080 | ) | (105 | ) | - | - | - | - | (386,370 | ) | - | (386,475 | ) | |||||||||||||||||||||||
Net
income through December 31, 2009
|
- | - | - | - | - | - | - | 8,376,273 | 8,376,273 | |||||||||||||||||||||||||||
Balance
December 31, 2009
|
13,215,311 | $ | 13,215 | 9,733,531 | $ | 97,335 | $ | (167,600 | ) | $ | 67,410,068 | $ | (386,370 | ) | $ | (56,951,866 | ) | $ | 10,014,783 |
See notes
to financial statements.
F-6
MedPro
Safety Products, Inc.
Statements
of Cash Flows
For
the Years Ended December 31, 2009 and 2008
For the Year Ended
|
For the Year Ended
|
|||||||
December 31, 2009
|
December 31, 2008
|
|||||||
Cash
Flows From Operating Activities
|
||||||||
Net
income (loss)
|
$ | 8,376,273 | $ | (6,539,566 | ) | |||
Adjustments
to reconcile net income (loss) to net cash
|
||||||||
flows
from operating activities:
|
||||||||
Depreciation
and amortization
|
149,340 | 75,393 | ||||||
Amortization
of financing costs
|
41,772 | 41,772 | ||||||
Write
off of prepaid automation and asset disposition
|
2,892 | 200,000 | ||||||
Write-down
of inventory to lower of cost or market
|
- | 294,877 | ||||||
Loss
on cancellation of license agreement
|
- | 700,000 | ||||||
Stock
issued for services
|
- | 335,293 | ||||||
Share
based compensation
|
7,282,507 | 2,693,250 | ||||||
Change
in fair value of warrant (derivative liabilities)
|
(21,511,242 | ) | - | |||||
Changes
in operating assets and liabilities
|
||||||||
Accounts
receivable and accrued interest
|
(18,625 | ) | 22,525 | |||||
Inventory
|
40,433 | (37,336 | ) | |||||
Other
current assets
|
668,541 | (686,732 | ) | |||||
Accounts
payable and accrued expenses
|
144,796 | (1,431,752 | ) | |||||
Accrued
interest payable
|
(23,602 | ) | (105,272 | ) | ||||
Deferred
revenue
|
(464,900 | ) | - | |||||
Net
cash flows from operating activities
|
(5,311,815 | ) | (4,437,548 | ) | ||||
Cash
Flows From Investing Activities
|
||||||||
Advances
(to)/from SGPF, LLC
|
- | 24,089 | ||||||
Proceeds
from cancellation of license agreement
|
- | 2,300,000 | ||||||
Purchase
of intangible assets
|
- | (3,845,000 | ) | |||||
Cost
of property sold
|
- | 202,494 | ||||||
Purchases
of property and equipment
|
(480,865 | ) | (293,756 | ) | ||||
Net
cash flows from investing activities
|
(480,865 | ) | (1,612,173 | ) | ||||
Cash
Flows From Financing Activities
|
||||||||
Collection
of notes receivable
|
- | 2,000,000 | ||||||
Payments
on note - technology transfer payments
|
(2,000,000 | ) | - | |||||
Payment
of bank fees
|
- | (150,000 | ) | |||||
Proceeds
from bank borrowings
|
1,500,000 | 5,975 | ||||||
Repayments
on bank borrowings
|
(3,262,119 | ) | (1,063,160 | ) | ||||
Proceeds
from notes payable to and advances from shareholders
|
208 | 61,778 | ||||||
Payments
on notes payable to and advances from shareholders
|
(383,333 | ) | (2,534,912 | ) | ||||
Net
cash from issuance of preferred shares
|
2,760,000 | 13,025,751 | ||||||
Purchase
of treasury stock
|
(386,476 | ) | - | |||||
Net
cash flows from financing activities
|
(1,771,720 | ) | 11,345,432 | |||||
Net
increase / (decrease) in cash
|
(7,564,400 | ) | 5,295,711 | |||||
Cash
at the beginning of the period
|
11,636,843 | 6,341,132 | ||||||
Cash
at the end of the period
|
$ | 4,072,443 | $ | 11,636,843 | ||||
Supplemental
Disclosures of Cash Flow Information:
|
||||||||
Cash
paid for interest
|
$ | 277,324 | $ | 786,858 | ||||
Non-Cash
Activity
|
||||||||
Accrual
for purchase of intangible assets
|
$ | 2,750,000 | ||||||
Non-cash
proceeds from issuance of Series C preferred shares – derivative
liability exchanged for Shares
|
$ | 17,901,129 | ||||||
See notes
to financial statements.
F-7
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
1 – NATURE OF BUSINESS
Nature of Business – MedPro
Safety Products, Inc (“MedPro” or the “Company) is located in Lexington,
Kentucky and engages in the business of selling medical equipment that protects
against needlestick injuries and enhances the safety of patients and medical
professionals in the healthcare industry. MedPro has developed and/or
acquired proprietary and unique technology that management believes will deliver
the highest level of risk reduction technology to the industry.
Unless
indicated otherwise, share amounts have been adjusted to reflect the effect of
the January 2007 merger with Vacumate LLC and the December 2007 merger with
Dentalserv.com, both described below.
MedPro
was originally incorporated in Kentucky in 1995 and changed its corporate
domicile to Delaware in 1999. On January 10, 2007, MedPro merged with
Vacumate LLC, a limited liability company in which MedPro shareholders,
including its Chairman, owned a controlling interest. Vacumate LLC
was formed in March 2003 to re-acquire patents for the Vacumate technology after
the Company defaulted on its financial obligations under an earlier agreement to
acquire the patents. To retain the opportunity to develop the
technology when it had limited capital resources, MedPro entered into an
agreement to develop the Vacumate technology in exchange for a 40% interest in
Vacumate LLC.
The
January 2007 merger combined Vacumate LLC and the Company in a manner that gave
the equity owners of each party value in the combined Company equivalent to the
value held in each of the predecessor companies. In the
merger:
|
·
|
each
of the 60 ownership units of Vacumate LLC held by owners other than MedPro
converted automatically into approximately 103,651 shares of the common
stock of the combined Company (totaling approximately 6,219,000 shares);
and
|
|
·
|
each
of the shares of MedPro common stock issued and outstanding immediately
before the effective time was reduced to approximately 0.18 shares of the
common stock of the combined Company(totaling approximately 4,419,000
shares).
|
On
December 28, 2007, the Company completed a reverse takeover merger with
Dentalserv.com (“DRSV”), a Nevada corporation with nominal assets and no active
business whose shares were registered under the Securities Exchange Act,
resulting in MedPro becoming a public company. The reverse takeover
merger was a condition to a concurrent $13 million investment by Vision
Opportunity Master Fund, Ltd. (“VOMF”) and three Sands Brothers Venture Capital
Funds (“Sands Funds”) under the terms of the preferred stock purchase agreement
among MedPro and those purchasers.
The
following transactions occurred concurrently in connection with the reverse
takeover merger:
·
|
The
approximately 5.6 million then outstanding common shares of DRSV were
combined into approximately 1.4 million common shares in a 1-for-4 reverse
stock split.
|
·
|
VOMF
and the Sands Funds were issued a total of 6,668,229 shares of convertible
preferred stock and warrants to purchase common shares for a purchase
price of $13,000,000.
|
·
|
The
24,829,118 common shares owned by the MedPro shareholders immediately
before the merger were converted into 11,284,696 shares of DRSV, and DRSV
was renamed “MedPro Safety Products,
Inc.”
|
VOMF
purchased 5,129,407 preferred shares and related warrants for $10,000,000 in
cash and 1,025,881 preferred shares and related warrants for a $2,000,000
promissory note due March 31, 2008. The Sands Funds purchased the
remaining preferred shares and warrants for a total of $1,000,000 in
cash. VOMF paid its promissory note in full on March 3,
2008.
F-8
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
1 – NATURE OF BUSINESS– (Continued)
VOMF and
the Sands Funds were issued one Series “A” warrant and one Series “B” warrant
for each share of preferred stock they purchased. Both the “A” and
“B” Warrants have a five-year term expiring on December 28, 2012. The
“A” warrants were exercisable for 6,668,229 common shares at $1.81 per share and
the “B” warrants were exercisable for 6,668,229 common shares at $1.99 per
share. VOMF was also issued Series “J” warrants exercisable for
5,975,116 common shares at $2.18 per share that would have expired on December
28, 2008, and Series “C” warrants, exercisable for 5,976,116 common shares at
$2.18 per share, that expire on December 28, 2012. The “C” warrant
becomes exercisable only to the extent the “J” warrant is
exercised.
In
addition, for advisory services in connection with the transactions, SC Capital
Partners, LLC was issued 593,931 common shares and a warrant to purchase
533,458 common shares
and received a cash
fee based on 8% of the $13,000,000 capital raised. The initial
installment of $880,000 was paid on December 28, 2007 and the balance of
$160,000 was paid in March 2008 after VOMF paid the $2,000,000
note. The warrant issued to SC Capital Partners is exercisable for
$1.81 per share.
We valued
the warrants according to the Black-Scholes method, based on the assumptions
described in Note 12 of the Notes to Financial Statements. We also increased the
retained deficit by $3,975,120 and increased additional paid in capital by the
same amount effective on December 28, 2007 to reflect the intrinsic value of the
right to convert the Series A Stock into common stock. The $3,975,120 was
determined based on the relative estimated fair value of the embedded conversion
feature in the preferred shares and the detachable warrants. This amount would
normally be amortized over the period between the issue date and the conversion
date, but because the Series A Stock is convertible immediately upon issuance,
the entire amount was charged to retained earnings as a deemed dividend and an
increase to additional paid in capital.
In August
2008, we amended the then outstanding Series J warrant to give VOMF, our largest
preferred stockholder and the sole holder of J warrants, the right to purchase
1,493,779 shares of newly designated Series B Stock at a purchase price of
$8.72. Each share of Series B Stock converts into 4 shares of common stock. The
original Series J warrant had given VOMF the right to purchase 5,975,116 shares
of common stock at a purchase price of $2.18 no later than December 31, 2008.
VOMF and Vision Capital Advantage Fund (“VCAF”), an affiliate to whom VOMF
transferred a portion of its holdings in September 2008, exercised the J
warrants in full in September and October 2008, and we received $13,025,000 in
cash for our issuance of 1,493,779 shares of Series B Stock.
We
originally recorded warrants issued in connection with the sale of our Series A
preferred stock as equity, and the value of the warrants was reflected in
Additional Paid in Capital based on a Black-Scholes formula calculation.
Effective for financial statements issued for fiscal periods beginning after
December 15, 2008, or interim periods therein, EITF 07-05 (now codified as FASB
ASC 815) requires that warrants and convertible instruments with certain
conversion or exercise price protection features be recorded as derivative
liabilities on the balance sheet based on the fair value of the instruments. See
Note 12 for a full discussion of our outstanding warrants and the recording of
derivative liabilities during 2009.
In March
2009, we completed transactions in which VOMF and VCAF exercised a portion of
their Series C Warrants for cash and also exchanged the balance of their Series
C Warrants plus all of their Series A and Series B Warrants for shares of newly
designated Series C Stock. Each share of Series C Stock converts into 10 shares
of common stock. The two funds acquired 1,571,523 shares of Series C Stock as a
result of the warrant exercise and exchange. The exchange of warrants for Series
C Stock was the equivalent of a cashless exercise of the warrants at an assumed
market value of $13.00 per common share. The warrant exercise and exchange
reduced the total common shares issuable to the two Vision Funds by 2,570,462
common shares, and we received net cash proceeds of $2,760,000 ($3,000,000 less $240,000
in fees to SC Capital). During 2008 the Series “J” warrants
were exercised for cash.
During
2009 the Company issued warrants to a vendor in settlement of a dispute in
connection with the warrants originally allocated to the vendor in December
2007. The original 68,036 warrants were increased to 100,000 warrants
at $1.99 and an additional 75,000 warrants were issued at
$3.75. Significant lock up and leak out restrictions were added to
these warrants. See Note 12 for details on the valuation of the
various warrants.
F-9
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The
following is a summary of the significant accounting policies followed in the
preparation of the accompanying financial statements. On July 1,
2009, the Financial Accounting Standards Board (“FASB”) issued the FASB
Accounting Standards Codification (“ASC” of the “Codification”), the single
source of authoritative, non-governmental U.S. generally accepted accounting
principles (“GAAP”), except for rules and interpretative releases of the
Securities and Exchange Commission (“SEC”), which are sources of authoritative
GAAP for SEC registrants. All other non-grandfathered, non-SEC
accounting literature not included in the Codification is
non-authoritative. The new guidelines and numbering system prescribed
by the Codification are used when referring to GAAP in this Form
10-K. As the Codification was not intended to change or alter
existing GAAP, it has not had any impact on the Company’s financial
statements.
Principles of Consolidation
–The Company applies ASC 810, “Consolidation of Variable Interest
Entities,” and ASC 805 in its principles of consolidation. ASC 810 addresses
arrangements where a company does not hold a majority of the voting or similar
interests of a variable interest entity (VIE). Under ASC 810 a company must
consolidate a VIE if it is determined that it is the primary
beneficiary.
During
the year ended December 31, 2006, substantially all of the equity interests of
MedPro and Vacumate were held under common ownership. MedPro also
held a direct equity ownership of 40 percent of Vacumate and had provided all
management functions for Vacumate under an agency agreement since Vacumate’s
inception. The January 10, 2007 merger between MedPro and Vacumate was approved
in principle by MedPro’s Board of Directors and the members of Vacumate on
August 24, 2006 and approved by the shareholders of MedPro on January 10, 2007.
As a result of the common management, ownership, and operations, the financial
statements of MedPro include the accounts of both MedPro and Vacumate.
Inter-company balances and transactions have been eliminated in
consolidation.
On
December 28, 2007, the Company completed a reverse takeover merger with DRSV, a
Nevada corporation with nominal assets and no active business whose shares were
registered under the Securities Exchange Act, resulting in MedPro becoming a
public company. The reverse takeover merger was a condition to a
concurrent $13 million investment by VOMF and the Sands Funds under the terms of
the preferred stock purchase agreement among
MedPro and those purchasers. MedPro was the survivor of the merger
for accounting purposes, although the Delaware corporation went out of
existence. The reverse merger and investment by the VOMF and the
Sands Funds were accounted for as capital transactions in which:
|
·
|
MedPro
issued 1,406,387 shares of its common stock to the DRSV shareholders for
the net monetary assets of the shell
corporation;
|
|
·
|
MedPro
issued 6,668,229 shares of convertible preferred stock and warrants to
purchase 25,820,150 common shares to the investors for $13,000,000;
and
|
|
·
|
MedPro
issued 593,931 shares of common stock and warrants to purchase 533,458
shares of common stock and also paid $1,040,000 in cash as an advisory
fee.
|
The
warrants, which are exercisable at prices ranging from $1.81 to $2.18 per common
share, were valued according to the Black-Scholes method, based on the
assumptions described in Note 12. MedPro also increased its retained
deficit by $3,975,120 and increased additional paid in capital by the same
amount effective on December 28, 2007 to reflect the intrinsic value of the
right to convert the Series A Stock into common stock, as described in Note
10. The $3,975,120 amount represents the difference between the
liquidation value of the preferred stock and the value of the
warrants. Because the Series A Stock is convertible immediately upon
issuance, the entire amount was charged to retained earnings as a deemed
dividend and an increase to additional paid in capital.
Basis of Presentation –
The accompanying
consolidated financial statements have been prepared assuming the Company will
continue as a going concern. The Company has incurred recurring losses from
operations, resulting in negative cash flows from operations and an accumulated
deficit of $(56,951,866) at December 31, 2009.
F-10
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES – (Continued)
Management’s
plan for the Company to meet its cash flow needs through the end of 2010 and to
ultimately achieve profitability is discussed below.
The
Company has historically depended on borrowings to fund
operations. See Notes 4, 5, and 7 for details of the Company’s debt.
Its Chairman had previously personally guaranteed up to $5.8 million of the
Company’s bank debt. In return, the Company agreed to pay its
Chairman a $250,000 fee annually until the note is paid or the guarantee is
released. The guarantee fees have been expensed as
incurred. During 2009, the Company negotiated the release of the
guarantee and has not paid a fee to its Chairman for 2009.
The
Company received net proceeds of approximately $11.6 million in cash from its
sale of preferred stock discussed above. The Company has also entered
into agreements with a European-based medical company providing for the
distribution and sale of three of the Company’s blood collection safety
products. The agreement for two of the products provides for the sale
of a minimum of 275 million units for approximately $33 million over a five-year
period beginning when product shipments commence. The agreement for the third
product provides for the sale of a minimum of 75 million units for approximately
$11.2 million over a five-year period beginning when product shipments
commence.
In
September and October of 2008 the Company received proceeds of $13.0 million
from the sale of Series B Preferred Stock to VOMF and VCAF. In March
2009, the Company received net cash proceeds of $2,760,000 from the exercise of
warrants by VOMF and VCAF.
Finally, the Company received $2.0 million in program fees and for
services performed under the terms of the distribution agreement for its blood
collection products. These funds provided adequate funding through
2009.
Accounting Estimates – The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenues and Costs Recognition
– The Company historically derived its revenues from the sales of dental needles
and needle destruction equipment. Revenues in 2009 were derived from
occasional sales of the needle destruction device. Revenues and
accounts receivable under our contracts and within existing customer
relationships are recognized when the price has been fixed, delivery has
occurred and collectability is reasonably assured. The Company
expects to begin receiving revenue from the tube-activated blood collection
device during the second quarter of 2010, following design and development
issues that delayed commencement of production. The Company completed its ISO
13485 Quality Plan and Registration process in 2008 and a large validation and
verification build of the tube-activated product in 2009. One more
validation and verification build of the tube-activated product is scheduled for
April 2010.
In 2008,
the Company recognized income from program fees paid under the terms of its two
distribution agreements with a worldwide medical products company to manufacture
and distribute three medical safety products. The parties entered
into the agreements in July 2008. The distributor agreed to purchase
minimum annual quantities of both models of our safety needles and our winged
blood collection set over a five-year term for royalties totaling over $43
million under both agreements. The agreements initially provided for
the Company to receive payments for designing and constructing the automated
production lines for manufacturing the products, payable in installments
beginning on October 1, 2008 upon the achievement of certain milestones leading
to validation of the final production line. We received initial payments
totaling $2.7 million on October 3, 2008 upon delivery and acceptance of the
initial design plan by the distributor.
In
November 2008 the distributor decided to complete the automation line with its
own personnel in its European facilities. Although amendments to the
two distribution agreements have not been finalized, the parties agreed to
allocate the $2.7 million, payment in October 2008 to pay a $1,000,000 program
fee under each of the agreements for the Company’s forbearance from offering
certain of its products to other manufacturers and distributors. The
balance of $700,000 was an advance for expenses incurred by the Company for
automation assistance provided and equipment acquired on behalf of the
distributor.
F-11
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES – (Continued)
The
distribution agreements provide that the Company must deliver multiple
services (multiple elements). The Company earned “program fees” for its
forbearance from offering its products to other manufacturers and distributors
and its delivery of an initial design plan. The Company also participates in the
validation of automated production lines to manufacture the products subject to
the forbearance arrangement. Finally, the Company is entitled to royalty
payments based upon the greater of minimum unit production levels or actual
future production. In accounting for these arrangements, the Company
considered the guidance in ASC 605 (formerly AICPA Statement of Position 81-1,
“Accounting for Performance of Construction-Type and Certain Production-Type
Contracts”, and the Financial Accounting Standards Board’s Emerging Issues Task
Force No. 00-21, “Revenue Arrangements with Multiple
Deliverables.”) In applying this guidance, the Company generally
limits the amount of revenue it recognizes from these types of arrangements to
amounts that are not contingent on additional deliveries.
Cost of
goods sold includes all direct production costs and shipping and handling
costs. General and administrative costs are charged to the
appropriate expense category as incurred.
Accounts Receivable – As is
customary in the industry, the Company does not require collateral from
customers in the ordinary course of business. Accounts receivable are
stated at the amount management expects to collect from outstanding
balances. Management provides for probable uncollected amounts
through a charge to earnings and a credit to the allowance for doubtful accounts
based on its assessment of the current status of individual
accounts. Allowances for doubtful accounts of $21,225 and $15,837
were recorded at December 31, 2009 and 2008. The Company does not accrue finance
charges on its past due accounts receivable. Balances that are still
outstanding after management has used reasonable collection efforts are written
off through a charge to the allowance and a credit to accounts
receivable.
Inventory – Inventory consists
primarily of Needlyzer devices, which are carried at the lower of cost or market
value on a first-in first-out basis.
Property and Equipment –
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization for assets placed in
service is provided using the straight line method over their estimated useful
lives. The cost of normal maintenance and repairs is charged against
earnings. Expenditures which significantly increase asset values or
extend useful lives are capitalized. The gain or loss on the
disposition of property and equipment is recorded in the year of
disposition.
Intangible Assets – Intangible
assets consist principally of intellectual properties such as regulatory product
approvals and patents. Intangible assets are amortized using the straight line
method over their estimated period of benefit, ranging from one to ten years
upon being placed in full production. We evaluate the recoverability of
intangible assets periodically and take into account events or circumstances
that warrant revised estimates of useful lives or that indicate that impairment
exists. No material impairments of intangible assets have been identified
during any of the periods presented. Amortization of the Vacumate
technology began in December 2009 when products were shipped for human use
evaluation by our customer. Management believes that future revenue
from an existing minimum volume contract for this product insures that the
carrying value of this asset is not impaired.
The
Key-Lok intellectual property intangible asset acquired in 2006 is still in the
process of being evaluated for reintroduction into the
marketplace. Since no sales or contracts have been signed, management
has elected to delay the start of amortization based on no units of production
experience. Management expects future revenue to be sufficient on
this product to avoid any impairment adjustment as of December 31,
2009. Management expects to couple this product with future products
in kits.
F-12
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES – (Continued)
On
December 31, 2007, the Company purchased an option for $3,000,000 from Unilife
Medical Solutions Ltd. of Australia to negotiate an exclusive license agreement
to market Unilife safety syringes in the United States. The Company
originally recorded the option on its balance sheets until such time that
Unilife either granted the license or refunded the option payment. In 2008, the
parties agreed to terminate the license agreement, and Unilife refunded the
$2,300,000 option payment and retained $700,000 as reimbursement for legal and
related expenses incurred in connection with strategic initiatives between the
two parties. The Company expensed the $700,000 as legal expenses.
On August
24, 2007, MedPro entered into a Technology Development and Option Agreement with
SGPF, LLC. MedPro’s Chairman owns all of the equity units of SGPF,
which was established to acquire technology underlying a family of prefilled
safety syringe products (the “Blunt Technology”) that MedPro believed had
potential for successful commercialization, at a time when MedPro did not have
the financial resources to acquire the technology and risked losing the
opportunity to other interested parties.
To
acquire the Blunt Technology, SGPF paid an initial transfer payment of $250,000
and agreed to pay the seller transfer payments totaling $2,750,000 in
installments over three years beginning in 2007. SGPF also agreed to
pay a royalty of 5% of on the first $250,000 of adjusted gross sales of products
using the Blunt Technology in any calendar year, and 4% of the adjusted gross
sales of such products for the remainder of the year.
MedPro’s
agreement with SGPF provides that MedPro will direct the development of the
Blunt Technology with the objective of fully commercializing it as quickly as
possible, and will pay up to $375,000 towards the cost of
development. MedPro also acquired the option to purchase the Blunt
Technology from SGPF for the following purchase price:
|
·
|
$2,500,000
payable in cash to SGPF;
|
|
·
|
assumption
of the $2,750,000 in patent transfer payments payable by SGPF, including
reimbursement of any installments previously paid by SGPF;
and
|
|
·
|
$2,500,000
payable in common stock to be issued to SGPF, based on a value of $1.81
per common share, which was the valuation agreed upon in MedPro’s
agreement with its preferred
stockholders.
|
MedPro
also agreed to assume SGPF’s obligation to pay the royalties on sales of any
products based on the Blunt Technology.
On
September 30, 2008, MedPro exercised the option to purchase the Blunt
technology. The purchase
price was $3,345,000 payable in cash and the contingent issuance of 690,608
shares of our common stock.
MedPro had paid the cash portion of the purchase price in full by October
2008. The share-based component of the purchase price is due upon the
collection of $5,000,000 in sales revenue from the products, the sale or license
of all or part of the product to a third party or the change in control of
MedPro. The purchase price and share component of the agreement were
renegotiated in September in connection with the commitment by VOMF and VCAF to
exercise the J warrants for $13 million in cash. We assumed the remaining
$1,500,000 of patent payments that were due after the time we exercised our
option.
In June
2008, MedPro entered into an agreement with Visual Connections, Inc. and its
controlling shareholder to acquire the patents, patent applications and related
rights to the technology underlying our winged safety blood collection
set. Visual Connections transferred its interest to us upon execution
of the agreement, and we paid an initial transfer payment of $250,000 shortly
after we entered into our agreement with a customer for the production and
distribution of the product. We also agreed to pay transfer payments
totaling $1,250,000 in five
quarterly installments beginning in October 2008, as well as a royalty of 4% of
the adjusted gross sales of the product. The agreement also grants
MedPro a right of first refusal to negotiate an agreement for the rights to
commercialize any additional Visual Connections products in the
future.
F-13
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES – (Continued)
At
December 31, 2009, we had paid our technology transfer obligations for the Blunt
Technology in full, and one final $250,000 payment on winged blood collection
technology was due in the first quarter of 2010.
Research and Development Costs
– Research and development costs are charged to expense as
incurred. These expenses do not include an allocation of salaries and
benefits for the personnel engaged in these activities. Although not
expensed as research and development, all salaries and benefits for the years
ended December 31, 2009 and 2008, have been expensed.
Advertising – Advertising
costs are expensed as incurred. The Company incurred $386,480 and
$204,286 of such costs during the years ended December 31, 2009 and 2008,
respectively.
Income Taxes –Income tax
expense is provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred
taxes. Deferred taxes are recognized for differences between the
basis of assets and liabilities for financial statement and income tax
purposes. The differences relate primarily to the effects of net
operating loss carry forwards and differing basis, depreciation methods, and
lives of depreciable assets. The deferred tax assets represent the future tax
return consequences of those differences, which will be deductible when the
assets are recovered.
Cash and Cash Equivalents –
For the purposes of the Statements of Cash Flows, the Company considers cash and
cash equivalents to be cash in all bank accounts, including money market and
temporary investments that have an original maturity of three months or
less.
Concentration of Credit Risk –
From time to time during the years ended December 31, 2009 and 2008, certain
bank account balances exceeded federally insured limits. The Company
has not experienced losses in such accounts and believes it is not exposed to
any significant credit risk on cash.
Recent
Accounting Pronouncements
Not
Yet Adopted
In June
2009, the FASB issued accounting guidance that eliminates the exemption from
consolidation for qualifying special-purpose entities, effective for financial
asset transfers occurring after the beginning of an entity's first fiscal year
that begins after November 15, 2009. We currently do not have any of these
entities.
In June
2009, the FASB issued accounting guidance that assists in determining whether an
enterprise has a controlling financial interest in a variable interest entity.
This guidance is effective as of the beginning of the first fiscal year that
begins after November 15, 2009. We currently do not have any such
arrangements.
In
October 2009, the FASB issued new accounting guidance (Accounting Standards
Update (ASU), 2009-13) related to revenue arrangements with multiple
deliverables, Revenue
Recognition (“Topic 605-25-65-1”): Multiple Deliverable Revenue Arrangements — A
Consensus of the FASB Emerging Issues Task Force, that provides
principles for allocation of consideration among an arrangement's
multiple-elements, allowing more flexibility in identifying and accounting for
separate deliverables. The guidance introduces an estimated selling price method
for valuing the elements of a bundled arrangement if vendor-specific objective
evidence or third-party evidence of selling price is not available, and
significantly expands related disclosure requirements. This guidance is
effective on a prospective basis for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010.
Alternatively, adoption may be on a retrospective basis, and early application
is permitted. We are currently evaluating the impact of adopting this guidance
on our financial statements.
F-14
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES – (Continued)
In
January 2010, the FASB issued ASU, 2010-06, Fair Value Measurement and
Disclosures (Topic 820-10-65-7), which relates to the disclosure
requirements for fair value measurements and provides clarification for existing
disclosures requirements. This update will require an entity to disclose
separately the amounts of significant transfers in and out of Levels 1 and
2 fair value measurements and to describe the reasons for the
transfers. It also will require entities to disclose information
about purchases, sales, issuances and settlements to be presented separately
(i.e. present the activity on a gross basis rather than net) in the
reconciliation for fair value measurements using significant unobservable inputs
(Level 3 inputs). This guidance clarifies existing disclosure requirements
for the level of disaggregation used for classes of assets and liabilities
measured at fair value and requires disclosures about the valuation techniques
and inputs used to measure fair value for both recurring and nonrecurring fair
value measurements using Level 2 and Level 3 inputs. The new
disclosures and clarifications of existing disclosure are effective for fiscal
years beginning after December 15, 2009, except for the disclosure
requirements for related to the purchases, sales, issuances and settlements in
the roll forward activity of Level 3 fair value measurements. Those
disclosure requirements are effective for fiscal years ending after
December 31, 2010. We are currently evaluating the impact of implementing
this new disclosure requirement on our financial statements.
Adopted
in 2009
In June
2008, effective for financial statements issued after December 15, 2009, ASC
260-10-65-2, Determining
Whether Instruments Granted in Share-Based Transactions Are Participating
Securities, the FASB issued guidance on the impact on earnings per share
of the inclusion of share-based transaction. The adoption of Codification
Topic ASC 260-10-65-2 did not have a material impact on the Company’s financial
position, results of operations or earnings per share.
In
December 2007, the FASB ratified Codification Topic ASC 808-10-65-1, Collaborative Arrangements,
which applies to collaborative arrangements where no separate legal entity
exists and in which the parties are active participants and are exposed to
significant risks and rewards that depend on the success of the
activity. This issue, among other things, requires certain statement
of operations presentation of transactions with third parties and of payments
between parties to the collaborative arrangement, along with disclosure about
the nature and purpose of the arrangement. The provisions of
Codification Topic ASC 808 are effective for fiscal years beginning on or after
December 15, 2008. The Company adopted Codification Topic 808 on
January 1, 2009. The adoption of Codification Topic 808 did not have a
material impact on the Company’s financial position or results of
operations. The Company had no such arrangements in
2009. The Topic is expected to have an impact on future periods and
the Company is monitoring its activity in this arena.
In May
2009, the FASB issued Statement No. 165, Subsequent Events, which was
primarily codified into ASC Topic 855 (“Topic 855”). Topic 855 establishes
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. In particular, this Statement requires the following:
(a) the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, (b) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and (c) the
disclosures an entity should make about events or transactions that occurred
after the balance sheet date. In accordance with this Statement, an entity
should apply the requirements to interim or annual financial periods ending
after June 15, 2009. Topic 855 was updated by FASB Accounting Standards Update
(“ASU”) 2010-09.
On
February 24, 2010, the FASB issued ASU 2010-09, effective immediately, which
amended ASC Topic 855, Subsequent Events. The
amendments were made to address concerns about conflicts with SEC guidance and
other practice issues. Among the provisions of the amendment, the FASB defined a
new type of entity, termed an “SEC filer,” which is an entity required to file
or furnish its financial statements with the SEC. Entities
other than registrants whose financial statements are included in SEC filings
(e.g., businesses or real estate operations acquired or to be acquired, equity
method investees, and entities whose securities collateralize registered
securities) are not SEC filers. While an SEC filer is still required by GAAP to
evaluate subsequent events through the date its financial statements are issued,
it is no longer required to disclose in the financial statements that it has
done so or the date through which subsequent events have been evaluated. The
Company does not believe the changes have a material impact on our results or
financial position.
F-15
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES – (Continued)
In
February 2008, ASC 820-10-15-1A was amended, which delayed the effective date of
ASC 820, Fair Value
Measurements and Disclosures, for all non-financial assets and
non-financial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually),
until the beginning of the first quarter of fiscal year 2009. The Company’s
adoption of 820-10-15-1A on January 1, 2009 did not have a material impact
on the Company’s financial position, results of operations or cash
flows.
In April
2008, ASC 350-30-65-1, Determination of the Useful Life of Intangible
Assets (“ASC 350-30-65-1”), amended the factors considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under ASC 350, Intangibles-Goodwill and Other , ASC
350-30-65-1 requires a consistent approach between the useful life of a
recognized intangible asset under ASC 350 and the period of expected cash flows
used to measure the fair value of an asset under ASC 805. ASC 350-30-65-1 also
requires enhanced disclosures when an intangible asset’s expected future cash
flows are affected by an entity’s intent and/or ability to renew or extend the
arrangement. ASC 350-30-65-1 is effective for financial statements issued for
fiscal years beginning after December 15, 2008 and is applied
prospectively. Early adoption is prohibited. The Company’s adoption of ASC
350-30-65-1 on January 1, 2009 did not have a material impact on the
Company’s financial position, results of operations or cash flows.
In June
2008, ASC 815-10-65-3, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock, provides
guidance for determining whether an equity-linked financial instrument (or
embedded feature) is indexed to an entity’s own stock, which would qualify as a
scope exception under ASC 815-10-15-74(a), Accounting for Derivative
Instruments and Hedging Activities. ASC 815 is effective for fiscal years
beginning after December 15, 2008 and early adoption for an existing
instrument is not permitted. The Company’s adoption of ASC 815 on
January 1, 2009 had a material impact on the Company’s financial position,
results of operations and cash flows. Its impact is more fully
disclosed in the Notes to our financial statements and reflected on our
Statement of Shareholders’ Equity.
In
December 2007, the FASB issued FASB ASC 805-10 (Prior authoritative literature:
SFAS No. 141 (revised 2007), “Business Combinations”, which
replaces FASB Statement No. 141). FASB ASC 805-10 establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business
combination. FASB ASC 805-10 will change how business combinations
are accounted for and will impact financial statements both on the acquisition
date and in subsequent periods. The adoption of FASB ASC 805-10 did not have an
impact on the Company’s financial position and results of operations although it
may have a material impact on accounting for business combinations in the future
which cannot currently be determined.
In April
2009, ASC 820-10-65-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, provided
additional guidance for estimating fair value in accordance with ASC 820, Fair
Value Measurements and Disclosures, when the volume and level of activity for
the asset or liability have significantly decreased. This ASC also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. This ASC emphasizes that even if there has been a significant decrease
in the volume and level of activity for the asset or liability and regardless of
the valuation technique(s) used, the objective of a fair value measurement
remains the same. Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction (that is, not a
forced liquidation or distressed sale) between market participants at the
measurement date under current market conditions. ASC 820-10-65-4 is effective
for interim and annual reporting periods ending after June 15, 2009, and is
applied prospectively. Accordingly, the Company adopted the provisions of ASC
820-10-65-4 on April 1, 2009.
F-16
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES – (Continued)
The
adoption of this guidance did not have a material impact on the Company’s
financial position, results of operations or cash flows.
In April
2009, ASC 825-10-65-1, Interim Disclosures about Fair Value of
Financial Instruments, was revised to require disclosures about fair
value of financial instruments in interim as well as annual financial
statements. This standard is effective for periods ending after June 15,
2009. Accordingly, the Company adopted the provisions of ASC 825-10-65-1 on
April 1, 2009. The adoption of this guidance did not have a material impact
on the Company’s financial position, results of operations or cash flows.
However, the provisions of ASC 825-10-65-1 may, in the future, result in
additional disclosures with respect to the fair value of the Company’s financial
instruments.
In
January 2010, guidance was issued to alleviate diversity in the accounting for
distributions to shareholders that allow the shareholder to elect to receive
their entire distribution in cash or shares but with a limit on the aggregate
amount of cash to be paid. The amendment states that the stock portion of a
distribution to shareholders that allows them to elect to receive cash or shares
with a potential limitation on the total amount of cash that all shareholders
can elect to receive in the aggregate is considered a share issuance. The
amendment is effective for interim and annual periods ending on or after
December 15, 2009 and had no impact on the Company’s financial
statements. The Company does not currently, nor does it expect to
issue dividends to shareholders in the foreseeable future.
In April
2009, guidance was issued by the FASB, ASC 320-10-65-1, Recognition and Presentation of
Other Than Temporary Impairments, effective for financial statements
issued after June 15, 2009, on the reporting for other than temporary
impairments. The adoption of this guidance did not have a material
impact on the Company’s financial position, results of operations or cash
flows.
Reclassifications
Certain
amounts in the 2008 financial statements have been reclassified to conform to
the classifications used to prepare the 2009 financial
statements. These reclassifications had no material impact on the
Company’s financial position, results of operations, or cash flow as previously
reported.
NOTE
3 – ACQUISITIONS
As
described in Note 1, MedPro merged with Vacumate, LLC on January 10,
2007. Because they were held under common control, MedPro and
Vacumate reported their financial results as a single entity before the
merger.
As
described in Note 1, on December 28, 2007 the Company completed a reverse
takeover in which it merged into DRSV, a Nevada public shell corporation. MedPro
survived the merger for accounting purposes. Accordingly, these
financial statements reflect the historical operations of MedPro before the
reverse merger, but the capital structure is that of DRSV, the corporation that
legally survived the merger.
NOTE
4 – INVENTORY
The
Company’s inventory consists primarily of the Needlyzer product less an amount
that is necessary to adjust inventory to its estimated net realizable value less
all applicable disposition costs. The Company recorded an additional
write down of the Needlyzer inventory in 2008. The entire Safe-Mate
inventory was written off in 2008 and the product abandoned. Write
downs of our inventory amounted to $294,877 in 2008. There were no
inventory write downs in 2009.
F-17
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
5 – NOTES PAYABLE TO AND ADVANCES FROM SHAREHOLDERS
Notes
payable to and advances from shareholders represent loans and advances received
from officers, directors, shareholders and entities over which they exert
significant control. They are comprised of the following:
2009
|
2008
|
|||||||
Short
term advances with no stated terms settled in the ordinary course of
business
|
$ | 49,742 | $ | 1,656 | ||||
Demand
and promissory notes with varying interest rates and conversion
features
|
- | 468,445 | ||||||
Less
amounts reflected in accounts payable
|
(49,742 | ) | (86,768 | ) | ||||
$ | 0 | $ | 383,333 |
Short
term advances consisted of $49,742 and $1,656 for December 31, 2009 and 2008,
respectively, which were due to various related parties including a company
controlled by our Chairman for charter air services, unpaid expense reports
submitted after yearend totaling $35,550. An additional $3,635 of
expense reports due to our Chief Operating Officer and an employee were part of
the year-end short term advances. Finally, the Company owed SC
Capital $10,557 for travel expenses incurred in 2009 but billed in
2010. The 2008 balance consisted of unpaid expense reports at
December 31, 2008.
Demand
and promissory notes payable to related parties at December 31, 2008 included
$85,112 of accrued back pay included in accounts payable. Of this
amount, our Chief Operating Officer was due $68,420 and $16,692 was due to
another employee. The remaining $383,333 of the notes payable is
comprised of accrued management fees of $87,500 due to our Chairman, an accrued
loan guarantee fee of $250,000 due to our Chairman, and accrued management fees
of $45,833 due to our Chief Operating Officer.
NOTE
6 – RELATED PARTY TRANSACTIONS
As part
of the September 2006 debt restructuring, our Chairman agreed to personally
guarantee the term loan and revolving line of credit under the Company’s credit
agreement with a commercial lender, for which the Company agreed to pay him
$250,000 annually. The final fee was accrued in 2008 and paid in
2009. The personal guarantee was released in 2009.
In
addition to the transactions discussed above and in Note 4, the Company incurred
interest expense on the indebtedness to shareholders totaling approximately
$286,012 for the year ended December 31, 2008. No interest was due
shareholders in 2009.
On March
6, 2008, the Company entered into a consulting agreement with SC Capital
Partners, LLC to assist it with future capital requirements, strategic financial
planning and support of the Company’s efforts to build shareholder
liquidity. The agreement calls for a retainer of $15,000 per month,
plus out-of-pocket expenses, beginning on the date of execution. The
agreement may be terminated by the Company with appropriate notice or upon
satisfaction of the goals of the agreement. The agreement also
contains certain fees for future capital milestones achieved. Warren
Rustand, a director of the Company, is a principal of SC Capital Partners,
LLC.
F-18
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
7 – INTANGIBLE ASSETS
The
Company’s intangible assets consist primarily of intellectual properties
(medical device patents) that give the Company the right to produce and exploit,
commercially, certain medical devices. To date, none of the existing patents
have been commercially exploited. The Company expects to begin delivering
product in the second quarter of 2010. These various patents include
the skin and tube-activated blood collection devices with a cost of $2,525,425,
the Key-Lok™ patent at $489,122, the syringe guard prefilled family of products
at $4,845,000 and the winged infusion set at $1,250,000.
Amortization
expense was $83,862 which included amortization of $42,090 for the intellectual
property and the annual charge off of prepaid loan fees of
$41,772. Estimated future amortization of these intangibles is
expected to consist of the following amounts for the twelve month periods ended
on December 31:
12 Months Ending
December 31,
|
Amount
|
|||
2010
|
$ | 1,814,769 | ||
2011
|
1,835,854 | |||
2012
|
1,821,909 | |||
2013
|
1,821,909
|
|||
2014
|
1,828,731 | |||
After
12/31/14
|
- |
NOTE
8 – LONG-TERM DEBT
Long-term
debt at December 31, 2009 and 2008 consisted of the
following:
December 31, 2009
|
December 31, 2008
|
|||||||
Payable
to Fifth Third Bank, Term Loan, interest payable
at prime plus 2%, monthly principal payments of $138,889 beginning June
2008, maturing August 1, 2011, collateralized by an assignment
of intellectual properties
|
$ | 2,361,111 | $ | 4,027,777 | ||||
Payable
to Fifth Third Bank, Revolving Line of Credit, Interest at prime plus 2%,
payable monthly beginning in April 2007, due April 1,
2009
|
- | 1,498,475 | ||||||
Payable
to Traditional Bank, Term Note, Interest at 3.65%, payable on March 31,
2010, fully collateralized by certificates of deposit at
1.65%
|
1,500,000 | - | ||||||
Payable
to Whitaker Bank, Draw Loan, interest payable at 7.5% monthly
payments of principal and interest of $10,000 due through July 23, 2010,
secured by certain inventory of the Company and personally guaranteed by
the Company’s Chairman, CFO and two other shareholders
|
246,866 | 343,843 | ||||||
4,107,977 | 5,870,095 | |||||||
Less:
current portion
|
3,413,533 | 3,262,660 | ||||||
Long-term
portion
|
$ | 694,444 | $ | 2,607,435 |
F-19
MEDPRO
SAFETY PRODUCTS, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
8 – LONG-TERM DEBT – (Continued)
The
revolving line of credit, as amended in November 2008, permitted the Company to
draw up to $1,500,000. The credit agreement was also amended in 2008
to remove financial covenants and include cross-collateral agreements and a
pledge of intangible assets. The line of credit was paid off in
2009. The term note at Traditional Bank was taken out to pay off the
line of credit and was fully collateralized with a certificate of
deposit.
The
following table summarizes the maturities of long-term debt:
12 month periods
ended December 31,
|
||||
2010
|
$ | 3,413,533 | ||
2011
|
694,444 | |||
Total
|
$ | 4,107,977 |
NOTE
9 – SHAREHOLDERS’ EQUITY
The
Company is authorized to issue 90,000,000 shares of common stock with a par
value of $0.001 per share, and 10,000,000 shares of preferred stock with a par
value of $.01 per share, which is issuable in series. Of the 10,000,000 shares
of preferred stock authorized, 6,668,230 shares are designated as Series A
Convertible Preferred Stock (“Series A Stock”), 1,493,779 shares are designated
as Series B Convertible Preferred Stock (“Series B Stock”) and 1,571,523 were
issued as Series C Convertible Preferred (“Series C Stock”) during
2009.
At
December 31, 2009, the Company’s issued and outstanding shares consisted of
13,215,311 shares of common stock, 6,668,229 Series A Stock, 1,493,779 shares of
Series B Stock and 1,571,523 of Series C Stock. At December 31, 2009,
warrants to purchase 1,734,340 shares of common stock were
outstanding. At December 31, 2008, the Company’s issued and
outstanding shares consisted of 13,320,366 shares of Common Stock, 6,668,229
Series A Stock, and 1,493,779 shares of Series B Stock. In addition, warrants to
purchase 19,913,068 shares of common stock were outstanding at December 31,
2008.
In the
private placement to four investment funds completed on December 28, 2007, and
described in Note 1, MedPro issued a total of 6,668,229 shares of Series A Stock
and warrants to purchase a total of 25,286,692 shares of common
stock. The reverse takeover merger with DRSV as of that date was a
condition to the purchase of the preferred stock and stock purchase warrants
under the terms of the preferred stock purchase agreement with these
institutional investors.
The
Company’s original four Series A Stockholders were issued one Series “A” warrant
and one Series “B” warrant for each of the 6,668,229 shares of preferred stock
they held. In addition, for making a total investment of at least $5
million, one Series A Stockholder also received one “J” warrant and one “C”
warrant for each of the 5,975,116 shares of preferred stock it
held. See Note 12 for a description of the rights of the four series
of warrants issued with the Series A Stock and the valuation of these warrants
pursuant to the Black-Scholes method.
By
resolution dated August 18, 2008, the Company’s Board of Directors designated
1,493,779 of the unissued preferred shares as Series B Convertible Preferred
Stock. On that date, VOMF, then the sole holder of J warrants, and
the Company amended the J warrants to give VOMF the right to purchase 1,493,779
shares of Series B Stock at a purchase price of $8.72. The J warrants
originally had given the holder the right to purchase 5,975,116 shares of common
stock at a purchase price of $2.18.
VOMF
transferred a portion of its common stock, Series A and Series B Preferred Stock
and Series A, B, J and C warrants to VCAF, an affiliate, in August
2008. During September and October 2008, VOMF and VCAF exercised all
of the outstanding J warrants, purchasing 1,493,779 shares of Series B Stock for
cash totaling $13,025,753.
F-20
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
9 – SHAREHOLDERS’ EQUITY – (Continued)
On March
24, 2009 VOMF and VCAF exchanged all of their outstanding warrants and
$3,000,000 of cash for 1,571,523 shares of Series C Stock and 12 shares on
common stock in lieu of fractional shares of Series C Stock.
Series
A Convertible Preferred Stock
The
following is a summary of the material rights, preferences, privileges, and
restrictions of the Series A Convertible Preferred Stock.
Dividends
|
The
Series A Stockholders are entitled to receive cash dividends at the rate
of 5% of the stated liquidation preference amount ($1.81 per share).
Dividends will be prorated for shares not outstanding for a full
year.
|
|
|
||
Dividends
are cumulative, and will only accrue and be payable upon any liquidation
of the Company. Dividends on Series A Stock will be paid before dividends
on any junior stock.
|
||
Liquidation
Rights
|
Upon
any liquidation of the Company, the holder of Series A Stock is entitled
to receive $1.81 per share plus any accrued and unpaid dividends, before
any amounts are paid on common stock or any junior
stock.
|
|
|
||
Voting
Rights
|
The
Series A Stockholders have no voting rights, except that as long as there
are 200,000 shares of Series A Stock outstanding, the affirmative vote of
75% of the Series A Stock is required for the Company to take the
following actions:
|
|
· To
authorize the issuance of a series of stock ranking equal or senior to the
Series A Stock with respect to liquidation rights.
· To
repurchase, redeem, or pay dividends on shares of common stock other than
de minimus repurchases or contractual redemption
obligations.
|
||
· To
amend the articles of incorporation or bylaws or to reclassify our
outstanding securities in a way that materially and adversely affect the
rights of Series A Stock.
· To
make any unauthorized distribution to the holders of stock junior to the
Series A Stock.
|
||
· To
voluntarily file for bankruptcy, liquidate assets or make an assignment
for the benefit of our creditors.
· To
discontinue involvement in the Company’s current
business.
|
||
Conversion
Rights
|
|
The
Series A Stock is convertible into shares of common stock at any time, in
whole or in part, at the option of the holder. For each share of Series A
Stock converted, the holder will be entitled to receive a number of shares
of common stock equal to the quotient of: (1) $1.95, divided by
(2) the conversion price in effect as of the date of the delivery of
the holder’s notice of election to convert.
|
|
||
The
conversion price is initially $1.95 per share, but is subject to
adjustment for certain events, including stock splits, stock dividends,
distributions, reclassifications or reorganizations. In addition, the
conversion price is subject to adjustment if the Company issues additional
shares of common stock or securities convertible into, or exchangeable
for, common stock, in either case at a price per common share less than
the conversion price then in effect. The conversion price adjustment does
not apply to the issuance of shares in certain transactions identified in
the certificate of designations unless the holder of the Series A Stock
waives the
restriction.
|
F-21
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
The
Series A Stock cannot be converted into common stock if the conversion
will result in the holder beneficially owning in the aggregate more than
9.9% of our common stock outstanding.
|
||
|
||
Buy-In
Rights
|
If
the Company fails to timely deliver common stock issuable upon conversion
of Series A Stock, and the holder is required to purchase
common stock to deliver in satisfaction of a sale of the shares to have
been issued upon the conversion, then the Company must pay the holder in
cash the difference between the total purchase price the holder paid to
acquire common stock to complete the sale and the amount obtained by
multiplying (1) the number of shares of common stock issuable upon
conversion of the Series A Stock times (2) the price at which the holder’s
sell order for those shares was
executed.
|
Redemption
Rights
|
Upon
the occurrence of a “major transaction,” each holder of Series A Stock can
require the Company to redeem all or a portion of the holder’s Series A
Stock equal to 100% of the liquidation preference amount plus any accrued
but unpaid dividends. The Company can elect to pay in shares of common
stock, in which case the price per share will be based on the conversion
price then in effect.
|
|
|
||
A
“major transaction” includes consolidation or merger transactions that
would result in a change of control of our company, the sale of more than
50% of our assets, or the purchase of more than 50% of the outstanding
shares of our common stock.
|
||
|
||
Upon
the occurrence of one of the triggering events listed below, each holder
of Series A Stock can require the Company to redeem all or a portion of
the holder’s Series A Stock at a price per share equal to 120% of the
liquidation preference amount plus any accrued but unpaid dividends and
liquidated
damages.
|
Triggering
events include:
|
||
(1)
Lapse of the effectiveness of the registration statement for 20
consecutive trading days, or unavailability of the registration statement
for sale of MedPro common stock for 20 consecutive trading days and MedPro
common stock cannot be sold in the public securities market, provided that
the unavailability is not due to factors solely within the control of the
holder of the Series A Stock.
|
||
(2)
Suspension from listing or trading on any one of, or the failure of
MedPro’s common stock to be listed or traded on at least one of, the OTC
Bulletin Board, the Nasdaq Capital Market, the Nasdaq Global Market, the
New York Stock Exchange, Inc., or American Stock Exchange, Inc. for five
consecutive trading days.
|
||
(3)
Notice of our inability to convert Series A Stock into shares of common
stock.
|
||
(4)
Failure to comply with a notice conversion for 15 days.
|
||
(5)
Deregistration of common stock so it is no longer publicly
traded.
|
||
(6)
Consummation of a “going private” transaction so that the common stock is
no longer registered under the Securities Exchange Act of
1934.
|
||
(7)
Breach of a term of the purchase agreement or the certificate of
designation or any other agreement delivered in connection with
contemplated transactions that has a materially adverse effect and is not
a curable breach of a covenant that continues for more than 10 business
days.
|
||
|
||
For
triggering events (1), (2), (3), and (7), the Company can elect to pay in
cash or shares of common stock (the price per share is the conversion
price then in effect). For (4), (5), and (6), the Company will redeem for
cash.
|
||
|
||
See
Note 12 regarding the classification of the Series A Stock as
equity.
|
F-22
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
No
Preemptive Rights
|
Except
as noted in the following paragraph, a holder of Series A Stock will not
have the right to subscribe for, purchase or receive any part of any new
or additional shares of any class of our shares, or any of our debt
securities convertible into shares, except for the holder’s conversion
rights. Our board of directors will have the power to authorize the
company to issue shares (other than Series A Stock) or debt securities on
such terms and for such consideration as they deem
advisable.
|
|
For one year following the effective date of the registration statement covering the resale of shares of common stock issuable upon the conversion of Series A Stock or the exercise of the related warrants, each Series A Stockholder will have the option to purchase up to its pro rata portion of all or a portion of the securities being offered in any subsequent debt or equity financing on the same terms and conditions proposed by any third party. The right would not apply to shares issued to acquire patents for technology, under employee benefit plans and certain other corporate transactions. |
If the
Company were to liquidate, dissolve or engage in certain other transactions, the
Company would owe the Preferred Shareholders a liquidation preference
dividend. The liquidation preference dividend amounts would have been
$1,215,544 through December 31, 2009 and $610,260 through December 31,
2008. These amounts have not been recorded in the financial
statements.
The
Company’s Series A Convertible Preferred Stockholders also hold Series “A”
warrants and Series “B” warrants to purchase common stock, one warrant of each
series for each of the 6,668,229 shares of preferred stock they
hold. In addition, for making a total investment of at least $5
million, one Series A Stockholder also received one “J”
warrant and one “C” warrants for each of the 5,975,116 shares of preferred stock
it holds. See Note 12 for a description of the terms of these four
series of warrants and details on how they have been valued under the
Black-Scholes methodology.
Series
B Convertible Preferred Stock
Each
share of Series B Stock converts into 4 shares of common stock at the present
conversion price of $2.18 per share, which is subject to adjustment. The Series
B Stock ranks equal to the Company’s common stock, but ranks junior to the
Series A Stock and to our indebtedness. If the Company declares dividends, the
Series B Stockholders will receive dividends on a pro rata basis with the common
stockholders. Upon liquidation, dissolution or winding up of the Company, the
holder of Series B Stock is entitled to an amount equal to the amount
distributable per share of common stock multiplied by the number of shares of
common stock into which the Series B Stock can be converted. The Series B Stock
has no general voting rights.
Series
C Convertible Preferred Stock
Each
share of Series C Stock converts into 10 shares of common stock, which ratio is
subject to adjustment. The Series C Stock ranks equal to the Company’s Series B
Stock and common stock, but ranks junior to the Series A Stock and to our
indebtedness. If the Company declares dividends, the Series C Stockholders will
receive dividends on a pro rata basis with the common stockholders. Upon
liquidation, dissolution or winding up of the Company, the holder of Series C
Stock is entitled to an amount equal to the amount distributable per share of
common stock multiplied by the number of shares of common stock into which the
Series C Stock can be converted. The Series C Stock has no general voting
rights.
Registration
Rights
The
Company entered into a registration rights agreement with the Series A
Stockholders that required it to register their "registrable securities" with
the SEC for public resale. "Registrable securities" are the shares of the
Company’s common stock issuable upon (a) the conversion of the Series A Stock
and (b) the exercise of the Series A, B, J and C stock purchase
warrants. The material terms of the registration rights of the
Series A Stockholders are as follows:
F-23
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Resale
Registration
|
The
Company must (and did) file a registration statement within 60 days after
closing, to register all registrable securities. The
registration statement also covers additional shares of common stock
resulting from stock splits, dividends or other similar transactions with
respect to the registrable securities.
|
|
The
Company must (and did) use commercially reasonable efforts to promptly
cause the registration statement to become effective and stay continuously
effective, until the earlier of (i) the date when all registrable
securities covered under the registration statement have been sold or (ii)
the date when the registrable securities can be sold without any
restriction pursuant to Rule 144 of the Securities Act.
|
||
Liquidated
Damages
|
If
the Company fails to file:
·
A request for acceleration of effectiveness of the registration
statement within 3 business days after the SEC notifies us that a
registration statement will not be reviewed; or
·
A subsequent registration statement if the original registration
statement ceases to be effective before expiration of the effectiveness
period; or
|
|
If
the Company postpones or suspends the effectiveness of a registration
statement for more than 60 days in the aggregate during any 360-day
period; or
If
trading in the Company’s common stock is suspended or if the common stock
is no longer quoted on or is delisted from the OTC Bulletin Board (or
other principal exchange on which the common stock is traded) for any
reason for more than three business days in the aggregate;
Then
the Company must pay liquidated damages to each Series A Stockholder equal
to 1.5% of the holder's initial investment in the Series A Stock then held
by the holder for each calendar month, or portion thereof, until the
failure or breach is cured. Liquidated damages will not exceed
an aggregate of 20% of the amount of the holder's initial investment in
the Series A Stock.
The
registration statement contemplated herein became effective in the third
quarter of 2009.
|
||
Piggy-Back
Registrations
|
If
the Company registers securities for an offering for sale (other than
registrations in connection with the acquisition of a business or with
employee benefit plans), then the Company must register the shares of its
common stock issuable upon the conversion of Series A Stock or the
exercise of warrants, upon the request of a Series A
Stockholder.
|
|
Demand
Registration Rights
|
Series
A Stockholders may make a written request for registration of shares of
common stock not previously registered that are issued upon the occurrence
of a "major transaction" or "triggering event." The Company
must use reasonable best efforts to register the shares no later than 120
days after the holder's request and keep the registration statement
continuously effective for as long as the holder shall request, but no
later than the date that the shares of common stock may be offered for
resale to the public without restriction pursuant to Rule
144.
|
|
A
"major transaction" includes certain consolidation or merger transactions,
the sale of more than 50% of the Company’s assets, or the purchase of more
than 50% of the outstanding shares of the Company’s common
stock.
|
||
"Triggering events" include: |
F-24
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
(1)
Lapse of the effectiveness of the registration statement for 20
consecutive trading days, or unavailability of the registration statement
for sale of the Company’s common stock for 20 consecutive trading days and
the Company’s common stock cannot be sold in the public securities market,
provided that the unavailability is not due to factors solely within the
control of the Series A Stock holder.
|
||
(2)
Suspension from listing or trading on any one of, or the failure of the
Company’s common stock to be listed or traded on at least one of, the OTC
Bulletin Board, the Nasdaq National Market, the Nasdaq Capital Market, the
New York Stock Exchange, Inc., or the American Stock Exchange, Inc. for 5
consecutive trading days.
|
||
(3)
Notice of the Company’s inability to convert Series A Stock into shares of
common stock.
|
||
(4)
Breach of a term of the purchase agreement, the certificate of designation
or any other agreement delivered in connection with the sale of the Series
A Stock that has a materially adverse effect and is not a curable breach
of a covenant that continues for more than 10 business
days.
|
||
Expenses
|
The
Company will bear all expenses of any registration described above, other
than any underwriting, discounts, commissions, transfer taxes or fees
incurred by the holders of registrable securities in connection with the
sale of registrable securities.
|
|
Assignment
|
The
registration rights of the holders of registrable securities can be
assigned to the holders and subsequent successors and
assigns.
|
The
Company issued warrants to purchase 533,458 common shares for $1.81 per share to
assignees of SC Capital Partners, LLC. These warrants were
compensation for financial advisory services in connection with the $13,000,000
Series A Stock sale. The terms of these warrants are comparable to
the “A” warrants and expire on December 28, 2012. None of these
warrants had been exercised as of December 31, 2009.
The
Company had previously authorized the issuance of warrants to purchase up to
68,036 common shares for $1.99 per share as compensation for the publication of
a research report about the Company in a medical device industry
publication. These warrants became exercisable when the report was
delivered to the Company and will expire on December 28, 2012. During
2009, the Company and the warrant holder negotiated a settlement of a
disagreement resulting in the issuance of an additional 31,964 warrants under
the original terms and 75,000 warrants exercisable under the original timing but
at the market price of $3.75 per share at the date of issuance.
During
the year ended December 31, 2009
On May
27, 2009, the Company issued incentive options to purchase 185,715 shares of
common stock to its officers and employees pursuant to the MedPro Safety
Products, Inc. 2008 Stock and Incentive Compensation Plan (“2008
Plan”). A second round of incentive options to purchase 47,256 shares
of common stock issued to employees other than officers, on October 6,
2009. On August 24, 2009, the two directors who joined the board in
October 2008 were each granted non-qualified options to purchase
50,000 shares of common stock on the same terms as the options issued
to our other directors on August 18, 2008. This additional grant of
“in the money options” was approved by VOMF. The stock option awards
are described in Note 12.
During
the year ended December 31, 2008
On August
18, 2008, the Company adopted the 2008 Plan and issued options to purchase
3,000,000 shares of common stock to its directors and employees on the terms
agreed upon in the September 2007 stock purchase agreement with the Series A
Stockholders. The stock option awards are described in Note
12.
In
December 2008, the Company issued 35,294 shares of common stock as a portion of
the compensation payable for investor relations advisory
services.
F-25
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
10 – INCOME TAXES
The
Company incurred no current or net deferred income tax expense or benefit for
the years ended December 31, 2009 and 2008. Income tax expense
(benefit) varies from the amounts expected by applying ordinary federal income
tax rates to income before income taxes principally as a result of share-based
compensation for 2009 and 2008. The Company has provided allowances
for the entire amount of its net operating losses for both 2009 and
2008. Deferred income taxes reflect the net effects of temporary
differences between the carrying amount of assets and liabilities for financial
statement purposes and the amounts used for income tax purposes. Our open tax
years include all returns filed for 2005 and later.
The tax
effects of temporary differences that give rise to significant portions of the
deferred assets at December 31, 2009 and 2008 are presented below:
2009
|
2008
|
|||||||
Deferred
tax assets (liabilities):
|
||||||||
Fixed
assets
|
$ | (40,304 | ) | $ | (34,734 | ) | ||
Accounts
receivable
|
7,217 | |||||||
Write
off of intangible assets
|
- | (95,880 | ) | |||||
Unearned
share based compensation
|
3,423,018 | 860,763 | ||||||
Accrued
interest payable
|
153,970 | (18,224 | ) | |||||
State
deferred tax asset
|
1,296,773 | 1,102,151 | ||||||
Net
operating loss carryforwards
|
7,431,375 | 5,158,871 | ||||||
Less:
valuation allowance
|
(12,272,049 | ) | (6,972,947 | ) | ||||
Net
deferred tax assets
|
$ | - | $ | - |
The
Company had no net deferred tax liabilities as of December 31, 2009 and
2008. As of those dates, the majority of its deferred tax asset
consisted of net operating loss carryforwards (tax effect) of $7,431,375 and
$5,125,871, respectively, directly related to its total net operating loss
carryforwards of $21,856,985 and $16,222,223, respectively. These net operating
loss carryforwards begin expiring in 2015 and are entirely offset by valuation
allowances of $(12,272,049) and $(6,972,947) as of December 31, 2009 and 2008,
respectively.
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets depends on
the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax assets, projected future
taxable income and tax planning strategies in making this
assessment. Management believes it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Management
has evaluated the positions taken in connection with the tax provisions and tax
compliance for the years included in these financial statements as required by
ASC 740. The Company does not believe that any of its positions it
has taken will not prevail on a more likely than not basis. As such
no disclosure of such positions was deemed necessary.
In 2008,
the Company scrapped its remaining Safe-Mate inventory and took a loss of
$42,445. We took additional write downs on our Needlyzer inventory amounting to
$252,432 based on our determination of the lower of cost or market value. Since
the tax treatment for these transactions mirrored the accounting treatment, no
deferred taxes were reflected for these adjustments.
F-26
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
10 – INCOME TAXES – (Continued)
As a
result of its merger with DRSV on December 28, 2007, the Company’s ability to
utilize loss carryforwards from the former MedPro (the loss corporation and the
acquired corporation for tax purposes) to offset taxable income will be limited
by Internal Revenue Code Section 382. Future utilization of net
operating loss will be based on the long-term tax exempt rate at the date of
merger applied against the value of the loss corporation. The value
of the loss corporation ($22,000,000) for purposes of the merger was established
by arms-length negotiation. The available net operating loss will be
further adjusted by the recognition, for tax purposes, of built-in gains or
losses as of the date of acquisition.
The
following table reconciles the federal statutory tax rate to the Company’s
effective tax rate:
2009
|
2008
|
|||||||
Federal
statutory tax rate
|
35.0 | % | (35.0 | )% | ||||
State
and local income taxes, net of federal tax benefit
|
(6.2 | ) | (3.9 | ) | ||||
Derivative
gain and permanent differences
|
(90.3 | ) | 0.1 | |||||
Share-based
compensation
|
30.8 | 14.4 | ||||||
Other
temporary differences
|
0.8 | (2.1 | ) | |||||
Valuation
allowance change
|
29.0 | 26.5 | ||||||
Effect
of lower brackets
|
0.7 | 0.0 | ||||||
0.0 | % | 0.0 | % |
NOTE
11 – LEASE COMMITMENT WITH RELATED PARTY
The
Company leases its office and storage facility in Lexington, Kentucky, under a
non-cancelable operating lease with a related party. On January 10,
2007, the Company signed a lease addendum that extended the term of the original
1998 lease through August 2012 with two five-year extension
options. The amended lease provides for lease payments of $3,500 per
month from January 1, 2007, through July 31, 2007, and $6,500 per month from
August 1, 2007, through January 31, 2008. Beginning on February 1,
2008, the lease payment increased to $6,975 per month ($83,700 per year) for the
remainder of the term when the Company increased its leased space by an
additional 1,063 square feet.
Total
lease expense was $83,700 and $83,225 for the years ended December 31, 2009 and
2008, respectively. Future minimum annual lease payments at December
31, 2009, were as follows:
12 month period
ended December 31,
|
||||
2010
|
$ | 83,700 | ||
2011
|
83,700 | |||
2012
|
55,800 | |||
Total
|
$ | 223,200 |
NOTE
12 – STOCK OPTIONS AND WARRANTS
2008
Stock Option Awards
The
September 2007 preferred stock purchase agreement among the Company and the
Series A Stockholders authorized the Company to award rights to purchase
3,000,000 common shares to its management and employees at $1.81 per share, the
agreed upon valuation of the Common Stock in the September 2007 agreement, under
an employee stock option program. At December 31, 2007, , the Company
had no stock option program for employees, the terms of the purchase rights had
not been established, nor had they been assigned or allocated to any members of
management, directors or employees.
F-27
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
12 – STOCK OPTIONS AND WARRANTS – (Continued)
On August
18, 2008, the Company adopted the 2008 Plan and issued stock options to its
directors and employees in the amounts and on the terms agreed upon in the
September 2007 stock purchase agreement with the Series A
Stockholders. The Company’s employees, including its three executive
officers, were granted a total of 2,800,000 options. The two
non-employee directors each were granted 100,000 options. The options
may be exercised at an exercise price of $1.81 per share only on the earliest of
January 1, 2013, the date of the holder’s death or 100% disability, termination
of employment or service as a director, or the date of a change in control of
the Company. Because the exercise price was less than market price of
MedPro stock on the date of grant, the Company set a date certain for the
exercise of the options in order to qualify for exemptions from excise taxes
under IRS deferred compensation rules.
The
Company has recorded unearned compensation of $14,580,000, or $4.86 per share
underlying the options, to reflect the grant of these options. In
determining the fair value of the options at the date of grant, management
relied in part upon the report of an independent valuation firm. The
trading price of MedPro common shares on the grant date was $9 per share and the
median trading price for the 30-day period ending on the grant date was also $9
per share. However, due to the infrequency and low volume of trading
in MedPro’s shares, it was determined that an active trading market did not
exist to provide pricing information on an ongoing basis under ASC
820. In addition, publicly traded guideline companies were not used
to value the underlying shares because neither MedPro nor any of the public
companies identified as comparable to MedPro were profitable, and an earnings
multiple could not be computed.
The
Black-Scholes model was used to value the options. Assumptions used
in the valuation included an expected term of 2.48 years, volatility of 60%
based on trading data of comparable public companies, and an equivalent bond
yield of 2.5%. The fully diluted value of $6.56 per share used in the
model was determined by first discounting the trading price of $9.00 per share
by 16% to reflect a lack of liquidity due to restrictions on exercise and a thin
trading market. Because only 1% of the 13,285,072 shares then
outstanding were not restricted under SEC Rule 144, an efficient trading market
as defined by ASC 718 did not exist for MedPro shares. Therefore, the
value per share was further adjusted for the dilutive effect of the exercise of
the 3,000,000 options.
The
unearned compensation is being charged to earnings over 24 months beginning on
August 18, 2008. The 24 month period coincides with the term of a
non-competition covenant included in the option agreement. The Company recorded
$7,290,000 and $2,693,250 of compensation expense for 2009 and the period from
August 18 through December 31, 2008, respectively. The balance of the unearned
compensation was $4,596,750 at December 31, 2009 and $11,886,750 at December 31,
2008.
Under ASC
718, the requisite service period is usually the vesting period. The
options issued on August 18, 2008, are fully vested on the grant date because
they can be exercised upon termination of employment or termination of service
on the board of directors (as the case may be). However, if
employment was terminated immediately, the recipient would remain subject to a
non-compete covenant in the award agreement during the 24 months following
termination, which is an implicit service period other than the vesting
period.
ASC 718
requires consideration of the following: (a) all vesting and exercisability
conditions; (b) all explicit, implicit, and derived service periods; and (c) the
probability that performance or service conditions will be satisfied. In this
case, the non-compete period is assumed to be the explicit requisite service
period and management believes the probability of the service conditions being
met is nearly 100 percent.
ASC 718
requires that compensation cost be recognized on a straight-line basis over the
requisite service period for each separately vesting portion or over the
requisite service period for the entire award. In this case, the vesting period
is immediate therefore compensation expense can only be recognized for the
entire award.
F-28
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
12 – STOCK OPTIONS AND WARRANTS – (Continued)
Stock
option activity for 2008 and 2009 may be summarized as follows:
Shares
|
Average weighted
exercise price
|
|||||||
Outstanding
at January
1, 2008
|
0 | n/a | ||||||
Granted
|
3,000,000 | $ | 1.81 | |||||
Exercised
|
0 | n/a | ||||||
Expired/cancelled
|
0 | n/a | ||||||
Outstanding
at December 31, 2008
|
3,000,000 | $ | 1.81 | |||||
Granted
|
332,971 | $ | 3.24 | |||||
Exercised
|
0 | n/a | ||||||
Outstanding
at December 31, 2009
|
3,332,971 | $ | 1.95 |
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2009:
Weighted average
exercise price
|
Options
outstanding
|
Average weighted
remaining contractual
life (years)
|
Options
exercisable
|
||||||||||
$ |
1.81
|
3,000,000 | 3.083 |
None
|
|||||||||
$ |
1.81
|
100,000 | 3.083 |
None
|
|||||||||
$ |
3.85
|
185,715 | 8.717 | 185,715 | |||||||||
$ |
3.65
|
47,256 | 9.833 | 47,256 | |||||||||
$ |
1.95
|
3,332,971 | 3.493 | 232,971 |
Stock
purchase warrants
The
Company’s four preferred stockholders received one Series “A” warrant and one
Series “B” warrant for each of the 6,668,229 shares of Series A Convertible
Preferred Stock they purchased. In addition, for making a total
investment of at least $5 million, VOMF also received one “J” warrant and one
“C” warrant for each of the 5,975,116 shares of Series A Stock it purchased on
December 28, 2007. The Series J Warrants were exercised in full
during September and October 2008 for 1,493,779 shares of new Series B
Convertible Preferred Stock, which is convertible into four common shares for
each Series B preferred share. The remainder of the A, B and C
warrants held by VMOF and VCAF were and $3,000,000 of cash were exchanged for
1,571,523 Series C Stock. The following is a summary of the rights of
the two series of warrants still outstanding that were issued with the Series A
Stock:
F-29
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
12 – STOCK OPTIONS AND WARRANTS – (Continued)
Series
A Warrant
|
|
Entitles
holder to purchase one share of common stock at a purchase price of $1.81
per share, 93% of the purchase price per share of Series A
Stock.
|
|
Series
B Warrant
|
Entitles
holder to purchase one additional share of common stock at a purchase
price of $1.99 per share, 102% of the purchase price per share of Series A
Stock.
|
||
Exercise
Period
|
The
Series A and Series B Warrants may be exercised through December 28,
2012.
|
||
Adjustments to the |
The
price per share and number of shares available under each series of
Warrant is subject to adjustment in the following
circumstances:
|
||
Exercise Price | |||
and Number |
•
|
the
recapitalization, reorganization or reclassification of our
company;
|
|
of Shares | |||
Available
|
•
|
the
consolidation, merger or sale of our company;
|
|
•
|
stock
dividends, stock splits or reverse stock splits;
|
||
•
|
or
the issuance of additional shares of common stock or common stock
equivalents, or other distributions made to the holders of common stock
other than permitted issuances.
|
||
Cashless
Exercise
|
If
at any time the registration statement covering the shares of common stock
underlying the Series A and Series B Warrants is no longer in effect, the
holders of those warrants may, in lieu of exercising their warrants for
cash, make a cashless exercise of their warrants and receive a number of
shares of common stock having a market value equal to the difference
between the then-current market value of the number of shares for which
the warrant is exercised and the exercise price for those
shares.
|
Registration
Rights
|
The
warrant holders have the registration rights with respect to the shares of
common stock issuable upon the exercise of their warrants described in
Note 8, above.
|
|
Buy-In
Rights
|
If
the Company fails to timely deliver common stock issuable upon exercise of
a warrant, and the holder is required to purchase common stock to deliver
in satisfaction of a sale of the shares to have been issued upon the
exercise, then the Company must pay the holder in cash the difference
between the total purchase price the holder paid to acquire common stock
to complete the sale and the amount obtained by multiplying (1) the number
of shares of common stock issuable upon exercise of the warrant times (2)
the price at which the holder’s sell order for those shares was
executed.
|
See the
table below for details on the valuation of these warrants pursuant to the
Black-Scholes method.
The
Company issued Series AA warrants to purchase 533,458 common shares for $1.81
per share as of December 28, 2007, as compensation for financial advisory
services rendered by SC Capital Partners, LLC in connection with the $13,000,000
private placement. The terms of the AA warrants are similar to the
“A” warrants and expire on December 28, 2012. The Company has valued
the AA warrants at $211,928 utilizing the Black-Scholes method.
The
Company has agreed to issue warrants to purchase up to 100,000 common shares for
$1.99 per share and 75,000 warrants to purchase common shares for $3.75 per
share as compensation for a research report to be published about the Company in
a medical device industry publication. These warrants became
exercisable when the report was delivered to the Company and will expire on
December 28, 2012. Utilizing the Black-Scholes method, the Company
valued these warrants at $167,600 and reflected them as unearned compensation in
its shareholder equity section.
F-30
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
12 – STOCK OPTIONS AND WARRANTS – (Continued)
In
accounting for the conversion feature embedded within the Series A Stock, the
Company considered ASC 815 (formerly FASB SFAS 133, Accounting for Derivative
Instruments and Hedging Activities and EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in a Company’s own stock)
and ASC 470 (formerly EITF 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Features, and EITF 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments). Under this guidance, the
classification of an issuer’s convertible preferred stock as permanent equity
depends upon the issuer having control with respect to the manner of redemption
of the convertible preferred stock.
The right
of Series A Stockholders to redeem their shares arises first in the event of a
consolidation or merger that would result in a change of control of the Company,
the sale of 50% of its assets, or a purchase of 50% of the outstanding shares of
the Company’s common stock. Mergers, consolidations and asset sales
require approval by the board of directors. A third party could
purchase 50% of the outstanding shares only from the Company directly or in a
voluntary sale by one or more common shareholders. These
circumstances, being characteristic of all equity, do not preclude
classification as equity.
Of the
other seven events triggering the right of Series A Stockholders to redeem their
shares, four are events for which the issuer has the option to redeem in either
cash or common shares. The redemption ratio is fixed and adjusts only
if the Company sells common shares at a price less than the price per share at
which the preferred stock converts into common stock. In other words, the
adjustments to the ratio are not of a dilutive nature that would generally give
rise to liability treatment.
The other
triggering events would occur only through purposeful actions by the Company or
otherwise within its control.
|
·
|
As
of December 31, 2009, the Company had 90,000,000 common shares authorized
and 13,215,311 common shares issued and outstanding. Therefore,
the Company had a sufficient number authorized and unissued common shares
to convert all of the preferred stock at the conversion ratio then in
effect had a notice of conversion been presented as of that date, meeting
the “current status” test of ASC 815 (formerly EITF
00-19).
|
|
·
|
The
deregistration of Company’s common stock is within its
control;
|
|
·
|
The
consummation of a going private transaction is within the Company’s
control.
|
Based on
the foregoing analysis, the Company concluded that the embedded conversion
feature would not be separately accounted for as a derivative liability from the
Series A Stock.
In
accordance with this guidance, the Company recorded a deemed dividend in the
amount of $3,975,120 by increasing the retained deficit and increasing
additional paid in capital by that amount effective on December 28, 2007 to
reflect the estimated fair value of the embedded conversion feature in the
Series A Stock. The $3,975,120 amount
represents the approximately $0.60 difference per share between the $1.81
liquidation value per share of the preferred stock and the $1.21 per share value
of the warrants. This amount would normally be amortized over the
period between the issue date and the conversion date, but because the Series A
Stock is convertible immediately upon issuance, the entire amount was charged to
retained earnings as a deemed dividend and an increase to additional paid in
capital.
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of
subjective assumptions including the expected stock price volatility and
appropriate adjustments for restrictions on exercising the options. Because our
warrants have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management’s opinion, this model does not
necessarily provide a reliable single measure of the fair value of its
warrants.
F-31
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
12 – STOCK OPTIONS AND WARRANTS – (Continued)
Assumptions
used in valuing all but the J warrants included an expected term of 2.5 years,
volatility of 43.54 %, and an equivalent bond yield of 4.36%. Assumptions used
in valuing the J warrants included an expected term of 1.0 years, volatility of
36.57 %, and an equivalent bond yield of 4.53%.
The
following table summarizes the terms and values of the Company’s stock purchase
warrants outstanding at December 31, 2009 and 2008:
Warrant
Holder
|
Exercise
Price
|
Warrants
Outstanding
|
Weighted
Average
Remaining
Life
|
Shares Exercisable
|
Black-
Scholes
Valuation
|
||||||||||||
2009 Warrants
|
|||||||||||||||||
Sands
Funds A Warrants
|
$ | 1.81 | 512,941 |
2.5
Years
|
512,941 | $ | 203,777 | ||||||||||
Sands
Funds B Warrants
|
$ | 1.99 | 512,941 |
2.5
Years
|
512,941 | $ | 164,994 | ||||||||||
AA
Warrants
|
$ | 1.81 | 533,458 |
2.5
Years
|
0 | $ | 211,928 | ||||||||||
Vendor
Warrant
|
$ | 1.99 | 100,000 |
2.5
Years
|
0 | $ | 85,509 | ||||||||||
Vendor
Warrant
|
$ | 3.75 | 75,000 |
2.5
Years
|
0 | $ | 82,091 | ||||||||||
December
31, 2009 Totals Exercisable
at the end of the period.
|
1,734,340 | 1,025,882 | $ | 748,299 | |||||||||||||
Weighted
average exercise price
|
$ | 1.90 |
F-32
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
12 – STOCK OPTIONS AND WARRANTS – (Continued)
2008
Warrants
|
|||||||||||||||||
VOMF
A Warrants
|
$ | 1.81 | 4,751,079 |
2.5
Years
|
4,751,079 | $ | 1,887,472 | ||||||||||
VCAF
A Warrants
|
$ | 1.81 | 1,404,209 |
2.5
Years
|
1,404,209 | $ | 557,853 | ||||||||||
VOMF
B Warrants
|
$ | 1.99 | 4,751,079 |
2.5
Years
|
4,751,079 | $ | 1,528,250 | ||||||||||
VCAF
B Warrants
|
$ | 1.99 | 1,404,209 |
2.5
Years
|
1,404,209 | $ | 451,683 | ||||||||||
VOMF
C Warrants
|
$ | 2.18 | 4,612,010 |
2.5
Years
|
4,612,010 | $ | 1,181,039 | ||||||||||
VCAF
C Warrants
|
$ | 2.18 | 1,363,106 |
2.5
Years
|
1,363,106 | $ | 349,063 | ||||||||||
Sands
Funds A Warrants
|
$ | 1.81 | 512,941 |
2.5
Years
|
512,941 | $ | 203,777 | ||||||||||
Sands
Funds B Warrants
|
$ | 1.99 | 512,941 |
2.5
Years
|
512,941 | $ | 164,994 | ||||||||||
AA
Warrants
|
$ | 1.81 | 533,458 |
2.5
Years
|
0 | $ | 211,928 | ||||||||||
Vendor
Warrant
|
$ | 1.99 | 68,036 |
2.5
Years
|
0 | $ | 21,885 | ||||||||||
December
31, 2008
Totals
Exercisable at the end of the period.
|
19,913,068 |
—
|
19,311,574 | $ | 6,557,944 | ||||||||||||
Weighted
average exercise price
|
$ | 1.99 |
* C
Warrants became exercisable only upon the exercise of the related J Warrants,
which occurred in 2008.
The
Company recorded unearned non-employee compensation for services of $21,885 as
of December 31, 2008 and adjusted to $167,600 as of December 31,
2009.
The Company reduced Additional Paid in
Capital by $6,321,081, increased its Accumulated Deficiency by $35,081,114 and
recorded a liability of $41,402,196 as of January 1, 2009 to reflect the cumulative effect of
adopting ASC 815 (formerly FASB EITF 07-05). The amount recorded
as the cumulative effect of ASC 815 was determined by reference to the fair
value of the warrants at January 1, 2009. Approximately 1% of the
Company’s outstanding common was freely tradable at January 1, 2009. The thinly traded market
for the Company’s shares at January 1, 2009, and the volatility of its trading
price made the use of level one inputs (quoted market prices in active markets
for the warrants or the Company’s shares) under FASB ASC 820 (formerly SFAS 157)
as inappropriate. The Company used average share prices in a Black-Scholes
calculation using volatility inputs from similar companies and taking into
account the time it would take for the market to absorb the influx of over
19,000,000 common shares underlying the warrants based on then current trading
volumes. As a result, some level two inputs, such as sales of
warrants for cash, and some level three inputs, unobservable inputs developed
using estimates and assumptions expected to be utilized by market participants,
were used to determine fair value of the warrants for the derivative liability
analysis.
After consideration of all the factors
necessary to determine the value of the warrants as of January 1, 2009 for purposes of ASC 815 and ASC 820 and
the Company-specific issues regarding trading prices and trading volume,
including the restricted status of nearly 99% of the Company’s common shares
under Rule 144 through January 4, 2009, the following inputs were used to
value the warrants. Share prices ranged from $7.88 at January 1, 2009 to $5.00 at March 24, 2009. The January price was based
on a trailing 20-day average from the first trade in 2009 due to an extremely
thin market and price volatility. The Company used a 50% discount
from these quoted values in the Black-Scholes calculation in order to more
closely approximate the only observable input for the warrant values based on
the exercise of the Series C warrants for $2.18 per common share equivalent in
March 2009. We also considered the expected inefficient market
absorption of the common shares underlying the Series C preferred stock in the
warrant exercise, reflecting the average daily trading volume of fewer than 700
shares during the first quarter of 2009. In addition, the Series C
preferred issued in exchange for warrants in March 2009 as well as the
14,339,090 underlying shares of common stock cannot be transferred for one year,
and are subject to additional “leak-out” transfer restrictions during the
subsequent twelve months. The Company used comparable company volatility rates
of 50% in January 2009 and 55% in March 2009. The discount rate was based on
comparable term U.S. Treasury rates of 0.76% and 0.81%, respectively for January
and March 2009.
In March 2009, two Series A preferred
stockholders exchanged all of their Series A, B and C warrants, exercisable for
a total of 18,285,692 common shares, for $3,000,000 of cash and a total of
1,571,523 shares of new Series C preferred stock. Each Series C
preferred share converts into 10 common shares, a ratio equivalent to $2.18 per
common share. The Company issued 137,614 shares of Series C preferred
stock upon the exercise of a portion of the Series C warrants for the cash, plus
an additional 1,433,909 shares of Series C preferred stock in exchange for all
of the remaining Series A, B and C warrants held by the two
stockholders. A small number of common shares were issued in lieu of
fractional shares of Series C preferred. The liability for the
warrants exchanged in March 2009 was recomputed using the Black-Scholes method
with updated inputs and the difference was recorded as income from the decline
in debt due to the reduction in fair value of the outstanding warrants at March
24, 2009 immediately before the exchange. The valuation difference on
these warrants was $21,237,919 which accounts for the substantial portion of the
total gain for the year ended December 31, 2009, of
$21,603,185.
A total of 1,025,882 Series A and B
warrants remained outstanding at December 31, 2009. As of August 12, 2009, the
Company’s registration statement became effective and no derivative liabilities
remain outstanding at December 31, 2009.
ASC 820 defines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. ASC 820
establishes a fair value hierarchy that prioritizes the use of inputs used in
valuation methodologies into the following three levels:
F-33
·
|
Level 1: Quoted prices
(unadjusted) for identical assets or liabilities in active markets. A
quoted price in an active market provides the most reliable evidence of
fair value and must be used to measure fair value whenever
available.
|
·
|
Level 2: Significant other
observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data.
|
·
|
Level 3: Significant unobservable
inputs that reflect a reporting entity’s own assumptions about the
assumptions that market participants would use in pricing an asset or
liability. For example, level 3 inputs would relate to forecasts of future
earnings and cash flows used in a discounted future cash flows
method.
|
We concluded there was insufficient
trading frequency and volume in MedPro’s shares to use the Level 1 inputs to
value our warrants in a Black-Scholes calculation under ASC 820 as of
January 1, 2009. In particular, we noted
that nearly 99% of our outstanding common shares were restricted securities
under Rule 144 that could not be traded in public markets through January 4, 2009, and our stock continued to trade
sporadically thereafter. According, we used the following level 2 inputs and
level 3 inputs for purposes of our ASC 815 and ASC 820
analysis:
•
|
MedPro share prices ranging from
$7.88 at January 1, 2009 to $5.00 at March 24, 2009. The January price was
based on a trailing 20-day average from the first trade in 2009 due to an
extremely thin market and price volatility. These values were then
discounted by 50% to more closely approximate the only observable input
for the warrant values — the exercise of the Series C warrants for $2.18
per common share equivalent in March
2009.
|
•
|
The time it would take for the
market to absorb the influx of over 19,000,000 common shares underlying
the warrants, based on the average daily trading volume of fewer than 700
shares during the first quarter of
2009.
|
•
|
Transfer restrictions on the
Series C preferred stock issued in exchange for warrants in March 2009, as
well as the 14,339,090 underlying shares of common stock, which cannot be
transferred for one year, and are subject to additional “leak-out”
restrictions during the subsequent twelve
months.
|
•
|
Share price volatility rates of
50% in January 2009 and 55% in March 2009 for comparable
companies.
|
•
|
A discount rate based on
comparable term U.S. Treasury rates of 0.76% and 0.81%, respectively for
January and March 2009.
|
•
|
Average share prices using
volatility inputs from similar companies, and taking into account common
shares underlying the warrants based on then current trading
volumes.
|
NOTE
13 – EARNINGS PER SHARE
Basic
earnings/(loss) per common share represents the amount of
earnings/(loss) for the period available to each share of common stock
outstanding during the
reporting period. Diluted earnings (loss) per common share
is the amount of earnings (loss) for the period available to each share of
common stock outstanding during the reporting period and to each share that
would have been outstanding assuming the issuance of common shares for all
dilutive potential common shares outstanding during the period.
F-34
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
13 – EARNINGS PER SHARE – (Continued)
The
Company’s potentially dilutive securities consist of options and warrants, as
well as, convertible preferred stock. Since the Company had a loss in
2008, the potentially dilutive options, warrants and preferred shares were not
considered and earnings per share were only presented on a non dilutive
basis. In 2009, the Company had 1,734,340 warrants, 3,332,971 options
and 9,733,531 preferred shares (in three different Series which had different
conversion features) which had an impact on calculating fully diluted earnings
per share. The impact of the deemed exercise/conversion of those
securities are listed below.
The
reconciliation between the basic and diluted weighted-average number of common
shares for the years ended December 31, 2009 and 2008 is summarized as
follows:
2009
|
2008
|
|||||||
Basic
weighted-average number of common shares outstanding during the
year
|
13,296,075 | 13,285,072 | ||||||
Weighted-average
number of dilutive common stock options outstanding during the
year
|
515,380 | - | ||||||
Convertible
preferred shares - common stock equivalents
|
||||||||
Series
A - 6,668,229 shares
|
6,668,229 | - | ||||||
Series
B - 1,493,779 shares
|
5,975,116 | - | ||||||
Series
C - 1,571,523 shares
|
15,715,230 | - | ||||||
Diluted
weighted-average number of common and common equivalent shares outstanding
during the year
|
42,170,030 | 13,285,072 |
No
outstanding options and warrants were included in the computation of diluted net
income (loss) per share. For 2009, there were 5,067,311 options and
warrants considered in the denominator for the earnings per share calculation
that were adjusted by 4,551,931 shares (for a net of 515,380) for the effect of
convertible securities.
NOTE
14 – EMPLOYEE BENEFIT PLAN
MedPro
Safety Products, Inc. Defined Contribution Plan
The
Company adopted a retirement savings 401(k) and profit-sharing plan covering
substantially all employees. Employees may contribute up to 100% of
their compensation, up to allowable limits, with the Company matching the first
three percent and matching 50% of the next two percent of compensation under a
safe harbor plan. The Company may make a discretionary contribution
to the plan up to the maximum contribution allowable for a defined contribution
plan. The Company’s discretionary contribution for 2009 was $125,000
and $138,518 for 2008. The Company’s matching contributions for 2009
were $70,656 and for 2008 were $12,613.
Participants
have full and immediate vesting in any deferrals and in any employer
contributions. Eligibility begins on the first day of the month
coincident with or following the start of employment. The employee
must be 21 years of age to be eligible. Employer contributions
charged to expense for the years ended December 31, 2009 and 2008, were $195,656
and $151,131, respectively. The plan was established on October 1,
2008.
F-35
MEDPRO
SAFETY PRODUCTS, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
15 – SUBSEQUENT EVENTS
2010
VOMF Bridge Loan
On
February 8, 2010, MedPro borrowed $500,000 from VOMF. The loan
provides MedPro with additional financial flexibility. The
outstanding principal balance bears interest at an annual rate of 6%, and all
principal and interest was originally due and payable on March 31,
2010.
Under the
terms of the note purchase agreement, we agreed to add a representative of VOMF
to our board of directors upon VOMF’s request. Other covenants of the
note purchase agreement provide that without the written consent of VOMF, we
will not guarantee or incur additional indebtedness in excess of $100,000, other
than trade accounts payable incurred in the ordinary course of business,
refinancing of current indebtedness, and financing secured by purchase money
liens, liens on equipment and other permitted liens. We also agreed
not to sell any of our properties, assets and rights including, without
limitation, its software and intellectual property, to any person except for
sales to customers in the ordinary course of business; or with the prior written
consent of VOMF.
On
February 26, 2010, we increased the outstanding principal balance of the bridge
loan to $850,000 and extended the date on which all principal and interest is
due and payable to June 30, 2010. In consideration, we issued to VOMF
a warrant to purchase 212,500 shares of our common stock at $4.00 per
share. The warrant has a five-year term. The warrant
provides that the warrant price will adjust if specified corporate transactions
occur, including a provision that if we issue any additional shares of common
stock at a price per share less than $4.00 (or the adjusted warrant price then
in effect) or without consideration, then the warrant price will adjust to the
price per share paid for the additional shares of common stock upon each such
issuance.
Joint
Development Agreement
On March
8, 2010, we entered into a Joint Development Agreement with Helvoet
Pharmaceutical N.V. relating to the development and distribution of our
pre-filled passive safety syringe system. The joint development
agreement formalizes the relationship between MedPro and Helvoet and establishes
their respective responsibilities and contributions to the project.
The
agreement provides that we will develop the safety syringe portion of the
pre-filled passive safety syringe system, and Helvoet will develop rubber
components for the product including determining the appropriate chemical rubber
formulation and component design for use with the medicament cartridge. The
agreement also establishes a general framework for formalizing the role of
additional participants in the project, including the responsibilities and
contributions required as a minimum standard for participation.
Headquartered
in Alken, Belgium, Helvoet is a worldwide manufacturer of rubber closures and
aluminum and plastic caps for pharmaceutical packaging, drug delivery and
diagnostics. With more than 1,250 employees and five plants for
rubber components and four plants for aluminum and plastic caps in Europe and
the United States, Helvoet produces over 12 billion parts per
year. Helvoet is the pharmaceutical packaging division of the
Daetwyler Holding, Altdorf, Switzerland.
F-36
INDEX TO
EXHIBITS
Exhibit
No.
|
Description
|
||
3.1
|
Amended
and Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to Form 8-K filed on January 4,
2008).
|
||
3.2
|
Bylaws
(incorporated by reference to Exhibit 3.2 to Form 8-K filed on
January 4, 2008).
|
||
3.3
|
Bylaw
amendment dated August 10, 2009 (incorporated herein by reference to Form
8-K filed on August 17, 2008).
|
||
4.1
|
Certificate
of Designations, Series A Convertible Preferred Stock Turner (incorporated
by reference to Exhibit 4.1 to Amendment No. 1 on Form S-1/A (Reg. No.
333-149163) filed on July 3, 2008).
|
||
4.2
|
Form
of Series A Common Stock Purchase Warrant (incorporated by reference to
Exhibit 4.3 to Form 8-K/A filed on September 10, 2007).
|
||
4.3
|
Form
of Series B Common Stock Purchase Warrant (incorporated by reference to
Exhibit 4.4 to Form 8-K/A filed on September 10, 2007).
|
||
4.4
|
Series
A Convertible Stock Purchase Agreement dated as of September 5, 2007
(incorporated by reference to Exhibit 4.6 to Form 10-K filed on April 18,
2008).
|
||
4.5
|
Amendment
to Certificate of Designations, Series A Convertible Preferred Stock
(incorporated by reference to Exhibit 4.6 to Form 10-K filed on March 30,
2009)
|
||
4.6
|
Certificate
of Designations, Series B Convertible Preferred Stock (incorporated herein
by reference to Exhibit 4.9 to Form 8-K filed on August 22,
2008).
|
||
4.7
|
Omnibus
Amendment to Series A, B, and C Warrants held by Vision Opportunity Master
Fund, Ltd. (incorporated herein by reference to Exhibit 4.10 to Form 8-K
filed on August 22, 2008).
|
||
4.8
|
Certificate
of Designations, Series C Convertible Preferred Stock (incorporated herein
by reference to Exhibit 4.1 to Form 8-K filed on March 30,
2009).
|
||
10.1
|
Technology
Acquisition Agreement, dated February 19, 2007, by and among SGPF, LLC,
Hooman Asbaghi and Visual Connections, Inc (incorporated by reference to
Exhibit 10.1 to Form 10-K filed on April 18, 2008)
|
||
10.2
|
Technology
Development and Option Agreement, between SGPF, LLC and MedPro Safety
Products, Inc. (incorporated by reference to Exhibit 10.2 to Form 10-K
filed on April 18, 2008).
|
||
10.3
|
Loan
Agreement and Amendments, between Fifth Third Bank and MedPro Safety
Products, Inc. (incorporated by reference to Exhibit 10.3 to Form 10-K
filed on April 18, 2008)
|
||
10.4
|
Promissory
Note dated September 1, 2006, between MedPro Safety Products, Inc. and CRM
Development Company (incorporated by reference to Exhibit 10.4 to Form
10-K filed on April 18, 2008)
|
||
10.5
|
Fourth
Amendment to Loan Agreement between Fifth Third Bank and MedPro Safety
Products, Inc. Company (incorporated by reference to
Exhibit to Form 10-K filed on March ,
2009)
|
||
10.6
|
Financial
Advisory Agreement, between MedPro Safety Products, Inc and SC Capital
Partners LLC (incorporated by reference to Exhibit 10.5 to Form 10-K filed
on April 18,
2008).
|
10.7
|
Medical
Supply Manufacturing Agreement as of July 15, 2008 between MedPro Safety
Products, Inc. and Greiner Bio-One GmbH (blood collection products) (incorporated by
reference to Exhibit 10.1 to Form 8-K filed on July 21,
2008).
|
||
10.8
|
Medical
Supply Manufacturing Agreement as of July 15, 2008 between MedPro Safety
Products, Inc. and Greiner Bio-One GmbH (winged butterfly product) (incorporated by
reference to Exhibit 10.2 to Form 8-K filed on July 21,
2008).
|
||
10.9
|
Amendment
to Technology Development and Option Agreement, between SGPF, LLC and
MedPro Safety Products, Inc. (incorporated by reference to Exhibit 10.1 to
Form 8-K filed on October 6, 2008).
|
||
10.10
|
MedPro
Safety Products, Inc. 2008 Stock and Incentive Compensation Plan
(incorporated by reference to Exhibit 10.9 to Form 8-K filed on August 22,
2008).
|
||
10.11
|
Form
of Nonqualified Stock Option Award Agreement (incorporated by reference to
Exhibit 10.10 to Form 8-K filed on August 22, 2008).
|
||
* |
10.12
|
Form
of Incentive Stock Option Award Agreement.
|
|
10.13
|
Employment
Agreement with Marc T. Ray (incorporated by reference to Exhibit 10.1 to
Form 8-K filed on April 7, 2009).
|
||
10.14
|
Employment
Agreement with W. Craig Turner (incorporated by reference to Exhibit 10.1
to Form 8-K filed on July 22, 2009).
|
||
10.15
|
Employment
Agreement with Agreement with Walter W. Weller (incorporated by reference
to Exhibit 10.1 to Form 8-K filed on October 21, 2009)
|
||
10.16
|
Note Purchase Agreement between
MedPro Safety Products, Inc. and Vision Opportunity Master Fund, Ltd.
dated as of February 8, 2010 (incorporated by reference to Exhibit
10.1 to Form 8-K filed on February 11, 2009).
|
||
* |
10.17
|
Note Purchase Agreement between
MedPro Safety Products, Inc. and Vision Opportunity Master Fund, Ltd.
dated as of February 26, 2010.
|
|
* |
10.18
|
6%
Promissory Note dated February 26, 2010
|
|
* |
10.19
|
Common
Stock Purchase Warrant dated February 26. 2010.
|
|
* |
31.1
|
Certification
of Chief Executive Officer pursuant to SEC Rule
13(a)-14(a)
|
|
* |
31.2
|
Certification
of Chief Financial Officer pursuant to SEC Rule
13(a)-14(a)
|
|
* |
32.1
|
Certification
of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title
18 of the U.S. Code
|
|
* |
32.2
|
Certifications
of Chief Financial Officer, pursuant to Section 1350 of Chapter 63 of
Title 18 of the U.S. Code
|
*
Filed herewith