Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - MedPro Safety Products, Inc.Financial_Report.xls
EX-32.2 - SECTION 906 CERTIFICATION BY CFO - MedPro Safety Products, Inc.ex322_63011x10q01.htm
EX-31.2 - SEC RULE 13(A)-14(A) CERTIFICATION BY CFO - MedPro Safety Products, Inc.ex312_63011x10q-01.htm
EX-32.1 - SECTION 906 CERTIFICATION BY CEO - MedPro Safety Products, Inc.ex321_63011x10q-01.htm
EX-31.1 - SEC RULE 13(A)-14(A) CERTIFICATION BY CEO - MedPro Safety Products, Inc.ex311_63011x10q-01.htm
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
  
FORM 10-Q/A
(Amendment No. 2)
 
(Mark One)
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2011
Or
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             

Commission file number: 000 – 52077
MEDPRO SAFETY PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Nevada
91-2015980
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
145 Rose Street, Lexington, KY
40507
(Address of principal executive offices)
(Zip Code)
(859) 225-5375
(Registrant’s telephone number, including area code)
 
 

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 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 T   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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  £                                                              Accelerated filer  £
Non-accelerated filer  £                                                                Smaller reporting company  T
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  £    No  T
Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date, 12,905,932 shares of Common Stock were outstanding at August 10, 2011
 



Explanatory Note

This Amendment (No. 2) is being filed to include the entire 10-Q as originally filed, including all sections and certifications and to make corrections to the Certifications removing reference to the title of the certifying individual in the heading of the Certification. This filing also updated the signature dates throughout the report and certifications.




INDEX




2


PART I

Item 1. Financial Statements

The following financial statements of MedPro Safety Products, Inc. are included:

Balance Sheets as of June 30, 2011 and December 31, 2010

Statements of Operations for the three and six months ended June 30, 2011 and 2010

Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2011 and the year ended December 31, 2010

Statements of Cash Flows for the six months ended June 30, 2011 and 2010

Notes to Unaudited Financial Statements
 

 

3


MedPro Safety Products, Inc.
Balance Sheets
June 30, 2011 and December 31, 2010


 
June 30,
2011
 
December 31,
2010
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
10,947,011

 
$
8,315,644

Restricted cash
2,054,255

 
3,864,411

Accounts receivable
644,241

 
179,107

Accrued interest income
2,047

 
3,898

Prepaid expenses and other current assets
64,166

 
29,368

Escrowed Senior Note funds


 
7,870,000

 
 
 
 
Total current assets
13,711,720

 
20,262,428

 
 
 
 
Property and Equipment
 

 
 

Equipment and tooling
1,105,136

 
887,607

Leasehold improvements
787,248

 
240,411

Computers, network and phones
220,490

 
210,816

Furniture and fixtures
146,270

 
117,896

Trade show booth
25,521

 
7,341

 
 
 
 
Total property and equipment
2,284,665

 
1,464,071

 
 
 
 
Less: accumulated depreciation
450,111

 
422,586

 
 
 
 
Property and equipment, net
1,834,554

 
1,041,485

Other Assets
 

 
 

Intangible assets, net of amortization of $849,380 and $596,839, respectively
8,065,268

 
8,317,810

Deferred financing costs, net of amortization of $403,486 and $157,291, respectively
1,641,014

 
1,887,210

Prepaid royalties
100,000

 
100,000

 
 
 
 
Total other assets
9,806,282

 
10,305,020

 
 
 
 
Total assets
$
25,352,556

 
$
31,608,933

 
See notes to financial statements.







4


MedPro Safety Products, Inc.
Balance Sheets (Continued)
June 30, 2011 and December 31, 2010

 
June 30,
2011
 
December 31,
2010
 
(Unaudited)
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable and accrued expenses
$
456,636

 
$
762,523

Accrued interest payable
700,000

 
700,000

Derivative liabilities – fair value of warrants
971,249

 
1,157,823

 
 
 
 
Total current liabilities
2,127,885

 
2,620,346

 
 
 
 
Long-Term Liabilities
 

 
 

Senior Notes
30,000,000

 
30,000,000

 
 
 
 
Total long-term liabilities
30,000,000

 
30,000,000

 
 
 
 
Total liabilities
32,127,885

 
32,620,346

 
 
 
 
Shareholders’ Equity


 


Preferred stock $.01 par value: 10,000,000 shares authorized:
 

 
 

Series A Preferred 6,668,229 shares issued and outstanding.  Liquidation preference $2,120,984 and $1,820,829, respectively
66,682

 
66,682

Series B Preferred 1,493,779 shares issued and outstanding
14,937

 
14,937

Series C Preferred 1,571,523 shares issued and outstanding
15,715

 
15,715

Common stock $.001 par value; 90,000,000 shares authorized; 12,949,189 and 13,091,507 issued and outstanding, respectively
12,949

 
13,092

Additional paid-in capital
71,213,259

 
71,344,241

Accumulated deficit
(78,098,871
)
 
(72,466,080
)
 
 
 
 
Total shareholders’ deficiency
(6,775,329
)
 
(1,011,413
)
 
 
 
 
Total liabilities and shareholders’ deficiency
$
25,352,556

 
$
31,608,933

 
See notes to financial statements.



5


MedPro Safety Products, Inc.
Statements of Operations
For the Three and Six Months Ended June 30, 2011 and 2010
 
 
For the Three Months Ended
 
For the Three Months Ended
 
For the Six Months Ended
 
For the Six Months Ended
 
June 30, 2011
 
June 30, 2010
 
June 30, 2011
 
June 30, 2010
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
Revenues
 
 
 
 
 
 
 
Product Royalty Income
$
631,250

 


 
$
781,250

 


Other Revenue
10,042

 


 
10,042

 


Total revenue
641,292

 

 
791,292

 

Cost of revenues and amortization of intellectual property
161,932

 
137,265

 
297,101

 
277,612

Gross profit
479,360

 
(137,265
)
 
494,191

 
(277,612
)
Operating Expenses
 

 
 

 
 

 
 

Salaries, wages, and payroll taxes
739,318

 
2,318,627

 
1,566,364

 
4,582,577

Qualified profit sharing plan
14,895

 
16,842

 
28,914

 
31,277

Advertising and promotion
131,513

 
12,535

 
169,562

 
202,971

Product development costs
200,845

 
238,665

 
448,297

 
448,686

Professional fees
451,586

 
442,422

 
802,895

 
842,385

Insurance
72,445

 
53,273

 
171,948

 
136,562

General and administrative
150,720

 
33,430

 
286,888

 
104,441

Travel and entertainment
164,725

 
142,475

 
239,480

 
270,224

Loss on disposal of assets


 


 
144,114

 


Depreciation
69,643

 
37,620

 
119,322

 
73,604

Total operating expenses
1,995,690

 
3,295,889

 
3,977,784

 
6,692,727

Loss from operations
(1,516,330
)
 
(3,433,154
)
 
(3,483,593
)
 
(6,970,339
)
Other Income/(Expenses)
 

 
 

 
 

 
 

Interest expense - including amortization of financing costs
(1,173,106
)
 
(59,754
)
 
(2,346,204
)
 
(111,108
)
Interest income
4,931

 
5,570

 
10,432

 
12,472

Change in fair value of derivative liabilities
(214,723
)
 
99,147

 
186,574

 
142,075

Total other income /(expenses)
(1,382,898
)
 
44,963

 
(2,149,198
)
 
43,439

Provision for income taxes


 


 


 

Net (loss)
$
(2,899,228
)
 
$
(3,388,191
)
 
$
(5,632,791
)
 
$
(6,926,900
)
Net (loss) per common share
 

 
 

 
 

 
 

Basic net (loss) per share
$
(0.22
)
 
$
(0.26
)
 
$
(0.43
)
 
$
(0.53
)
Diluted net (loss) per share
$
(0.22
)
 
$
(0.26
)
 
$
(0.43
)
 
$
(0.53
)
Shares used in computing earnings per share
 

 
 

 
 

 
 

Weighted average number of shares outstanding - basic
12,984,050

 
13,166,609

 
13,043,620

 
13,190,825

Weighted average number of shares outstanding - diluted
12,984,050

 
13,166,609

 
13,043,620

 
13,190,825

 
 
 
 
 
 
 
 
See notes to financial statements. 

6


MedPro Safety Products, Inc.
Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2011
and the Year Ended December 31, 2010


 
Common Stock
 
Preferred Stock
 
Unearned
 
Paid-In
 
Accumulated
 
Shares
 
Amount
 
Shares
 
Amount
 
Compensation
 
Capital
 
Deficiency
Balance, January 1, 2010
13,215,311

 
$
13,215

 
9,733,531

 
$
97,334

 
$
(167,600
)
 
$
67,023,700

 
$
(56,951,866
)
Earned portion of vendor share-based compensation


 


 


 


 
167,600

 


 


Earned portion of employee and director options


 


 


 


 


 
4,824,853

 


Derivative liabilities - warrants issued with debt


 


 


 


 


 
(844,488
)
 


Derivative liability discount accretion


 


 


 


 


 
685,000

 


Purchases of common shares
(123,804
)
 
(123
)
 


 


 


 
(344,824
)
 


Net (loss)


 


 


 


 


 


 
(15,514,214
)
Balance December 31, 2010
13,091,507

 
$
13,092

 
9,733,531

 
$
97,334

 
$

 
$
71,344,241

 
$
(72,466,080
)
Earned portion of employee and director options


 


 


 


 


 
201,297

 


Purchases of common shares
(142,318
)
 
(143
)
 


 


 


 
(332,279
)
 


Net (loss)


 


 


 


 


 


 
(5,632,791
)
Balance, June 30, 2011
12,949,189

 
$
12,949

 
9,733,531

 
$
97,334

 
$

 
$
71,213,259

 
$
(78,098,871
)
 
See notes to financial statements.


7


MedPro Safety Products, Inc.
Statements of Cash Flows
For the Six Months Ended June 30, 2011 and 2010

 
June 30,
2011
 
June 30,
2010
 
(Unaudited)
 
(Unaudited)
Cash Flows From Operating Activities
 
 
 
Net (loss)
$
(5,632,791
)
 
$
(6,926,900
)
Adjustments to reconcile net (loss) to net cash flows from operating activities:
 

 
 

Depreciation
119,322

 
73,604

Amortization
498,737

 
273,429

Loss on disposal of assets
144,114

 


Share based compensation
201,297

 
3,911,270

Change in fair value of warrant (derivative liabilities)
(186,573
)
 
(142,075
)
Changes in operating assets and liabilities
 

 
 

Accounts receivable and accrued interest
(463,283
)
 
13,450

Inventory


 
(26,720
)
Other current assets
(34,798
)
 
(4,722
)
Accrued interest payable


 
2,410

Accounts payable and accrued expenses
(305,889
)
 
161,045

Net cash flows from operating activities
(5,659,864
)
 
(2,665,209
)
Cash Flows From Investing Activities
 

 
 

Purchases of property, equipment and intangibles
(1,056,505
)
 
(62,113
)
Restricted cash-Interest Reserve releases
1,810,157

 


Net cash flows from investing activities
753,652

 
(62,113
)
Cash Flows From Financing Activities
 

 
 

Technology transfer payments


 
(250,000
)
Repayments on bank borrowings


 
(884,784
)
Proceeds from notes payable to and advances from shareholders


 
2,328,382

Senior Note funds released from escrow
7,870,000

 


Repurchases of common shares
(332,421
)
 
(203,051
)
Net cash flows from financing activities
7,537,579

 
990,547

Net increase / (decrease) in cash
2,631,367

 
(1,736,775
)
Cash at the beginning of the period
8,315,644

 
4,072,443

Cash at the end of the period
$
10,947,011

 
$
2,335,668

Supplemental Disclosures of Cash Flow Information:
 

 
 

   Cash paid for interest
$
2,100,000

 
$
79,044

Non-Cash Activity
 

 
 

   Non-cash portion of derivative liabilities associated with warrants
$
186,573

 
$
823,858

See notes to financial statements.



8

MedPro Safety Products, Inc.
Notes to Financial Statements
(Unaudited)




NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011.  For further information, refer to the Company’s financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010.

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-Q.  As the Codification was not intended to change or alter existing GAAP, it has not had any impact on the Company's financial statements.

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 -  Revenues in 2011 have been derived from royalties on our blood collection products pursuant to our minimum volume contract.  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.  In the case of our royalty income, revenues are recognized when the amount is determined based on contract terms and no possibility of refund exists.  The Company began receiving revenue from its tube-activated blood collection device during the fourth quarter of 2010.

Cost of revenues sold includes all direct production costs, shipping and handling costs, royalty expenses and amortization of patents.  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.  As of June 30, 2011 and December 31, 2010 the Company has no allowance for doubtful accounts since we have only one customer and revenue is being received based upon a minimum volume contract.  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 at December 31, 2009 consisted primarily of Needlyzer™ devices, which were carried at the lower of cost or market value on a first-in first-out basis.  Finished Needlyzer™ inventory and the remaining raw materials inventory associated with our blood collection devices was written off during the year ended December 31, 2010. The Company has not manufactured any product for resale during the six months ended June 30, 2011. We have manufactured product for testing and as samples for prospective customers. The cost of these items has been expensed.

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

9

MedPro Safety Products, Inc.
Notes to Financial Statements
(Unaudited)



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.  

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.  

Advertising and Promotion - Advertising and promotion costs are expensed as incurred.  

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.
 
No income tax benefit (expense) was recognized for the three or six months ended June 30, 2011 as a result of tax losses in this period and because deferred tax benefits, derived from the Company’s prior net operating losses, were previously fully reserved and the Company has cumulative net operating losses for tax purposes through December 31, 2010 in excess of $29 million.
 
The Company currently has tax return periods open beginning with December 31, 2007 through December 31, 2010 .

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 year ended December 31, 2010 and six months ended June 30, 2011, 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.  


NOTE 3 – EARNINGS PER SHARE

In accordance with Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share”, which was primarily codified into ASC Topic 260, basic earnings per share were computed using weighted average shareholdings of 12,984,050 and 13,166,609 for the three months ended June 30, 2011 and 2010.  Basic earnings per share were computed using weighted average shareholdings of 13,043,620 and 13,190,825 for the six months ended June 30, 2011 and 2010. There were no new common shares issued in the three or six months ended June 30, 2011.  

The basic earnings per share are calculated on the weighted average number of common shares outstanding.  Diluted earnings per share are based on the weighted average number of common shares outstanding and all dilutive potential common shares outstanding.  Because the Company had a net loss for the three and six month periods ended June 30, 2011 and 2010, there is no dilutive effect and both the basic and diluted losses per share were the same for each period.

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.

The Company’s potentially dilutive securities consist of options and warrants, as well as, convertible preferred stock.  Since the Company had a loss in 2011 and 2010, the potentially dilutive options, warrants and preferred shares were not considered and earnings per share were only presented on a non dilutive basis.  



10

MedPro Safety Products, Inc.
Notes to Financial Statements
(Unaudited)



NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
 
Recent Accounting Pronouncements

Not Yet Adopted

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The update contains the results of the work of the FASB and the IASB to develop common requirements for measuring fair value and for disclosing fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in this update are effective for periods beginning after December 15, 2011 and as a result are not yet applicable to the Company. The Company is evaluating the impact of the update on its financial statements.

Adopted

In April 2010, the FASB issued ASU 2010-17   Revenue Recognition-Milestone Method (Topic 605). The update is intended to assist with the definition of a milestone event and determining when the application of milestone revenue recognition in connection with revenue recognition for research and development transaction. Disclosures will include the description of the milestone payment arrangement, a description of each milestone and the related payment or contingent payment, a determination whether the milestones are substantive, the factors considered in making the determination of the substantive nature of the milestones and the amount of revenue recognized during the period related to the milestone or milestones.  The standard is effective for fiscal years beginning on or after June 15, 2010. The Company has adopted the standard but does not currently have any such contracts.  The adoption of the standard has not had a material impact on its financial statements.

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 disclosure 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 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. The adoption of the disclosure requirement did not have a material impact on the Company's financial statements.

In 2010, the FASB issued ASU 2010-28, Intangibles-Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.  It is effective for fiscal years beginning after December 15, 2010.  Essentially the FASB is requiring testing be performed at the Reporting Unit level with zero or negative carrying amounts.  For goodwill and other intangible assets, testing for impairment is a two-step test.  When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1).  If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2).  The effect will potentially be an impairment of goodwill or other intangibles that will be required to be reported sooner than under current standards.  The Company has adopted the standard but does not have any negative goodwill issues. Therefore, the adoption did not have a material impact on the Company's financial statements. 

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

11

MedPro Safety Products, Inc.
Notes to Financial Statements
(Unaudited)



is permitted. We have adopted this standard but it has not had a material impact on our financial statements.

In April 2010, the FASB issued ASU 2010-12 - Income Taxes (Topic 740) Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts. This updates makes it clear that the two laws passed a few days apart and commonly known as health care reform will be treated as one for accounting purposes despite the fact that they may have been passed in two different fiscal years for some. Our adoption of ASU 2010-12 did not have a material impact on our financial statements.

In January 2010, the FASB adopted ASU 2010-06 - Fair Value Measurements and Disclosures-Improving Disclosures about
Fair Value Measurements (Topic 820). This statement enhances disclosure relating to recurring or nonrecurring fair value measurement, specifically transfers between Level 1 and Level 2 inputs and the reasons for such transfers, the Level 3 activity reporting information on a gross rather than a net basis and improved guidance about disclosure by classes of assets and liabilities. Also, disclosure should include the various inputs and techniques used for valuation of assets and liabilities. We have adopted this statement and the enhanced disclosure in our financial statements.

Reclassifications

Certain amounts in the 2010 financial statements have been reclassified to conform to the classifications used to prepare the 2011 financial statements.  These reclassifications had no material impact on the Company’s financial position, results of operations, or cash flow as previously reported.

NOTE 5 – INVENTORY

The Company had no inventory at December 31, 2010 or June 30, 2011. The former Needlyzer inventory was completely disposed of in late 2010. The Company maintains no inventory of finished goods for sale. The cost of materials and supplies purchased for testing prototype products is expensed.

NOTE 6 – 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 certain medical devices commercially.  The various patents include the skin and tube-activated blood collection devices with a cost of $2,525,425, the Key-Lok™ patent at an original cost of $489,122, the syringe guard prefilled family of products at $4,845,000 and the winged infusion set at $1,250,000.  The Company also has $2,044,500 of loan fees recorded as intangible assets.

Loan fees of $2,044,500 were recorded as of October 1, 2010.  These fees are being amortized over the term of our Senior Notes, which ends October 30, 2016. Amortization began when the respective Senior Notes were issued. The fees are being amortized under a yield method based on the relative outstanding principal of the Senior Notes.

To date, three of the existing patented products, the blood collection devices, the winged blood collection set and the syringe guard products, have been utilized to manufacture parts for testing and evaluation.  The Company's customer and manufacturer began delivering the Tube-Touch™ blood collection device in the second quarter of 2011.  The Company has earned royalty revenue, based on minimum production volumes, for the last two calendar quarters.

Amortization expense of $498,737 includes amortization of $252,542 for the intellectual property and amortization of loan fees of $246,195.  Estimated future amortization for the balance of this fiscal year is expected to be $498,738 (financing costs $246,195 and intellectual property $252,543). The following amounts of amortization for the fiscal years ended on December 31 are expected to be as follows:
Fiscal Year Ending
December 31,
 
Intellectual Property
Amount
 
Financing Costs
Amount
2012
 
$
1,724,085

 
$
492,390

2013
 
$
1,724,085

 
$
432,327

2014
 
$
1,681,995

 
$
320,155

2015
 
$
1,219,000

 
$
137,638

After 12/31/2015
 
$
1,219,000

 
$
12,309



12

MedPro Safety Products, Inc.
Notes to Financial Statements
(Unaudited)



NOTE 7 – LONG-TERM DEBT

Long-term debt at June 30, 2011 and December 31, 2010 consisted of the following:


June 30,
 
December 31,

2011
 
2010
14% Senior Notes due 2016 to various noteholders, interest due quarterly beginning October 31, 2010, principal payments commence when revenue from the guaranteed minimum volume contract is sufficient to cover principal and interest; 100% of the contract revenue, reduced by certain limited expenses, is allocated to debt service through October 30, 2016
$
30,000,000

 
$
30,000,000


30,000,000

 
30,000,000

      Less: current portion


 


      Long-term portion
$
30,000,000

 
$
30,000,000


There are no maturities of long-term debt for the remainder of this fiscal year.  The following table summarizes the estimated maturities of long-term debt for the fiscal years ended December 31:
 
Fiscal Years Ended December 31
Amount
2012


2013
$
5,606,029

2014
$
7,957,317

2015
$
13,254,329

2016
$
3,182,325


The Company issued $30,000,000 of 14% Senior Secured Notes due 2016 in two tranches on September 1 and October 1, 2010.  Gross proceeds from the issuance of the Notes were reduced by $2,044,500 of issuance costs, payment of $121,000 of legal fees of the investors and the trustee, $4,500,000 to fund an interest reserve and $7,870,000 set aside in a reserve payable to the Company upon the receipt of FDA clearance for the Wing device.  FDA clearance on the Wing device was received in November 2010, and on January 30, 2011, the $7,870,000 in escrowed funds, plus interest, were released to the Company.

The interest reserve is being used to pay interest during the ramp up of royalty payments due on the blood collection devices under our minimum volume contracts.  Payments of interest on the Notes have been made through July 30, 2011. Royalty revenues received under the minimum volume contract are deposited into a collection account held by the trustee, and these funds are supplemented from the interest reserve, as necessary, to complete the scheduled payments on the Notes.  The next four quarterly payments on the Notes are scheduled to be $1,050,000 per quarter.  The balance in the interest reserve account at December 31, 2010 was $3,864,411, which is less than the total amount of payments due during the calendar year of 2011.  Accordingly, the Company classified the entire balance of the restricted cash account as a current asset.  However, because royalties increase as minimum product purchases increase over the term of the agreement, the full amount of the interest reserve account is not expected to be used to pay the entire interest payments on the Notes during the next twelve months.  Payments of principal and interest to the Noteholders are guaranteed by the Company. The balance in the interest reserve (restricted cash) account at June 30, 2011 was $2,054,255.


13

MedPro Safety Products, Inc.
Notes to Financial Statements
(Unaudited)



The use of proceeds from the Senior Notes is presented in tabular form below:
Source and Use of Funds
Amount
Proceeds from Sale of Senior Notes
$
30,000,000

Expenses not amortized
(162,358
)
Amortizable loan fees and expenses
(2,044,500
)
Reserve for interest payments
(4,500,000
)
Net proceeds to the Company
$
23,293,142

Reserve for FDA product clearance (funded by the Company)
(7,870,000
)
Pay off of bank debt and shareholder bridge loans
(4,112,967
)


 Net proceeds after FDA reserve and debt repayment
$
11,310,175

 
The funds held in the reserve pending FDA product clearance were released to the Company on January 30, 2011.  Net proceeds, including the FDA Reserve funds, totaled $19,180,175.

Royalty collections through October 30, 2016 are allocated to the payment of principal and interest on the Notes.   Once principal is paid down to $1,000,000, additional interest is paid to the Note holders based on cash flow under the contract.  The final $1,000,000 of principal is paid with the last payment on the Notes.  Any Note payments made in 2016 are reduced by the marketing assistance payments due to our customer under the minimum volume contract.  The Company is also entitled to receive a servicing fee of $5,000 per quarter, plus out of pocket expenses, subject to quarterly limitations.

The Note covenants restrict additional senior borrowing to $7,500,000 and new subordinated debt to $15,000,000.


NOTE 8 – NOTES PAYABLE TO AND ADVANCES TO/ FROM SHAREHOLDERS

2010 VOMF Bridge Loans

During 2010, MedPro borrowed a total of $2,800,000 in short-term bridge loans from Vision Opportunity Master Fund, the principal holder of our convertible preferred stock ("VOMF").  MedPro issued warrants to purchase common stock as consideration for the bridge loans. The following table provides certain information about each bridge loan.


Principal
Interest
Shares Subject to
Exercise Price
Date
Amount
Rate
Warrants
Per Share
February 8, 2010
500,000

6
%

$

February 26, 2010
350,000

6
%
212,500

4.00

March 31, 2010
450,000

6
%
112,500

4.00

May 4, 2010
250,000

7
%
208,334

3.00

May 28, 2010
300,000

7
%
50,001

3.00

June 30, 2010
450,000

7
%
75,002

3.00

August 5, 2010
500,000

7
%
83,335

3.00


$
2,800,000



741,672




The $2,800,000 outstanding principal balance of the VOMF bridge loans plus accrued interest of $57,214 was paid in full on September 1, 2010. Previously recorded loan discount, totaling $685,000, was expensed as interest when the loans were paid.

14

MedPro Safety Products, Inc.
Notes to Financial Statements
(Unaudited)





NOTE 9 – RELATED PARTY TRANSACTIONS

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 contract was superseded by a new contract on January 11, 2010.  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.

The Company also issued Series AA warrants to purchase 533,458 common shares for $1.81 per share as compensation for financial advisory services provided by SC Capital in connection with the December 28, 2007 private placement.  The terms of these warrants are comparable to the terms of the Company's “A” warrants and they expire on December 28, 2012.  None of the AA warrants have been exercised as of the date of the financial statements.

As a part of the issuance of the Senior Notes on September 1, 2010, SC Capital earned a fee of $500,000.   When the second tranche closed on October 1, 2010, SC Capital earned an additional $100,000 fee.


NOTE 10 – 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, 6,668,229 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 shares are designated as Series C Convertible Preferred Stock (“Series C Stock”).

At June 30, 2011, the Company’s issued and outstanding shares consisted of 12,949,189 shares of common stock, 6,668,229 shares of Series A Stock, 1,493,779 shares of Series B Stock, and 1,571,523 shares of Series C Stock.  In addition, warrants to purchase 2,476,012 shares of common and options to purchase 4,208,471 shares of common were outstanding at June 30, 2011.  

See Note 12 of the notes to our audited financial statements included in our Annual Report on Form 10-K for 2010 for a detailed description of the terms of our three series of preferred stock and stock purchase warrants issued and outstanding, including the accounting treatment.

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.  We expensed the unearned portion of these warrants in the first quarter of 2010.

On June 25, 2009, the Company announced that its Board of Directors had authorized the repurchase of up to one million shares of the Company’s common stock.  Through December 31, 2010 the Company had repurchased 228,884 shares in open market transactions at an average price per share of $3.20.  During the quarter ended June 30, 2011, the Company acquired an additional 72,937 shares of its own common stock at an average price of $2.32 per share. The Company has acquired 142,318 of its own shares in open market transaction during the six months ended June 30, 2011 for a total cost of $334,722 at an average cost per share of $2.35. The total number of shares repurchased has been 371,202 shares at $2.87 per share average cost.  The Company has spent $1,063,945 on share repurchases since the inception of the buy-back program.


NOTE 11 – STOCK PURCHASE WARRANTS

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:

15

MedPro Safety Products, Inc.
Notes to Financial Statements
(Unaudited)



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.

The assets or liabilities fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The Company's fair value measurements are designated as Level 3 since one of the significant inputs, the estimated term, cannot be derived from a Level 1 or Level 2 observable.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The following table sets forth by level, within the fair value hierarchy, the Company's liabilities at fair value as of March 31, 2011 (in thousands):

Derivative Liabilities
Level 1
Level 2
Level 3
Balance at December 31, 2010
$

$

$
1,157,823

Change in Valuation for March 31, 2011
$

$

(401,297
)
Change in Valuation for June 30, 2011


214,723

Balance June 30, 2011
$

$

$
971,249


All of the warrants we issued in 2010 provide for cashless exercise after one year.  In addition, if we issue any additional shares of common stock at a price per share less than the adjusted warrant exercise price then in effect or without consideration, then the exercise price will adjust to the price per share paid for the additional shares of common stock upon each such issuance.

The factors utilized to value the warrants at June 30, 2011 and the resulting change in derivative liabilities are reflected in the following table:


Valuation Factors Used and Resulting Valuation Adjustments at June 30, 2011

Warrants Issued
Warrants
Risk Free Return
Remaining Term
June 30, 2011 Per Share Valuation
Value at June 30, 2011
Value at March 31, 2011
Loss from Change in Derivative Valuation
2/26/2010
212,500

0.81
%
3.67

$
1.1913

$
253,159

$
193,690

$
59,469

3/31/2010
112,500

0.81
%
3.75

1.2073

135,823

104,068

31,755

4/30/2010
208,334

0.81
%
3.83

1.3777

287,018

227,145

59,873

6/3/2010
50,001

0.81
%
3.92

1.3915

69,577

55,118

14,459

6/30/2010
75,002

1.76
%
3.92

1.4109

105,820

82,678

23,142

8/5/2010
83,335

1.76
%
4.08

1.4382

119,852

93,827

26,025


741,672




$
971,249

$
756,526

$
214,723

Volatility used at June 30, 2011 was 82.902%; market price of the Company stock at June 30, 2011 was $2.50.

The warrants we issued in the first quarter of 2010 had an exercise price of $4.00 per share.  As a result of the cashless exercise

16

MedPro Safety Products, Inc.
Notes to Financial Statements
(Unaudited)



and anti-dilution features, the Company had recorded a liability for the fair market value of these warrants at their respective issue dates of $412,954. 

The inputs used to value the derivative liability as of the respective issue dates were:

The market price of the Company’s stock on February 26, 2010 of $3.40 and March 31, 2010 of $3.10;
Specific Company Volatility for the quarter – 48%
Risk free return rate – 2.3%
Estimated life of the warrants - 5 years

These inputs, coupled with the individual warrant exercise prices, resulted in a Black-Scholes value of $1.34 per share for the February 26, 2010 warrants and $1.14 per share for the March 31, 2010 warrants.  These warrants have been adjusted quarterly since issue and the current market valuation and effect on earnings and derivative liability for the quarter are listed in the table at the beginning of this note.

The warrants we issued in the second quarter of 2010 had an exercise price of $3.00 per share.  As a result of the cashless exercise and anti-dilution features, the Company had recorded a liability associated with these warrants at their respective issue dates of $410,902.  

The inputs used to value the derivative liability as of the issue date of the respective warrants were:

The market price of the Company’s stock on April 30, 2010, June 3, 2010 and June 30, 2010 were all $3.00 per share;
Specific Company Volatility for the valuation dates were 44.51%, 43.32% and 42.26%, respectively;
Risk free return rates were 2.43%, 2.17% and 1.79%, respectively; and
Estimated life of the warrants - 5 years.


These inputs, coupled with the individual warrant exercise prices, resulted in Black-Scholes per share values of approximately $1.25, $1.22 and $1.18 for the respective warrant grant dates.  

The warrants we issued in the third quarter of 2010 also have an exercise price of $3.00 per share.  As a result of the cashless exercise and anti-dilution features, the Company had recorded a liability associated with these warrants at their respective issue dates of $82,631.  

The inputs used to value the derivative liability as of the issue date of the respective warrants were:
The market price of the Company’s stock on August 5, 2010 was $3.00 per share;
Specific Company Volatility for the valuation date was 34.79%;
Risk free return rate was 1.57% at issue date and 1.27% at quarter end; and
Estimated life of the warrants - 5 years.

These inputs, coupled with the individual warrant exercise prices resulted in a Black-Scholes value of approximately $0.99 per share for the warrant grant date.  


NOTE 12 – STOCK OPTIONS

On August 18, 2008, the Company adopted the MedPro Safety Products, Inc. 2008 Stock and Incentive Compensation Plan (“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 the 30 days following January 1, 2013, the date of the holder’s death or 100% disability, termination of employment or service as a director, and 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

17

MedPro Safety Products, Inc.
Notes to Financial Statements
(Unaudited)



under IRS deferred compensation rules.

The Company recorded unearned compensation expense of $14,580,000, or $4.86 per underlying share, for the grant of these 3,000,000 options. The unearned compensation was 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 balance of the unearned compensation of $951,750 was expensed in the third quarter of 2010.  Unearned compensation was fully amortized into expense by the end of the third quarter of 2010.

On May 27, 2009, the Company awarded incentive stock options to purchase 185,715 common shares to all of its employees.  The exercise price of the options was $3.85 per share, the market price at the close of trading on the grant date, except that the exercise price for the options to purchase 25,974 shares awarded to the Company’s Chairman was $4.24, 110% of the market price, because he is a 10% shareholder.  The options are exercisable immediately and have a ten-year term, except for the Chairman’s options, which are limited to a five-year exercise term.  The Company recorded $355,106 of unearned compensation expense for the May 27, 2009 awards.  The Company is recording compensation expense over three different periods for the Chairman, other officers and other employees, respectively, at $5,819 per month or $17,457 for the three months ended June 30, 2011. Unearned compensation for these options was $208,941 at June 30, 2011.

The CEO’s options were valued based on a 2.5 year life with 1.23% risk-free return.  The other officer options were based on a 5 year life and a 2.43% risk-free return.  Finally, the employee options were based on a 6 year life and a 2.83% risk-free return.  The resulting values were $1.21, $1.90 and $2.09 per option, respectively, utilizing these inputs.

On August 24, 2009, the Company awarded options to purchase 50,000 shares to both of the directors appointed to its board in October 2008.  The options have the same terms as the options previously granted to the employees and the other directors in August 2008.  The option exercise price is $1.81 per share and the options may only be exercised between January 1, 2013 and January 31, 2013.  The unearned compensation booked at August 24, 2009 for these two options was $224,372. The Company recorded compensation expense of $28,047 for the three months ended June 30, 2011.  The factors utilized, at the issue date, to value these options were a volatility factor of 53%, a life of 2 years, $3.70 fair value at grant based on market prices and a 1.05% risk-free rate of return.  The resulting option value based on the $1.81 exercise price was $2.24.  Unearned compensation for these options was $16,674 at June 30, 2011.

On October 6, 2009, the Company awarded incentive stock options to purchase 47,256 common shares to its employees,
excluding officers.  The exercise price of the options was $3.65 per share, the market price at the close of trading on the grant
date.  The options are exercisable immediately and have a ten-year term. The Company recorded $91,944 of unearned compensation expense for the October 6, 2009 awards.

The unearned compensation is being recorded as expense over a six year life of the options at $1,277 per month. The Company recorded compensation expense of $3,831 for the three months ended June 30, 2011.   The factors used to value these options, at the issue date, were a life of 6 years, market prices for the stock value ($3.65 exercise price at date of grant), a 55% volatility factor and a 2.25% risk-free return.  The resulting value was $1.95 per option.  Unearned compensation on these options was $65,347 at June 30, 2011.

On September 29, 2010, the Company awarded non-qualified stock options to purchase 575,000 common shares to its employees, including the COO and CFO, but excluding the CEO.  The exercise price of the options was $2.70 per share, the market price at the close of trading on the grant date.  The options are exercisable immediately and have a five-year term. The Company recorded $422,824 of unearned compensation expense for the September 29, 2010 awards.

The unearned compensation is being recorded as expense over a two and one-half year life for the officer options at $6,079 per month. The Company recorded compensation expense of $18,237 for the three month period ended June 30, 2011.   The employee options are being recorded over five years at $3,983 per month.  The Company recorded $11,948 of earned compensation for the three months ended June 30, 2011.

The factors used to value these options were a life of 2.5 and 5 years, market prices for the stock value ($2.70 exercise price at date of grant), a 34.79% volatility factor and a 0.67% and 1.28% risk-free return. The resulting values were $0.60 and $0.88 per option, respectively for officers and employees.  Unearned compensation on these options was $331,689 at June 30, 2011.

On February 2, 2011, the Compensation Committee of the Board awarded options to purchase 300,000 common shares to our CEO, one-third of the options vest on each of December 31, 2011, 2012 and 2013 provided our CEO continues to be employed

18

MedPro Safety Products, Inc.
Notes to Financial Statements
(Unaudited)



by the Company on each vesting date. The exercise price is $2.62 and the options have a five-year exercise period after they vest. The earned portion of these options was $26,199 for the second quarter ended June 30, 2011.

We calculated the value of these options using a 2.5 year exercise period after vesting and based the valuation on the Black-Scholes formula utilizing the following inputs:


Expected
Option


Risk Free
Option Vests
Exercise Date
Term
Price
Volatility %
Return %
12/31/2011
6/30/2014
3.5
$2.62
72.148
%
1.12
%
12/31/2012
6/30/2015
4.5
$2.62
72.148
%
2.10
%
12/31/2013
6/30/2016
5.5
$2.62
72.148
%
2.10
%


Based on the inputs, the options were valued as follows:



Amortization



of Earned
Unearned


Compensation
Compensation
Option
Value
at June 30, 2011
at June 30, 2011
12/31/2011
$
132,103

$
15,929

$
116,174

12/31/2012
149,822

13,967

135,855

12/31/2013
162,750

12,361

150,389


$
444,675

$
42,257

$
402,418


The following table summarizes stock option activity for the periods indicated:
 
Six Months Ended
June 30, 2011
 
Twelve Months Ended
December 31, 2010
 
Shares
 
Average weighted exercise price
 
Shares
 
Average weighted exercise price
Outstanding  beginning of period
3,908,471

 
$
2.06

 
3,332,971

 
$
1.95

Granted
300,000

 
$
2.62

 
575,500

 
$
2.70

Exercised

 

 

 

Expired/cancelled

 

 

 

Outstanding, end of Period
4,208,471

 
$
2.10

 
3,908,471

 
$
2.06


The following table summarizes information about stock options outstanding and exercisable at June 30, 2011:

Weighted average exercise price
 
Options
outstanding
 
Average weighted remaining contractual life (years)
 
Options
Exercisable
$2.10
 
4,208,471
 
3.135
 
808,471


NOTE 13 – LEASE COMMITMENT

With Related Party

The Company leased its office and storage facility in Lexington, Kentucky, under an 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,

19

MedPro Safety Products, Inc.
Notes to Financial Statements
(Unaudited)



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 $20,925 for the three months ended June 30, 2011 and 2010.  Future minimum lease payments for the balance of this fiscal year are expected to be $41,850 and $55,200 for the fiscal year ended December 31, 2012.
 
The Company recorded a loss of $144,114 in connection with the abandonment of leasehold improvements following its move to new offices on March 25, 2011.

Lease of New Office Space (Unrelated Party)

On October 29, 2010, the Company signed a lease on new office space to accommodate expected growth in staff over the next 12 to 18 months.  The new premises cost the Company $8,000 per month rent, after a 90-day rent abatement period, and will continue for five years with three extensions of three years each.  The lease may be terminated with a 90-day notice prior to the commencement of the third year and a payment of one year's rent ($96,000) as a termination fee.

Our existing space is being actively marketed but we may have to pay dual rent for a period of time until this space is rented.

Lease expense on the new premises began on May 1, 2011. There was no rent expense in the first quarter of 2011 on the new offices.  Future minimum lease payments for the balance of this fiscal year are expected to be $48,000 and for future annual fiscal periods ended December 31 are as follows:
 
Fiscal Year Ended
December 31,
 
2012
$
96,000

2013
96,000

2014
96,000

2015
96,000

2016
8,000

 
 
Total
$
392,000



NOTE 14 – DISTRIBUTION AGREEMENT

On July 16, 2010, we entered into a new agreement with an international manufacturer and supplier of medical products through its worldwide distribution network. The agreement grants the distributor the right to manufacture, market and distribute MedPro's tube-activated and skin-activated blood collection systems and its winged blood collection set and terminates and supersedes the two prior agreements.  The July 2010 Agreement has a term ending six years from October 1, 2010, which may be extended for up to three years in certain circumstances.

During the term of the July 2010 Agreement, the distributor will pay a total minimum royalty of not less than $43,750,000 (the “Royalty Amount”).  Royalty payments will be made no later than the fifteenth day following the end of each calendar quarter, based on a minimum number of units for each calendar quarter.  Until the Royalty Amount has been paid in full, if the aggregate royalties paid for all preceding quarters in the aggregate exceeds the minimum aggregate royalties owed on minimum quarterly production for all preceding quarters, then the minimum royalty obligation for the next quarter will be reduced accordingly.

The Company agreed to make a quarterly financial contribution to the distributor to help cover the anticipated expenses of marketing the products once production has begun.  Our marketing contributions would total approximately $6.65 million over the six-year term of the July 2010 Agreement.  The Company also agreed to pay the distributor $350,000 to resolve issues of prior agreements.

20


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

The following discussion and analysis of the financial condition and results of operations of MedPro Safety Products, Inc. as of and for the three and six months ended June 30, 2011 should be read in conjunction with our audited financial statements and the notes to those financial statements that are included elsewhere in this report or our annual filings of Form 10K for 2010.  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.

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. Any statements that are not statements of historical fact are forward-looking statements. Words such as “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,”, “intend,” , “likely,” “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 “Item 1A Risk Factors” of our Annual Report on Form 10-K and our subsequent reports, 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.
New product introductions by our current or future competitors could adversely affect our ability to compete in the global market.
The ability of our competitors with greater financial resources to develop and introduce products and services that enables them to compete more successfully than us.
The continued service of key management personnel.
Our ability to attract, motivate and retain qualified employees.
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.
Potential litigation or other proceedings, including product liability and patent infringement claims adverse to us.
The effects, if any, of adverse media exposure or other publicity regarding our business, products or operations.
Product efficacy or safety concerns resulting in product recalls, regulatory action on the part of the FDA (or foreign counterparts) or declining sales.
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.


21


Overview

MedPro Safety Products, Inc. has acquired and developed 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 of 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.

Our long-term strategy is to enter into partnership agreements with major medical products distribution partners, which whenever possible would be fixed minimum volume contracts. We have entered into one such agreement 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 and a prefilled pharmaceutical safety syringe.  Our product development plans also include a needleless intravenous line based on patents and designs we control.    We have also acquired intellectual property rights to a safety needle for “pen” delivery systems for various medicaments such as insulin.

In July 2010 we entered into a six-year agreement granting rights to manufacture and distribute our three blood collection products and providing for royalty payments based on minimum volume commitments commencing October 1, 2010.  The royalties began accruing on October 1st and we received our first royalty payment in January 2011.

The agreement contemplates that the production and sale of our three blood collection and infusion products, and therefore the amount of revenue realized, will increase over the next several fiscal quarters. The total value of royalty payments based on minimum production volumes over the six-year term of the July 2010 agreement totals $43.75 million. We also agreed to make a marketing contribution totaling approximately $6.65 million over the six-year term of the agreement.  The July 2010 agreement was described in the Company’s Form 8-K filed July 22, 2010.

In addition to revenue commencing on our blood collection device, we have been active in the development of our prefilled and fillable safety syringes. We have produced product samples and packaging for our prefilled and hypodermic safety syringe systems and have built lower volume sample tools for both. In addition, we have developed an IV delivery system that will work with our prefilled medicament cartridge. We are actively seeking development and distribution partners for these products.

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 Senior Notes to which the royalty revenues from our blood collection and infusion products are committed. In the future, we expect to use revenue from operations and borrowing from commercial lenders to supplement funding for our operations.

Senior Note Offering

On September 1, 2010, MedPro completed the issuance of $25 million principal amount of 14% Senior Secured Notes due 2016 (the “Notes”) in a private placement to institutional investors. In connection with the Note issuance, MedPro transferred all of its rights under the July 2010 agreement to receive royalties from the distribution of three safety blood collection and infusion products to a newly formed, wholly owned subsidiary, MedPro Investments, LLC (“Issuer”), which issued the Notes. The maturity date of the Notes is October 30, 2016. The Notes are obligations of the Issuer and are guaranteed by MedPro.  The Notes bear interest on the unpaid principal balance at a rate of 14% per annum. The transaction is described in the Company’s Form 8-K filed September 8, 2010.

MedPro received approximately $18,649,000 in net proceeds after the establishment of a $4,500,000 interest reserve and payment of offering expenses.  The trustee for the Notes will use the interest reserve to pay interest due prior to January 30, 2013, if royalty revenues are not sufficient to cover interest and principal payments when due.

MedPro also established and funded a $7,870,000 reserve from the net proceeds to cover potential liquidated damages payable if regulatory approval of one the blood collection products were to be delayed. The funds were released from the reserve on January 30, 2011 after the FDA Freedom to Practice clearance letter was received. 

We used the net proceeds to pay off all of our bank debt and all principal and accrued interest on bridge loans made by a principal shareholder, which together totaled $4,359,833.

22



On October 1, 2010, we received net proceeds of $4,644,587 (after payment of offering fees and expenses) from the sale of a second tranche of Notes in an aggregate principal amount of $5,000,000.

Transaction costs for both tranches of Notes totaled $2,206,858.  They consisted of fees to the investment banking firms of $1,800,000 (6%), legal fees for all parties of $362,000, expenses of $37,858 and trustee fees of $7,000.  The Company capitalized, as loan fees, the $1,800,000 investment banking fees, the trustee fee of $3,500 and the bond counsel fees of $241,000.  These costs are being amortized based on a yield method over the term of the revenue stream commencing on September 1, 2010 for six years.

The balance of the net proceeds from the both tranches of the Notes will be used for the development of our safety products and to fund ongoing operations.

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.

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 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. After writing off all remaining inventory of discontinued legacy products, the Company had no inventory of product for sale at June 30, 2011.

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.  We began amortization of the patents for our two blood collectors in December 2009 when these products were first introduced for human use.  Because our winged blood collection product, our Key-Lok technology and our Syringe Guard family of products are currently not in production for distribution, we have not begun to amortize the patents for those technologies. 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 ($338.3 million), is in excess of our cost of our patents and estimated development costs ($66.6 million) by approximately 508%.

In 2010, we wrote off our Key-Lok™ assets and wrote down our patent cost to 50% of its original cost. We will continue to monitor the remaining intellectual property cost for impairment.

We have also recognized a $100,000 asset for costs incurred in connection with the development of our Winged Safety Blood Collection Set.  We are allowed to offset the first $100,000 of these costs against future product royalties.  Royalties payable on the Wing product are expected to total significantly more than $100,000. The Company is also entitled to reimbursement of certain costs beyond $100,000 for the Wing development.  These amounts are recoupable over the six year

23


contract and may be settled in cash.  Costs are still being incurred and accumulated.

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 Three and Six Months Ended June 30, 2011 and 2010

MedPro recorded a net loss of $(2,899,228) for the three months ended June 30, 2011, as compared to a net loss of $(3,388,191) for three months ended June 30, 2010.  Loss from operations for the three month period ended June 30, 2011 was $(1,516,330) and $(3,433,154) for the three months ended June 30, 2010.   

Total employee compensation, including share-based compensation, for the three months ended June 30, 2011 decreased by $1,579,309 compared to the same period of 2010.  We completed the amortization of compensation costs from the August 18, 2008 employee and director options in the third quarter of 2010.  This resulted in a quarterly decrease in share-based compensation in 2011 of $1,776,250, which accounts for more than the total decline.  The remaining difference relates to changes in compensation and the effect of adding two new employees in the fourth quarter of 2010 and hiring our new COO in April 2011. The change for the six months ended June 30, 2010 to June 30, 2011 was a decrease of $3,016,213 in salaries, wages and payroll taxes. The same changes impacted the six month period that influenced the decline in the most recent quarter. Predominantly, the reduction in salaries was due to the $3,552,500 decline in amortization of earned compensation from the 2008 share-based compensation from employee options. The increases in 2011 versus 2010 related to bonuses of $253,000, raises and three additional employees in 2011 versus the same period in 2010.

Advertising and promotion expense decreased $33,409 in the six months ended June 30, 2011 versus the same period in 2010.  The decrease in the six month period ended June 30, 2011 relates to a one-time charge in the same period ended in 2010 of $167,600 relating to a share-based grant to a research organization. Offsetting this decline was an increase in investor relations activity in the six months ended June 30, 2011 and the attendance at a national infectious disease conference ("APIC") during the second quarter of 2011. Investor relations expenditures declined $168,038 between the six month periods ended June 30, 2010 and 2011. Marketing materials increased by $126,365 from 2010 to 2011. Other promotional costs increased by $8,266 between the six month periods ended June 30, 2010 and 2011.

Advertising in the second quarter was $93,464 which is $55,415 greater than the first quarter costs of $38,049. Specific product brochures, marketing material and promotional items in connection with the APIC conference and numerous prospective customer presentations increased the second quarter costs. The second quarter costs in 2011 of $93,464 were less than the $190,436 spent in the second quarter of 2010. The 2010 numbers included the $167,600 share-based payment previously mentioned.

Professional fees and costs were down in the six months ended June 30, 2011 by $39,490 versus the same period in 2010. Legal fees were up during the same period this year over 2010 by $28,909. Consulting costs declined by $145,420 as a result of a product positioning study in the six months ended June 30, 2010 that did not recur in the period in 2011. Accounting, auditing and certification costs were up $28,723 in the first half of 2011 over the first half of 2010.  Employee recruiting costs were up $48,299 in the six months ended June 30, 2011. Factors contributing to the increase in legal and advisory fees in the first half of 2011 relate to increased regulatory costs and patent matters. Increased certification costs included ongoing work toward our CE marking in Europe (which was recently granted) in the first half of 2011 and slightly higher audit fees versus the same period in 2010.

First quarter 2011 professional costs were $351,309. Second quarter 2011 professional costs were $451,586. Most of the increased costs were new and existing patent issues and patent protection costs, as well as, and product positioning activity performed by our staff with the assistance of consultants in the second quarter. Quarter to quarter, professional fees in the second quarter of 2011 were up $9,164 to $451,586 versus $442,442 in the second quarter of 2010.

Travel costs were down by $30,744 in the first half of 2011 over 2010.  The major changes during the six month periods ended in 2011 and 2010 was a decline in airfare of $48,878, decline in car rentals of $1,908 and a decline in hotels of $24,702. Meals were up in the first half of 2011 by $21,667 over the same period in 2010 reflecting increased investor relations activity and other meeting expenses. Entertainment was up $21,907 in the first half of 2011 versus the same period in 2010. All other travel costs were up a net of $1,170 in the first half of 2001versus the same period in 2010. We continue to

24


utilize teleconferencing technology to control travel costs in 2011.

Second quarter travel costs were $164,725 versus $74,755 in the first quarter of 2011. We had a board meeting in Lexington in April and another in Chicago in June of 2011. The Company incurred some additional travel costs domestically bringing contract manufacturers to Lexington and to meetings with customers in the second quarter. Several employees traveled to the APIC conference in the second quarter and the CEO spoke at several luncheons for stock brokers hosted by the Company in the second quarter of 2011. The second quarter costs were $22,250 higher that the second quarter of 2010.

General and administrative costs are up $182,197 in the first six months of 2011 over the same period in 2010.  Network and computer support services and software are up $47,242 in connection with our relocation and some continuing improvement in technology, as well as, standardizing software platforms within our staff. Rent is up $16,000, conference registrations are $8,588, employee training is up $6,095 and filing fees are up $8,679. We are paying for parking in 2011 totaling $5,520 which was not incurred in prior years. Postage and shipping is up $11,879. Utilities are up $5,689 in 2011. Filing fees were for LLC representation and association fees incurred in 2011. Office expenses are $7,390 higher due to the move and two new headcount over last year. These make up the majority of the differences in 2011 versus 2010.

The Company incurred $150,720 of second quarter 2011 General and Administrative costs. These costs for the first quarter of 2011 were only $136,168. This is an increase of $14,552 for the second quarter. The same costs for the second quarter of 2010 were $33,430, or a $117,290 increase between the quarters in 2010 and 2011. In 2011, rent was up $16,000 in the second quarter over the first quarter. As mentioned above, the second quarter of 2011 reflects substantial software costs and network support and maintenance costs as a result of our move and an effort to standardized our software platform for the staff. In 2010, the Company was a net borrower and we were controlling discretionary expenditures, especially in this area.

Insurance costs are $171,948 through June 30, 2011. They were $136,562 through the same period last year. We have three more employees in 2011 increasing our health and benefits coverage costs. Our health insurance basic coverage increased by less than 15% this year. We have increased our products liability coverage to include the substantially increased sales of product in 2011. We also instituted an evacuation and medical coverage plan for employees expected to travel out of the country this year. The plan covers injuries, illness, prescriptions, travel and recovery costs. The Company did not have this coverage in 2010. Our property and casualty coverage has also increased since we now have property in several states and in two locations in Lexington. Insurance cost in this quarter were $72,445 which is $19,172 greater than the $53,273 incurred in the same period in 2010.

Depreciation is up $45,718 for the six months ended June 30, 2011. Amortization charges on our intellectual property of $252,543 and amortization of Senior Note issuance costs of $246,195, both for the first six months of 2011, exceeded the 2010 costs for the same period of $73,604 and $273,429, respectively. The depreciation was reflected under cost of operations and the amortization of our intellectual property was reflected in cost of revenues. Amortization of loan costs on our Senior Debt were reflected in interest expense. All depreciation and amortization costs through June 30, 2010 totaled $347,032.

Product development costs were $448,297 in the first six months of 2011 and $448,686 in the first six months of 2010. These costs reflect the Wing build and the prefilled syringe tooling and manufacturing costs. Prefilled syringe packaging design costs were also incurred in the first six months of 2011 unlike the same period 2010. Engineering and material costs were up $97,094 in the six months ended June 30, 2011. Completed parts were down $78,952 for the six months ended June 30, 2011 due to the blood collection build in the same period of 2010 that did not recur in 2011. Other testing, sterilization and simulated use costs were $18,531 less in the first half of 2011 versus 2010.

Quarter to quarter comparison reflects $200,845 of product development costs in the second quarter of 2011 versus $238,665 for the same period in 2010. The prior year included build costs for the blood collection products. Although testing of the blood collection products is ongoing in 2011, most of them are being made by our customer and shipped to us. These costs in the second quarter of 2011 include our syringe products and some continuing work on our Wing product. We incurred $247,452 of product development costs in the first quarter of 2011. The second quarter costs were $46,607 less than the first quarter. Most of this decline relates to reduced outside costs to manufacture parts for testing on the blood draw products and limited run customer samples on the syringe products. The Wing costs were higher in the first quarter of 2011 as a result of a verification and validation build for additional testing in connection with the CE mark in Europe. The second quarter of 2011 also includes much more engineering, design and prototype work as opposed to contract manufacturing and product specific material costs in prior periods.

During 2011, the Company wrote off $144,114 in leasehold improvements and other fixed costs left behind at the old office and warehouse location. All these costs were recorded in the first quarter.


25


Interest expense was $2,235,096 higher in the first six months of 2011 versus the same period in 2010 primarily due to the issuance of the Senior Notes in September and October of 2010.  Interest expense was $1,176,106 and $59,754 in the three months ended June 30, 2011 and June 30, 2010, respectively. Interest income was $12,472 in the first half of 2010 and $10,433 in same period of 2011.  The respective interest income amounts were $4,931 and $5,570 for the three months ended June 30, 2011 and 2010.  The first two quarters of 2010 had interest costs on bank debt and shareholder loans, whose balances were less than 20% of the Senior Note balance this year.

The net gain from the change in fair value of the derivative liabilities associated with the outstanding warrants in the first six months of 2011 was $186,574. The first six months of 2010 reflected a gain of $142,075.  The difference is attributable to the difference in the size of the derivative liabilities between periods and the inputs utilized to value the underlying derivative liabilities. The second quarter change in 2011 was a loss of $214,723 reflecting an increase in the liability for the quarter. In 2010, the second quarter reflected a gain of $99,147 which correlates to a reduction of the liability for that period last year.

Liquidity and Capital Resources

Total assets were $31,608,933 as of December 31, 2010 and $25,352,556 as of June 30, 2011. The $6,256,378 decline in total assets reflects the impact of the negative cash flow from operations of ($5,659,864). Similarly, the loss for the six months ended June 30, 2011 of ($5,632,791) corresponds to the asset decline.   

Restricted cash declined from $2,959,188 at the beginning of this quarter to $2,054,255 at June 30, 2011. Collections to the account during the quarter were $150,000 plus a modest amount of interest income. Expenses were $1,050,000 in interest expense and $5,000 in fees.
 
During 2011, our restricted cash decreased from $3,864,411 at December 31, 2010 to $2,054,255 at June 30, 2011, a change of $1,810,156. Quarterly interest on the Senior Notes is $1,050,000 and was paid on January 30, 2011 and April 30, 2011. Revenue of $300,000 was collected in the first six months of 2011 to offset the interest expense payment out of restricted cash. In addition, the Company received $10,000 from the interest reserve account for servicing the loan. The additional change in restricted cash represents minor operating expenses associated with the Senior Notes.  

Our unrestricted cash increased from $8,315,644 to $10,947,011 during the six months ended June 30, 2011. The receipt of the reserve of $7,870,000 following FDA clearance on the Wing device increased our unrestricted cash in January 2011. The decrease in unrestricted cash of $5,238,632 through June 30, 2011 represents the amount by which cash operating expenses and asset purchases exceeded cash received during the first six months of 2011.

On a net basis, our fixed assets increased $793,069 during the first half of 2011. New manufacturing equipment was up $222,961 while dispositions had an original cost of $5,432. Leasehold improvements were up $739,214 while disposals of leasehold improvements were $192,377. Furniture and fixtures were up $65,780 while dispositions of assets in this category were $37,406 during the six months ended June 30, 2011. Computers were up $10,369 and dispositions were $695 in the first six months of 2011. We acquired a new trade show booth for a cost of $18,180 in the second quarter of 2011. The net book value of assets written off or abandoned was $144,114.

Our financial results and operations in future periods will depend upon our ability to enter into sales and distribution agreements for our other portfolio products currently under development so we can generate sustained revenues.  We plan to continue to monitor our cash position carefully.

Our July 2010 agreement for the distribution of three blood collection products provides for royalty payments based on minimum volume commitments.  We received our first two quarterly royalty payment in the first half of 2011. Royalty revenues are scheduled to increase over the next several fiscal quarters. The total value of royalty payments based on minimum production volumes over the six-year term of the new agreement totals $43.75 million. We also agreed to make minimum quarterly marketing contributions that will total approximately $6.65 million over the six-year term of the agreement, payable in proportion to the volume of royalty revenues we receive.

Our sale of $30 million of Notes enabled us to monetize our right to receive royalty revenues from the sale of our blood collection products over the six-year term of the July 2010 agreement.  An interest reserve pre-funded $4.5 million of debt service on the Notes.  The royalties received from the sale of our blood collection and infusion products are committed to pay principal and interest to the Noteholders until the July 2010 agreement expires in 2016. We also retain the obligation to make quarterly marketing contributions and to pay royalties on the intellectual property for the blood collection products. We expect to use the balance of the proceeds from the sale of the Notes for working capital to fund the commercialization of our

26


technology and expand our ability to manufacture and deliver products to commercial markets.

The net proceeds from the sale of the Notes enabled us to pay off all current bank and shareholder debt in September 2010. During the first nine months of 2010, we had borrowed a total $2,800,000 from our principal investor, VOMF, which was bearing interest at rates of 6% and 7% per annum.  In connection with this bridge financing, we granted VOMF warrants for the purchase 325,000 shares of common stock at $4 per share and 416,672 warrants to purchase common shares at $3.00 per share.  The outstanding principal and all accrued interest on the bridge financing was paid in full on September 1, 2010.

In addition to our $10,947,011 of unrestricted cash at June 30, 2011, we held restricted cash of $2,054,255 to service interest on our Senior Notes.

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 be covered by our existing cash resources.  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, primarily the Wing device, (b) continuing development of our safety syringe products and other medical device safety products based on the technology for which we hold rights, (c) actively pursuing commercialization opportunities for these products and (d) increasing our administrative capability as needed to support expanded day-to-day operations.

We have projected significant development activity during 2011 and the addition of several new employees and consultants to assist with the development of our new products.  We have no bank debt to service and we have paid for all of our current technology and leasehold improvements.

Our royalty revenue from our three blood collection and infusion products is committed to pay principal and interest during the six-year term of the Notes. Until royalty revenues increase to cover all payments of principal and interest on the Notes, we expect to cover the balance due from the interest reserve.  During 2011, we estimate our cash required to fund operations will be approximately $750,000 to $1,000,000 per month. Until we earn revenues from the sale of our other products currently under development, we expect to fund our operations from our cash balance. Other possible sources of funding include borrowing from commercial lenders and proceeds from the sale of securities. Covenants in the indenture of the Senior Notes limit our ability to borrow funds during the six-year term of the Notes to $7,500,000 of new senior debt and $15,000,000 of new subordinated debt.

Item 3.  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 4.  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 June 30, 2011.  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 first two quarters of 2011 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

27


fraud may occur and not be detected.


28


PART II

Item 1.  Legal Proceedings.

We are not a party to any pending legal proceedings as of this date.

Item 1A. Risk Factors

Information regarding risk factors appears our Annual Report on Form 10-K for the year ended December 31, 2010 under Item 1A – Risk Factors.  There have been no material changes from the risk factors previously discussed in our Form 10-K.

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

There were no unregistered sales of securities during the quarter ended June 30, 2011. The following table provides certain information with respect to our purchases of common stock during the three months ended June 30, 2011.

 
 
 
Total Number of
Maximum Number
 
 
 
Shares Purchased as
of Shares That May
 
Total Number
 
Part of Publicly
Yet Be Purchased
 
of Shares
Average Price
Announced Plans or
Under the Plans
Period
Purchased
Paid Per Share
Programs
or Programs
4/1/2011-4/30/2011
23,960

$
2.58

322,225

677,775

5/1/2011-5/31/2011
27,900

$
2.25

350,125

649,875

6/1/2011-6/30/2011
21,077

$
2.09

371,202

628,798

Through June 30, 2011
142,318

$
2.34

 
 

 
Item 3. Default Upon Senior Securities

Not applicable.

Item 4. Reserved

Item 5. Other Information

None.

29




Item 6. Exhibits and Financial Statement Schedules.
 
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).
 
4.9
 
Form of Common Stock Purchase Warrant held by Vision Opportunity Master Fund, Ltd. (incorporated by reference to Exhibit 4.9 to Form 10-K filed on March 30, 2010).
 
10.1
 
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).
 
10.2
 
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
 
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).
 
10.4
 
Second Amendment to Technology Development and Option Agreement, between SGPF, LLC and MedPro Safety Products, Inc. (incorporated by reference to Exhibit 10.4 to Form 10-Q filed on November 15, 2010).
 
10.5
 
Financial Advisory Agreement dated January 11, 2010, between MedPro Safety Products, Inc and SC Capital Partners LLC. (incorporated by reference to Exhibit 10.5 to Form 10-Q filed on November 15, 2010).

30


 
10.6
 
Medical Supply Manufacturing Agreement, dated as of July 14, 2010, between MedPro Safety Products, Inc. and Greiner Bio-One GmbH (incorporated by reference to Exhibit 10.1 to Form 10-Q filed on August 16, 2010) (portions of the exhibit have been omitted pursuant to a request for confidential treatment).
 
10.7
 
Purchase and Sale Agreement dated as of September 1, 2010, between MedPro Investments, LLC, and MedPro Safety Products, Inc. (incorporated by reference to Exhibit 10.7 to Form 10-Q filed on November 15, 2010).
 
10.8
 
Pledge and Security Agreement made by MedPro Safety Products, Inc. to U.S. Bank National Association, as Trustee, dated as of September 1, 2010. (incorporated by reference to Exhibit 10.8 to Form 10-Q filed on November 15, 2010).
 
10.9
 
Indenture dated as of September 1, 2010, by and between MedPro Investments, LLC, as issuer of the Notes, and U.S. Bank National Association, as initial trustee of the Notes (portions of the exhibit have been omitted pursuant to a request for confidential treatment). (incorporated by reference to Exhibit 10.9 to Form 10-Q filed on November 15, 2010).
 
10.10
 
Continuing Unconditional Guarantee, dated as of September 1, 2010, is made by MedPro Safety Products, Inc., to U.S. Bank National Association, as trustee under the Indenture. (incorporated by reference to Exhibit 10.10 to Form 10-Q filed on November 15, 2010).
 
10.11
 
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).
 
10.12
 
Form of Nonqualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.10 to Form 8-K filed on August 22, 2008).
 
10.13
 
Form of Incentive Stock Option Award Agreement (incorporated by reference to Exhibit 10.13 to Form 10-K filed on March 30, 2010).
 
10.14
 
Employment Agreement with Marc T. Ray (incorporated by reference to Exhibit 10.1 to Form 8-K filed on April 7, 2009).
 
10.15
 
Employment Agreement with W. Craig Turner (incorporated by reference to Exhibit 10.1 to Form 8-K filed on July 22, 2009).
 
10.16
 
Employment Agreement with Agreement with Walter W. Weller (incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 21, 2009).
 
10.17
 
Employment Agreement with Gregory C. Schupp. (incorporated by reference to Exhibit 10.17 to Form 10-K filed on March 31, 2011).
 
10.18
 
Employment Agreement with C. Garyen Denning. (incorporated by reference to Exhibit 10.18 to Form 10-K filed on March 31, 2011).
*
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
*
101.INS
 
EX-101.INS XBRL Instance Document
*
EX-101.SCH
 
XBRL Taxonomy Extension Schema Document
*
EX-101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document

*
EX-101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
*
EX-101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
*
EX-101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 _________________________ 

*    Filed herewith


31



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act if 1934, the Registrant had duly caused this amendment to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
MEDPRO SAFETY PRODUCTS, INC.
 
 
(Registrant)
January 12, 2012
By: 
/s/ W. Craig Turner
 
 
W. Craig Turner
 
 
Chief Executive Officer, Chairman of the Board of Directors
 
 
(Principal Executive Officer)
 
January 12, 2012
By: 
/s/ Marc T. Ray
 
 
Marc T. Ray
 
 
Vice President Finance and Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)
 

32


INDEX TO EXHIBITS
The following exhibits are filed with this report.
 
Exhibit No.
 
Description
 
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
 
101.INS
 
EX-101.INS XBRL Instance Document
 
EX-101.SCH
 
XBRL Taxonomy Extension Schema Document
 
EX-101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document

 
EX-101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
EX-101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
EX-101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
_________________________ 





33