PINX:MPSP Medpro Safety Products Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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MPSP-6.30.12-10Q


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
  
FORM 10-Q
 
(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, 2012
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 T      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, 12,904,455 shares of Common Stock were outstanding at August 13, 2012
 





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, 2012 and December 31, 2011

Statements of Operations for the three and six months ended June 30, 2012 and 2011

Statements of Changes in Shareholders’ Deficiency for the six months ended June 30, 2012 and the year ended December 31, 2011

Statements of Cash Flows for the six months ended June 30, 2012 and 2011

Notes to Unaudited Financial Statements
 

 

3



MedPro Safety Products, Inc.
Balance Sheets
June 30, 2012 and December 31, 2011


 
June 30,
2012
 
December 31,
2011
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
1,398,860

 
$
6,173,627

Restricted cash
874,059

 
1,206,371

Accounts receivable, net
892,888

 
900,865

Accrued interest income

 
2,628

Prepaid expenses and other current assets
54,625

 
53,899

 
 
 
 
Total current assets
3,220,432

 
8,337,390

 
 
 
 
  Property and Equipment
 

 
 

Equipment and tooling
1,203,414

 
1,152,702

Leasehold improvements
790,046

 
787,248

Computers, network and phones
270,304

 
237,945

Furniture and fixtures
140,726

 
139,521

Trade show booth
31,900

 
27,619

 
 
 
 
  Total property and equipment
2,436,390

 
2,345,035

 
 
 
 
Less: accumulated depreciation
736,844

 
590,340

 
 
 
 
Property and equipment, net
1,699,546

 
1,754,695

  Other Assets
 

 
 

Intangible assets, net of amortization of $1,305,553 and $1,053,011, respectively
7,315,622

 
7,812,726

Deferred financing costs, net of amortization of $895,876 and $649,681, respectively
1,148,624

 
1,394,819

Recoupable royalties - Visual Connections - Wing
100,000

 
100,000

 
 
 
 
Total other assets
8,564,246

 
9,307,545

 
 
 
 
Total assets
$
13,484,224

 
$
19,399,630

 
See notes to financial statements.











4



MedPro Safety Products, Inc.
Balance Sheets (Continued)
June 30, 2012 and December 31, 2011

 
June 30,
2012
 
December 31,
2011
 
(Unaudited)
 
 
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
 
 
 
Current Liabilities
 
 
 
Accounts payable and accrued expenses
$
867,106

 
$
951,646

Accrued interest payable
700,000

 
700,000

Senior Notes - current portion
2,996,193

 

Derivative liabilities – fair value of warrants
905,577

 
1,293,754

 
 
 
 
Total current liabilities
5,468,876

 
2,945,400

 
 
 
 
Long-Term Liabilities
 

 
 

Senior Notes - long term portion
27,003,807

 
30,000,000

 
 
 
 
Total long-term liabilities
27,003,807

 
30,000,000

 
 
 
 
Total liabilities
32,472,683

 
32,945,400

 
 
 
 
Shareholders’ Deficiency


 


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

 
 

Series A Preferred 6,668,229 shares issued and outstanding.  Liquidation preference $2,727,927 and $2,426,114, 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; 12,904,455 and 13,042,313 issued and outstanding, respectively
12,904

 
13,043

Additional paid-in capital
70,763,536

 
70,842,537

Accumulated deficit
(89,862,233
)
 
(84,498,684
)
 
 
 
 
Total shareholders’ deficiency
(18,988,459
)
 
(13,545,770
)
 
 
 
 
Total liabilities and shareholders’ deficiency
$
13,484,224

 
$
19,399,630

See notes to financial statements.



5



MedPro Safety Products, Inc.
Statements of Operations
For the Three and Six Months Ended June 30, 2012 and 2011
 
 
For the Three Months Ended
 
For the Three Months Ended
 
For the Six Months Ended
 
For the Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product royalty income
$
890,625

 
$
631,250

 
$
1,781,250

 
$
781,250

Other revenue

 
10,042

 

 
10,042

Total revenue
890,625

 
641,292

 
1,781,250

 
791,292

Cost of revenues and amortization of intellectual property
171,586

 
161,932

 
343,173

 
297,101

Gross profit
719,039

 
479,360

 
1,438,077

 
494,191

Operating Expenses
 

 
 

 
 

 
 

Salaries, wages, and payroll taxes
689,680

 
739,318

 
1,626,848

 
1,566,364

Qualified profit sharing plan
17,519

 
14,895

 
38,548

 
28,914

Advertising and promotion
166,485

 
131,513

 
366,339

 
169,562

Product development costs
273,276

 
200,845

 
642,496

 
448,297

Professional fees
348,476

 
451,586

 
939,328

 
802,895

Insurance
86,118

 
72,445

 
212,374

 
171,948

General and administrative
206,969

 
150,720

 
398,085

 
286,888

Travel and entertainment
77,209

 
164,725

 
231,053

 
239,480

Write downs of abandoned equipment, leasehold improvements and technology

 

 
244,561

 
144,114

Depreciation
73,414

 
69,643

 
146,503

 
119,322

Total operating expenses
1,939,146

 
1,995,690

 
4,846,135

 
3,977,784

Loss from operations
(1,220,107
)
 
(1,516,330
)
 
(3,408,058
)
 
(3,483,593
)
Other Income/(Expenses)
 

 
 

 
 

 
 

Interest expense - including amortization of financing costs
(1,173,097
)
 
(1,173,106
)
 
(2,346,195
)
 
(2,346,204
)
Interest income
317

 
4,931

 
2,526

 
10,432

Change in fair value of derivative liabilities
564,171

 
(214,723
)
 
388,178

 
186,574

Total other income /(expenses)
(608,609
)
 
(1,382,898
)
 
(1,955,491
)
 
(2,149,198
)
Provision for income taxes

 

 

 

Net (loss)
$
(1,828,716
)
 
$
(2,899,228
)
 
$
(5,363,549
)
 
$
(5,632,791
)
Net (loss) per common share
 

 
 

 
 

 
 

Basic net (loss) per share
$
(0.14
)
 
$
(0.22
)
 
$
(0.41
)
 
$
(0.43
)
Diluted net (loss) per share
$
(0.14
)
 
$
(0.22
)
 
$
(0.41
)
 
$
(0.43
)
Shares used in computing earnings per share
 

 
 

 
 

 
 

Weighted average number of shares outstanding - basic
12,946,725

 
12,984,050

 
12,978,842

 
13,043,620

Weighted average number of shares outstanding - diluted
12,946,725

 
12,984,050

 
12,978,842

 
13,043,620

 
 
 
 
 
 
 
 
See notes to financial statements. 

6



MedPro Safety Products, Inc.
Statements of Shareholders’ Deficiency
For the Six Months Ended June 30, 2012
and the Year Ended December 31, 2011


 
Common Stock
 
Preferred Stock
 
Paid-In
 
Accumulated
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Deficiency
 
 
Balance December 31, 2010
13,091,507

 
$
13,092

 
9,733,531

 
$
97,334

 
$
71,344,241

 
$
(72,466,080
)
 
 
Earned portion of share-based compensation

 

 

 

 
427,771

 

 
 
Purchases of treasury shares
(259,355
)
 
(259
)
 

 

 
(637,784
)
 

 
 
Exercise of employee options
210,161

 
210

 

 

 
(291,691
)
 

 
 
Net (loss)

 

 

 

 

 
(12,032,604
)
 
 
Balance December 31, 2011
13,042,313

 
13,043

 
9,733,531

 
97,334

 
70,842,537

 
(84,498,684
)
 
 
Earned portion of share-based compensation

 

 

 

 
312,564

 

 
 
Purchases of treasury shares
(158,347
)
 
(159
)
 

 

 
(386,042
)
 

 
 
Exercise of employee options
3,517

 
3

 

 

 
(5,523
)
 

 
 
Exercise of investor warrants
16,972

 
17

 
 
 
 
 
 
 
 
 
 
Net loss for the period ended June 30, 2012

 

 

 

 

 
(5,363,549
)
 
 
Balance June 30, 2012
12,904,455

 
$
12,904

 
9,733,531

 
$
97,334

 
$
70,763,536

 
$
(89,862,233
)
 
 
 
See notes to financial statements.


7



MedPro Safety Products, Inc.
Statements of Cash Flows
For the Six Months Ended June 30, 2012 and 2011

 
June 30,
2012
 
June 30,
2011
 
(Unaudited)
 
(Unaudited)
Cash Flows From Operating Activities
 
 

Net income (loss)
$
(5,363,549
)
 
$
(5,632,791
)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
 

 
 

     Depreciation
146,503

 
119,322

Amortization of financing costs and intangible assets
498,738

 
498,737

Write downs of abandoned equipment, leasehold improvements and technology
244,561

 
144,114

Share based compensation
312,564

 
201,297

Change in fair value of warrant (derivative liabilities)
(388,178
)
 
(186,573
)
Changes in operating assets and liabilities
 

 
 

Accounts receivable and accrued interest
10,605

 
(463,283
)
Other current assets
(728
)
 
(34,798
)
Accounts payable and accrued expenses
(84,536
)
 
(305,889
)
Net cash flows from operating activities
(4,624,020
)
 
(5,659,864
)
 Cash Flows From Investing Activities
 
 
 
Purchases of property, equipment and intangibles
(91,355
)
 
(1,056,505
)
Restricted cash-Interest Reserve
332,312

 
1,810,157

Net cash flows from investing activities
240,957

 
753,652

 Cash Flows From Financing Activities
 

 
 

Escrowed Senior Note Funds

 
7,870,000

Withholding taxes on cashless stock option exercise
(5,503
)
 

Purchase of treasury shares
(386,201
)
 
(332,421
)
 Net cash flows from financing activities
(391,704
)
 
7,537,579

Net increase / (decrease) in cash
(4,774,767
)
 
2,631,367

Cash at the beginning of the period
6,173,627

 
8,315,644

Cash at the end of the period
$
1,398,860

 
$
10,947,011

Supplemental Disclosures of Cash Flow Information:
 

 
 

Cash paid for interest
$
2,100,000

 
$
2,100,000

Non-Cash Activity
 

 
 

Non-cash portion of (gain) or loss on derivative liabilities associated with warrants
$
(388,178
)
 
$
(186,573
)
 
 
 
 
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 considered necessary for a fair presentation have been included.  Operating results for the three and six months ended June 30, 2012 and 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.  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, 2011.

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. 

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 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 and 2012 were 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 accruing revenue from its tube-activated blood collection device late in 2010 and collected its first revenue in 2011.

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.  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. There were no allowances for doubtful accounts at the end of 2011 or the first two quarters of 2012. The Company has only one customer and revenue is pursuant to a minimum volume contract. That customer also manufactures the product.

Property and Equipment – Property and equipment are stated at cost less accumulated depreciation and amortization.  Depreciation and amortization for assets placed in service is provided using the straight line method over their estimated useful lives.  The cost of normal maintenance and repairs is charged against earnings.  Expenditures which significantly increase asset values or extend useful lives are capitalized.  The gain or loss on the disposition of property and equipment is recorded in the year of disposition.  

Intangible Assets – Intangible assets consist principally of intellectual properties such as regulatory product approvals and patents. Intangible assets are amortized using the straight line method over their estimated period of benefit, ranging from one to ten years upon being placed in full production.  We evaluate the recoverability of intangible assets periodically and take into account potential triggering events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. Amortization of the Vacumate technology began in December 2009 when products were shipped for human use evaluation by our customer.  Management believes that future revenue from an existing minimum volume contract for this product insures that the carrying value of this asset is not impaired.

Research and Development Costs – Research and development costs are charged to expense as incurred.  These expenses do not include an allocation of salaries and benefits for the personnel engaged in these activities.  Although not expensed as

9

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


research and development, all salaries and benefits for the three and six months ended June 30, 2012 and 2011, have been expensed.

Advertising – Advertising 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.  The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences become deductible.  Management considers the scheduled reversal of deferred tax assets, projected future taxable income and tax planning strategies in making this assessment.  Management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Management has evaluated the positions taken in connection with the tax provisions and tax compliance for the periods included in these financial statements as required by ASC 740.  The Company does not believe that any of the positions it has taken will not prevail on a more likely than not basis.  As such no disclosure of such positions was deemed necessary.

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 six months ended June 30, 2012 and the year ended December 31, 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

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.

Potentially dilutive securities consist of options, warrants and convertible preferred stock. There were 3,837,809 outstanding options convertible into one share each of common stock at June 30, 2012. Stock purchase warrants outstanding at June 30, 2012 totaled 2,221,349 warrants convertible into an equal number of common shares. There were also three series of convertible preferred shares. Series A Preferred totaled 6,668,229 and convert into one share each of common stock. The Series B Preferred shares totaled 1,493,779 and had a four to one conversion representing 5,975,116 of potential new common shares. Finally, 1,571,523 of Series C Preferred with a ten to one conversion feature have the potential to increase outstanding common shares by 15,715,230.

Since the Company had a loss for the three and six months ended June 30, 2012 and 2011, the potentially dilutive options, warrants and preferred shares were not considered and earnings per share were only presented on a non-dilutive basis.    

NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
 
Recent Accounting Pronouncements

Not Yet Adopted

In July 2012, the FASB issued the Accounting Standards Update 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02). This update is effective for fiscal years beginning after September 15, 2012. The update permits qualitative analysis of impairment of indefinite-lived intangible assets to

10

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


determine if quantitative assessment of the value of such assets is necessary. It applies to intangible assets with an indefinite life other than goodwill. The update provides a series of events and circumstances that could impact significant inputs used to determine fair value of indefinite-lived assets. It also provides guidance as to frequency such qualitative and/or quantitative analysis must be performed. Finally, once an asset is determined to have a finite life, impairment assessment must be performed in accordance with paragraphs 350-30-35-18 through 35-19.

The intent of the update is to assess whether or not, on a more likely than not basis, using qualitative analysis as described in the update, an indefinite-lived asset is impaired. If it is determined to be impaired, a valuation on a quantitative basis must be performed. Similarly, if the indefinite-lived asset is determined to have a finite life it must be evaluated for amortization and/or impairment analysis. The Company has not yet adopted this update and is evaluating the impact of this update on its financial statements and whether or not any of its assets would fall into this category. It believes the impact on our financial statements will not be material.

In December 2011, the FASB issued the Accounting Standards Update 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The update requires disclosure on both a gross and net basis of offsetting assets and liabilities in connection financial assets and liabilities. It is effective for annual reporting periods beginning on or after January 1, 2013 and interim reporting periods within those annual periods. The Company does not have any offsetting financial assets and liabilities at the present time. If, in the future, after the effective date, the Company acquires such assets and liabilities it will comply with the disclosure requirements of the update.

Adopted

In September 2011, the FASB issued Accounting Standards Update 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment (ASU 2011-08). ASU 2011-08 allows entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The Company has adopted the provisions of ASU 2011-08. The effects of adoption were not material.

In May 2011, the FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 provides that the highest-and-best use and valuation-premise concepts included in ASC 820 are only relevant when measuring the fair value of non-financial assets, thereby prohibiting the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. However, under ASU 2011-04 an exception is permitted which allows an entity to measure the fair value of financial instruments that are managed on the basis of the entity's net exposure to a particular market risk, or to the credit risk of a particular counter-party, on a net basis when certain criteria are met. Such criteria include that there is evidence that the entity manages its financial instruments in that way, the entity applies such accounting policy election consistently from period to period, and the entity is required or has elected to measure those financial assets and financial liabilities at fair value in the statement of financial position at the end of each reporting period. Additionally, to qualify for the exception to the valuation premise, the market risks that are being offset must be substantially the same. ASU 2011-04 also extends ASC 820's prohibition on the use of blockage factors in fair value measurements to all three levels of the fair value hierarchy except for fair value measurements of Level 2 and 3 measurements when market participants would incorporate the premium or discount into the measurement at the level of the unit of account specified in other guidance. ASU 2011-04 also provides that an entity should measure the fair value of its own equity instruments from the perspective of a market participant that holds the instruments as assets. Under ASC 820, as amended, expanded disclosures are required including disclosure of quantitative information about significant unobservable inputs used in Level 3 fair value measurements, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements. Additional disclosures required under ASU 2011-04 include disclosure of fair value by level for each class of assets and liabilities not recorded at fair value but for which fair value is disclosed, and disclosure of any transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for those transfers. The provisions of ASU 2011-04 are effective for periods beginning after December 15, 2011, with disclosure of the change, if any, in valuation technique and related inputs resulting from application of the amendments to ASC 820 required upon adoption, along with quantification of the total effect of the change, if practicable. The Company's adoption of ASU 2011-04 had no material effects on its financial statements.

Reclassifications

Certain amounts in the 2011 financial statements have been reclassified to conform to the classifications used to prepare the 2012 financial statements.  These reclassifications had no material impact on the Company’s financial position, results of

11

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


operations, or cash flow as previously reported. 

NOTE 5 – INTANGIBLE ASSETS

The Company’s intangible assets consist primarily of intellectual properties (medical device patents) that give the Company the right to produce or license certain medical devices. These various patents include the skin and tube-activated blood collection devices with an original cost of $2,525,425, the Key-Lok™ patent at $489,122, the syringe guard prefilled family of products at $4,845,000 and the winged infusion set at $1,250,000.  In 2010, the Company wrote the Key-Lok™ patent down to 50% of the $489,122 original cost to $244,561. During the first quarter of 2012, the Company wrote off the balance of the Key-Lok patent cost of $244,561. The write down is reflected under the caption "Write downs of abandoned equipment, leasehold improvements and technology". The write down was triggered based on the limited remaining life of the patents, competing technology in the market and the estimated cost to redesign the product to be more functional. The Company decided to expend its resources on other products.

Through the second quarter of 2012, amortization expense was $498,738, including $252,544 amortization of intellectual property and $246,194 amortization of loan fees. In 2011, amortization expense for the second quarter was the same as in 2012. Amortization for the entire year of 2011 was $997,475 including $505,085 of intellectual property amortization reflected in cost of goods sold and $492,390 of loan fee amortization included in interest expense associated with the Company's Senior Notes. Estimated future amortization of these intangibles is expected to consist of the following amounts for the twelve month periods ended on December 31:

12 month periods ended December 31,
Amortization
2012
$
809,835

2013
$
1,724,085

2014
$
1,681,995

2015
$
1,219,000

2016
$
1,219,000

After 2016
$
914,250

 
 


12

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


NOTE 6 – LONG-TERM DEBT

Long-term debt at June 30, 2012 and December 31, 2011 consisted of the following:
 
June 30, 2012
December 31, 2011
Senior Notes Payable, Interest at 14%, payable quarterly beginning on October 30, 2010, secured by the royalty contract on blood collection devices, guaranteed by MedPro Safety Products, Inc. on behalf of MedPro Investments, LLC, the issuer
$
30,000,000

$
30,000,000


$
30,000,000

$
30,000,000

      Less: current portion
2,996,193


      Long-term portion
$
27,003,807

$
30,000,000


The Company issued $30,000,000 of Senior Secured 14% Notes due 2016 in two tranches on September 1, 2010 and October 1, 2010.  Gross proceeds from the issuance of the Notes were reduced by $2,206,858 of issuance expenses, $4,500,000 of funds held in reserve to pay interest during the ramp up of royalty income, and $7,870,000 held in a reserve payable to the Company upon the receipt of FDA clearance for the Wing device.  The Company used the net proceeds of the issuance of the Notes to pay off all of its outstanding bank debt in September 2010. The FDA cleared the Wing device in November 2010, and the Company received the $7,870,000  plus interest on January 30, 2011.

The interest reserve is used to supplement royalty revenues received under the GBO agreement.  Royalty revenues are deposited into a collection account held in trust and are supplemented from the interest reserve as necessary to complete the scheduled payments on the Notes.  The balance in the interest reserve account at June 30, 2012 and December 31, 2011 was $874,059 and $1,206,371, respectively. The current period ending balance is less than the total amount of payments due in the next year.  Accordingly, the Company has 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 GBO 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 seven months.  The interest reserve will be fully consumed on the payment due on the Senior Notes on January 30, 2013. Payments of principal and interest to the Noteholders are guaranteed by the Company.

Interest payments are subject to adjustment should our proceeds exceed minimum payments specified in the GBO agreement.

The Notes indenture limits the debt the Company can incur while the Notes are outstanding to an additional $7,500,000 of new senior debt and $15,000,000 of unsecured debt.

The following table summarizes the maturities of long-term debt:

12 month periods
ended December 31,
Maturities
2012
$

2013
5,606.029

2014
7,957.317

2015
13,254.329

2016
3,182.325




Total
$
30,000,000


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




13

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


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.

NOTE 7 – NOTES PAYABLE TO AND ADVANCES TO/FROM SHAREHOLDERS

As of June 30, 2012, the Company had accrued severance and related expenses payable to a former officer of $91,671. In addition, the Company had minor receivables from employees totaling a net of $645. As of December 31, 2011, the respective balances were $253,987 and $115. The employee receivables related to unreimbursed personal expenses on the Company credit card that are billed to the employees and collected each month.

14

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


NOTE 8 – RELATED PARTY TRANSACTIONS

On January 11, 2010, we signed a new agreement with SC Capital, which was an extension and modification of our previously existing agreement, to provide the Company with assistance in securing debt or equity and to assist the Company with acquisition or disposition services.  The current contract had an initial 24 month term which has expired and is now continuing on a month to month basis until terminated by 30 day notice.

We pay SC Capital a consulting fee of $15,000 per month until the agreement is terminated.  We agreed to pay additional compensation to SC Capital in connection with any definitive agreements we enter into with parties specifically identified by SC Capital during and within 24 months after termination of the agreement.  For an equity financing transaction, we must pay SC Capital a consulting fee equal to 8% of the principal cash amount of all securities and institutional and secondary financings introduced by SC Capital and provide SC Capital with warrants to purchase a number of shares or units equal to 8% of the number of shares or units sold under the equity financing.  In a debt financing transaction, we must pay SC Capital a consulting fee equal to 3% of any gross proceeds received by MedPro in connection with a debt financing.  In a committed debt facility, the fee owed to SC Capital is to be calculated on the gross available amount committed to us.  In connection with any merger and acquisition transaction occurring during the term of the agreement, SC Capital would be entitled to 2.5% of the total transaction consideration for the first $20 million and 2% for any amount over $20 million.  For strategic alliances or other business realignments resulting from SC Capital’s services, we must pay a consulting fee equal to 8% of the value of the transaction. During 2010, we paid SC Capital $600,000 in fees in connection with our issuance of $30,000,000 of Notes.

During 2010, MedPro borrowed a total of $2,800,000 from VOMF under the terms of a series of short-term bridge loans to MedPro with additional financial flexibility.  The annual interest rates on $1,300,000 of these loans was 6% and 7% on the balance. The $2,800,000 outstanding principal balance of the VOMF bridge loans plus accrued interest of $57,214 were paid in full on September 1, 2010.

In consideration of these loans, we issued to VOMF warrants to purchase 416,672 shares of our common stock at $3.00 per share and 325,000 shares of our common stock at $4.00 per share.  Each warrant has a five-year term.  Each warrant provides that the warrant price will adjust if specified corporate transactions occur, including a provision that if we issue any additional shares of common stock at either a price per share less than the warrant exercise price (or the adjusted price then in effect) or without consideration, then the warrant price will adjust to the price per share paid for the additional shares of common stock upon each such issuance.

The following table lists the loans and terms:

Principal
Interest
Shares Subject to
Exercise Price
Date
Amount
Rate
Warrants
Per Share
February 8, 2010
$500,000
6.00
%


February 26, 2010
350,000

6.00
%
212,500

$4.00
March 31, 2010
450,000

6.00
%
112,500

$4.00
May 4, 2010
250,000

7.00
%
208,334

$3.00
May 28, 2010
300,000

7.00
%
50,001

$3.00
June 30, 2010
450,000

7.00
%
75,002

$3.00
August 5, 2010
500,000

7.00
%
83,335

$3.00

$2,800,000

741,672


 
 
 
 
 


During 2012 and 2011, the Company leased its office and storage facility in Lexington, Kentucky from a company owned by the Company’s Chairman, which is described in Note 11.

The Company is obligated to issue 690,608 common shares to its CEO in the event the Company recognizes $5,000,000 or more in revenue on the Syringe Guard family of products. Additional triggers for these shares to be awarded include a change in control of the Company, the termination of the CEO or the sale or licensing of any part of the technology to another entity.



15

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


NOTE 9 – SHAREHOLDERS’ EQUITY

The Company is authorized to issue 90,000,000 shares of common stock with a par value of $0.001 per share, and 10,000,000 shares of preferred stock with a par value of $0.01 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 are designated as Series C Convertible Preferred (“Series C Stock”).

The following table sets forth the number of the shares of the Company’s capital stock issued and outstanding at the end of each of the last two fiscal periods presented in these financial statements:

 
 
Shares outstanding at
 
Shares outstanding at
 
Shares outstanding at
 
 
Shares Authorized
Par Value
June 30, 2012
 
December 31, 2011
Common stock
 
90,000,000

$
0.001

12,904,455

 
13,042,313

Preferred Shares
 
10,000,000

$
0.01


 

Series A Preferred
 

 
6,668,229

 
6,668,229

Series B Preferred
 

 
1,493,779

 
1,493,779

Series C Preferred
 
 
 
1,571,523

 
1,571,523

Common stock underlying outstanding stock purchase warrants
 
 
 
2,221,349

 
2,301,012


The following is a summary of the material rights, preferences, privileges, and restrictions of the Company's three series of convertible preferred Stock. Three Series A Stockholders also hold warrants to purchase common stock that were issued with the Series A Stock.  See Note 10 for a description of the terms of these warrants and how they have been valued under the Black-Scholes methodology.

Series A Convertible Preferred Stock

Dividends. The Series A Stockholders are entitled to receive cash dividends at the rate of 5% of the stated liquidation preference amount ($1.81 per share). Dividends are cumulative, and will only accrue and be payable upon any liquidation of the Company. Dividends on Series A Stock will be paid before dividends on any junior stock.
         
Liquidation Rights. Upon any liquidation, dissolution or winding up of the affairs of the Company, the holder of Series A Stock is entitled to receive $1.81 per share, plus any accrued and unpaid dividends, before any amounts are paid on common stock or any junior stock. The amount of this preferential liquidation distribution would have been $2,727,927 through June 30, 2012 and $2,426,114 through December 31, 2011. These amounts have not been recorded in the financial statements.
         
Voting Rights. The Series A Stockholders have no voting rights, except that as long as there are 200,000 shares of Series A Stock outstanding, the affirmative vote of 75% of the Series A Stock is required for the Company to take the following actions:
 
To authorize the issuance of a series of stock ranking equal or senior to the Series A Stock with respect to liquidation rights.
To repurchase, redeem, or pay dividends on shares of common stock other than de minimus repurchases or contractual redemption obligations.
To reclassify any outstanding securities in a way that materially and adversely affects the rights of Series A Stock.
To make any unauthorized distribution to the holders of stock junior to the Series A Stock.
To voluntarily file for bankruptcy, liquidate assets or make an assignment for the benefit of our creditors.
To discontinue involvement in the Company's current business.
         
Conversion Rights. The Series A Stock is convertible into common stock at any time, in whole or in part, at the option of the holder. Each share of Series A Stock is convertible into the number of common shares equal to the quotient of: (1) $1.95, divided by (2) the conversion price then in effect.

16

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




    
The conversion price is initially $1.95 per share, but is subject to adjustment for certain events, including stock splits, stock dividends, distributions, reclassifications or reorganizations. In addition, the conversion price is subject to adjustment if the Company issues additional shares of common stock or securities convertible into, or exchangeable for, common stock, in either case at a price per common share less than the conversion price then in effect. The conversion price adjustment does not apply to the issuance of shares in certain transactions identified in the certificate of designations.
         
The Series A Stock cannot be converted if it would result in the holder beneficially owning in the aggregate more than 9.9% of our common stock outstanding unless the holder of the Series A Stock waives the restriction.

Buy-In Rights. If the Company fails to timely deliver common stock issuable upon conversion of Series A Stock, and the holder is required to purchase common stock to deliver in satisfaction of a sale of the shares to have been issued upon the conversion, then the Company must pay the holder in cash the difference between the total purchase price the holder paid to acquire the common stock to complete the sale and the amount obtained by multiplying (1) the number of shares of common stock issuable upon conversion of the Series A Stock times (2) the price at which the holder's sell order for those shares was executed.
         
Redemption Rights. Upon the occurrence of a “major transaction,” each holder of Series A Stock can require the Company to redeem all or a portion of the holder's Series A Stock equal to 100% of the liquidation preference amount plus any accrued but unpaid dividends. The Company can elect to pay in common shares based on the conversion price then in effect. A “major transaction” includes a change of control of our company, the sale of more than 50% of our assets, or the purchase of more than 50% of the outstanding shares of our common stock.
         
Upon the occurrence of one of the triggering events listed below, each holder of Series A Stock can require the Company to redeem all or a portion of the holder's Series A Stock at a price per share equal to 120% of the liquidation preference amount plus any accrued but unpaid dividends and liquidated damages.

(1)
The holder's common stock cannot be sold in the public securities market due to the lapse of the effectiveness or unavailability of a resale registration statement for 20 consecutive trading days, unless due to factors solely within the control of the holder.
(2)
Our common stock is suspended from listing or trading on the OTC Bulletin Board or a stock exchange for five consecutive trading days.
(3)
Our inability to convert Series A Stock into shares of common stock.
(4)
Our failure to comply with a conversion notice for 15 days.
(5)
Our common stock is deregistered under the Securities Exchange Act of 1934.
(6)
We consummate a “going private” transaction so that our common stock is no longer registered under the Securities Exchange Act of 1934.
(7)
We breach a term of the Series A Stock purchase agreement, the certificate of designation or any related agreement that has a materially adverse effect on the Series A Stock and is not curable or continues for more than 10 business days.
         
For triggering events (1), (2), (3), and (7), the Company can elect to pay in cash or shares of common stock (the price per share is the conversion price then in effect). For (4), (5), and (6), the Company will redeem for cash.

Registration Rights. The Company entered into a registration rights agreement with the Series A Stockholders at the time of their investment. The agreement required us to register shares of common stock issuable upon the conversion of the Series A Stock and the exercise of the accompanying warrants with the SEC for resale by the holders. The agreement also provides that the Series A Stockholders have certain “piggy-back” registration rights if the Company registers securities for an offering (other than registrations in connection with the acquisition of a business or with employee benefit plans).

In addition, Series A Stockholders may make a written request for registration of shares of common stock not previously registered that are issued upon the occurrence of a "major transaction" or "triggering event." A "major transaction" includes certain consolidation or merger transactions, the sale of more than 50% of the Company's assets, or the purchase of more than 50% of the outstanding shares of our common stock. “Triggering events” are events (1), (2), (3), and (7) listed under “Redemption Rights” above.

17

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





Series B Convertible Preferred Stock

Each share of Series B Stock converts into 4 shares of common stock at the present conversion price of $2.18 per share, which is subject to adjustment. The Series B Stock ranks equal to the Company’s common stock, but ranks junior to the Series A Stock and to our indebtedness. If the Company declares dividends, the Series B Stockholders will receive dividends on a pro rata basis with the common stockholders. Upon liquidation, dissolution or winding up of the Company, the holder of Series B Stock is entitled to an amount equal to the amount distributable per share of common stock multiplied by the number of shares of common stock into which the Series B Stock can be converted. The Series B Stock has no general voting rights.

Series C Convertible Preferred Stock

Each share of Series C Stock converts into 10 shares of common stock, which ratio is subject to adjustment. The Series C Stock ranks equal to the Company’s Series B Stock and common stock, but ranks junior to the Series A Stock and to our indebtedness. If the Company declares dividends, the Series C Stockholders will receive dividends on a pro rata basis with the common stockholders. Upon liquidation, dissolution or winding up of the Company, the holder of Series C Stock is entitled to an amount equal to the amount distributable per share of common stock multiplied by the number of shares of common stock into which the Series C Stock can be converted. The Series C Stock has no general voting rights.

See Note 10 for a detailed description of the terms of our stock purchase warrants issued and outstanding, including the accounting treatment.

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, 2011 the Company had repurchased 488,239 shares in open market transactions at an average price per share of $2.17.  During the six months ended June 30, 2012, the Company acquired an additional 158,347 shares of its own common stock at an average price of $2.44 per share for a total cost of $386,200. The total number of shares repurchased since inception of the buyback program have been 646,586 shares at $2.72 per share average cost.  The Company has spent $1,755,756 on share repurchases since the inception of the buy-back program.

NOTE 10 – STOCK OPTIONS, WARRANTS AND DERIVATIVE LIABILITIES

Stock Option Awards

The Company grants share-based awards under the 2008 Stock and Incentive Compensation Plan ("2008 Plan") and the 2011 Non-Employee Director Stock Option Program ("Director Program"), which, among other things, (a) encourages employees and directors to help increase the profitability and growth of the Company; (b) provide competitive compensation to employees; (c) attract and retain exceptional personnel and encourage excellence in the performance of individual responsibilities; and (d) motivate key employees and directors to contribute to the Company's success.
The fair value of the share-based payments is recognized as compensation expense over the various expected lives of the different options. For the three months ended June 30, 2012 and 2011, compensation expense charged to income was $160,269 and $105,720, respectively. For the six months ended June 30, 2012 and 2011, compensation expense was $312,564 and $201,297, respectively.
The amount of unrecognized compensation expense for all share-based awards as of June 30, 2012 was approximately $2,117,801, which is expected to be recognized over a weighted-average remaining life of approximately 3.84 years.

The table below identifies the Company's June 30, 2012 and the year ended December 31, 2011 options granted for Officers, employees and Directors and the factors used to value the share-based compensation expense for each option.

18

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


 
Option Schedule and Valuation Assumptions for 2012 and 2011 Options
 
Grant Date
Expiration Date
Option Term in Years
Number of Options
Exercise Price
Market Price at Grant Date
Estimated Life for Valuation (Years)
Volatility Factor
Risk Free Return Factor
Valuation Per Option
Total Compensation Expense
 
2/2/2011
2/2/2021
10.00
100,000

$
2.62

$
2.62

3.5
72.15
%
1.12
%
$
1.344

$
134,350

 
2/2/2011
2/2/2021
10.00
100,000

$
2.62

$
2.62

4.5
72.15
%
2.10
%
$
1.523

$
152,272

 
2/2/2011
2/2/2021
10.00
100,000

$
2.62

$
2.62

5.5
72.15
%
2.10
%
$
1.578

$
157,843

 
8/15/2011
8/15/2021
10.00
50,000

$
2.96

$
2.96

3.0
78.36
%
0.34
%
$
1.496

$
74,794

 
8/23/2011
1/31/2013
1.44
50,000

$
1.81

$
2.96

1.44
77.821
%
0.22
%
$
1.542

$
77,078

 
8/23/2011
8/23/2021
10.00
125,000

$
2.96

$
2.96

3.0
77.821
%
0.38
%
$
1.488

$
186,001

 
12/9/2011
12/9/2021
10.00
300,000

$
2.25

$
2.25

9.95
104.088
%
0.82
%
$
1.712

$
513,480

 
12/9/2011
12/9/2021
10.00
275,000

$
2.25

$
2.25

9.95
104.088
%
1.82
%
$
2.045

$
562,507

 
3/5/2012
3/5/2022
10.00
100,000

$
2.73

$
2.73

5.0
113.393
%
0.87
%
$
2.180

$
217,910


During the year ended December 31, 2011

On February 2, 2011, the Compensation Committee of the Board granted three options to the CEO of 100,000 options each year for three years for one common share each, exercisable if the CEO stays through December 31st of the current and the next two succeeding years. The first option became exercisable on December 31, 2011 The valuation and the factors used to value these options are listed in the table above.

In connection with the employment of the Company's new COO, an option for 50,000 shares was granted on August 15, 2011. It may be exercised on the one year anniversary of the grant date. The valuation and the factors used to value these options are listed in the table above.

On August 23, 2011, the board of directors adopted the Director Program and reserved 500,000 of the shares authorized for issuance under the 2008 Plan for the stock options to be awarded under the Director Program.  The Director Program provides that each non-employee director automatically receives an award of options to purchase 25,000 shares each year upon election at each annual meeting.  The options have a ten-year term and become exercisable on the first anniversary of the award date.  The exercise price is trading price at close of trading on the award date, which was $2.960 for initial grant of 125,000 options on August 23, 2011.  Vested options may be exercised for one year following termination of service due to death or disability. Unvested options will become fully exercisable upon a change of control, as defined by the 2008 Plan.   The valuation and the factors used to value these options are listed in the table above.

19

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



In addition, one director was granted an option to acquire 50,000 common shares on August 23, 2011 under the same terms granted to the officers, employees and directors present for the August 18, 2008 award. The valuation and the factors used to value these options are listed in the table above.

On December 9, 2011, the Company awarded options to purchase 300,000 common shares to the Executive Officers other than the CEO and options to purchase 275,000 common shares to for the other employees. The valuation and the factors used to value these options are listed in the table above.

During the first two quarters ended June 30, 2012

On February 2, 2011, the Executive Compensation Committee approved awards of performance-based options to purchase up to 100,000 shares annually to our CEO based upon the achievement of predetermined goals for financial results, business and product development, capital market milestones, and organizational initiatives in each of December 31, 2011, December 31, 2012 and December 31, 2013.  On March 5, 2012, the committee determined that Mr. Turner's performance in 2011 had satisfied the objective and subjective criteria for performance-based options and awarded him 100,000 options exercisable at $2.725 per share.  The valuation and the factors used to value these options are listed in the table above.

A summary of stock option activity for 2012 and 2011 is as follows:
 
 
Shares
 
Weighted average 
exercise price
Outstanding at December 31, 2010
 
3,908,471

 
$2.060
Granted
 
1,100,000

 
$2.440
Exercised
 
(1,050,000
)
 
$1.810
Expired/Forfeited
 
(187,662
)
 
$2.930
Outstanding at December 31, 2011
 
3,770,809

 
$2.200
Granted
 
100,000

 
$2.725
Exercised
 
(33,000
)
 
$2.250
Outstanding at June 30, 2012
 
3,837,809

 
$2.214

The following table summarizes information about stock options outstanding and exercisable at June 30, 2012:

Exercise Price
 
Options
outstanding
 
Weighted average 
remaining contractual
life (years)
 
Options
exercisable
$1.81
 
1,950,000

 
0.5885

 
None

$1.81
 
100,000

 
0.5885

 
None

$3.85
 
122,079

 
6.9051

 
122,079

$4.24
 
25,974

 
1.9051

 
25,974

$3.65
 
47,256

 
7.2647

 
47,256

$2.70
 
425,500

 
8.2473

 
425,500

$2.62
 
100,000

 
3.5912

 
100,000

$2.62
*
100,000

 
3.5912

 
None

$2.62
*
100,000

 
3.5912

 
None

$2.96
*
50,000

 
9.1233

 
None

$2.96
*
125,000

 
9.1452

 
None

$1.81
 
50,000

 
0.5885

 
None

$2.25
 
542,000

 
9.4408

 
575,000

$2.73
 
100,000

 
9.6760

 
100,000

$2.21
 
3,837,809

 
3.8412

 
1,395,809

 * - Non-vested at June 30, 2012 or December 31, 2011. Weighted average remaining life at June 30, 2012.



20

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



The following table summarizes information about non-vested options for the year ended December 31, 2011 and the six months ended June 30, 2012.
 
Shares
Weighted Average Grant Date Fair Value
Per Share Fair Value
Outstanding Non-Vested Options 1/1/2011
Granted 2011
1,100,000

$
1,858,535

$1.690
Vested 2011
(725,000
)
$
(1,285,168
)
$1.773
Forfeited 2011

$

 
Outstanding Non-Vested Options at 12/31/2011
375,000

$
573,367

$1.529
Granted 2012
100,000

$
272,500

$2.725
Vested 2012
(100,000
)
$
(272,500
)
$2.725
Forfeited 2012

 
 
Outstanding Non-Vested Options at 6/30/2012
375,000

$
573,367

$1.529

The weighted average fair value per share of options granted was $2.440 for 2011 and $2.725 for the six months ended June 30, 2012. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
 
June 30, 2012

2011
Dividend yield
%
%
Expected volatility
98.533
%
90.03
%
Expected lives
5.00

5.63

Risk-free interest rate
0.41
%
1.23
%

The weighted average remaining contractual life of all options outstanding at December 31, 2011 was 4.64 years and at June 30, 2012 is 3.84 years. In addition to outstanding stock options, our stockholders have authorized an additional 1,816,529 shares of common stock that may be issued under the share-based payment plans.

The following table summarizes our outstanding non-vested stock options:
Grant
Number
Exercise
Contractual
Date
of Shares
Price
Life in Years




2/2/2011
200,000

$2.62
3.59
8/15/2011
50,000

$2.96
9.12
8/23/2011
125,000

$2.96
9.15
Totals
375,000

$2.78
6.18

As of December 31, 2011, we had $484,816 of total unrecognized compensation cost related to unvested options, net of expected forfeitures, which is expected to be recognized over the following periods: 2012 - $149,816, 2013 - $149,816, 2014 - $118,434 2015 - $49,254and 2016 - $17,496.


2012
2013
2014
2015
2016
Unearned Compensation to be Expensed by Year
$
149,816

$
149,816

$
118,434

$
49,254

$
17,496



21

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


On May 29, 2012, a former employee exercised his option to acquire 33,000 shares of the Company's common stock. The option was granted on December 9, 2011. The fair value of the stock on the exercise date was $2.71. The exercise price was 2.25. The gain on the exercise, taxed as compensation to the employee, was $15,015. The Company issued 3,517 shares net of the 27,449 shares necessary to exercise the option and the 2,034 shares needed to cover the withholding taxes for a net issuance of 3,517 shares.

Stock purchase warrants

Our preferred stockholders received one Series A warrant and one Series B warrant for each of the 6,668,229 shares of Series A Stock they purchased on December 28, 2007. For making a total investment of at least $5 million, VOMF also received one Series J warrant and one C warrant for each of the 5,975,116 shares of Series A Stock it purchased. In 2008, VOMF and VCAF exercised the Series J warrants in full for cash and received 1,493,779 shares of new Series B Stock, which is convertible into four common shares for each share of Series B Stock. In March 24, 2009, VMOF and VCAF delivered $3,000,000 of cash and all of the A, B and C warrants they held, receiving in exchange 1,571,523 shares of new Series C Stock, which is convertible into ten common shares for each share of Series C Stock.

Series A and Series B Warrants.
    
As of June 30, 2012 and December 31, 2011, 512,941 Series A warrants and 512,941 Series B warrants remained outstanding. Each Series A warrant entitles holder to purchase one share of common stock at a purchase price of $1.81 per share. Each Series B warrant entitles holder to purchase one share of common stock at a purchase price of $1.99 per share. Both the Series A and Series B warrants may be exercised through December 28, 2012.

The purchase price per share of both the Series A and Series B warrants is subject to adjustment in the event of any stock dividend, stock split, recapitalization, reclassification, merger or similar event. In addition, the purchase price is subject to adjustment in the event of the issuance of additional shares of common stock or common stock equivalents, or other distributions made to the holders of common stock other than permitted issuances.

The warrant holders have the same buy-in rights and registration rights as holders of Series A preferred described in Note 9, above.
         
If the resale registration statement covering the common shares underlying the Series A and Series B warrants is no longer in effect, the holders may, in lieu of exercising their warrants for cash, make a cashless exercise and receive a number of common shares having a market value equal to the difference between the then-current market value of the number of shares for which the warrant is exercised and the exercise price for those shares.

Series AA Warrants.

The Company issued Series AA warrants to purchase 533,458 common shares for $1.81 per share as compensation for financial advisory services rendered by SC Capital Partners, LLC in connection with the sale of the preferred stock and warrants on December 28, 2007. One warrant holder exercised 79,663 of these warrants, on a cashless basis, in exchange for 16,972 common shares on June 30, 2012. The fair value on the date of exchange was based on $2.30 for the Company's stock and the exercise price of $1.81. The remaining Series AA warrants totaled 453,795. The terms of the Series AA warrants are similar to the Series A warrants and expire on December 28, 2012 .

As consideration for interim financing provided to the Company by VOMF from February through August in 2010, the Company issued VOMF warrants to purchase 325,000 common shares at $3.00 per share and 416,672 shares at $4.00 per share. These warrants expire at various dates in 2015.

See the table below for information about the valuation of the Company's outstanding warrants pursuant to the Black-Scholes method.

Derivative Liabilities and Valuation
    
The Series A Stockholders have the right to redeem their shares if certain events occur. In accounting for this embedded conversion feature, the Company considered ASC 815 (formerly FASB SFAS 133, Accounting for Derivative Instruments and Hedging Activities and EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a

22

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


Company’s own stock) and ASC 470 (formerly EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Features, and EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments).  Under this guidance, the classification of an issuer’s convertible preferred stock as permanent equity depends upon the issuer having control with respect to the manner of redemption of the convertible preferred stock.

The right of Series A Stockholders to redeem their shares arises first in the event of a consolidation or merger that would result in a change of control of the Company, the sale of 50% of its assets, or a purchase of 50% of the outstanding shares of the Company’s common stock.  Mergers, consolidations and asset sales require approval by the board of directors.  A third party could purchase 50% of the outstanding shares only from the Company directly or in a voluntary sale by one or more common shareholders. These circumstances, being characteristic of all equity, do not preclude classification as equity.

Of the other seven events triggering the right of Series A Stockholders to redeem their shares, four are events for which the issuer has the option to redeem in either cash or common shares.  The redemption ratio is fixed and adjusts only if the Company sells common shares at a price less than the price per share at which the preferred stock converts into common stock. In other words, the adjustments to the ratio are not of a dilutive nature that would generally give rise to liability treatment.

The other triggering events would occur only through purposeful actions by the Company or otherwise within its control.

As of June 30, 2012, the Company had 90,000,000 common shares authorized and 12,904,455 common shares issued and outstanding.  Therefore, the Company had a sufficient number authorized and unissued common shares to convert all of the preferred stock at the conversion ratio then in effect had a notice of conversion been presented as of that date, meeting the “current status” test of ASC 815 (formerly EITF 00-19).
The deregistration of Company’s common stock is within its control;
The consummation of a going private transaction is within the Company’s control.

Based on the foregoing analysis, the Company concluded that the embedded conversion feature would not be separately accounted for as a derivative liability from the Series A Stock.

In accordance with this guidance, the Company recorded a deemed dividend in the amount of $3,975,120 by increasing the retained deficit and increasing additional paid in capital by that amount effective on December 28, 2007 to reflect the estimated fair value of the embedded conversion feature in the Series A Stock. The $3,975,120 amount represents the approximately $0.60 difference per share between the$1.81 liquidation value per share of the preferred stock and the$1.21 per share value of the warrants.  This amount would normally be amortized over the period between the issue date and the conversion date, but because the Series A Stock is convertible immediately upon issuance, the entire amount was charged to retained earnings as a deemed dividend and an increase to additional paid in capital.

We have used the Black-Scholes option valuation model to value our stock purchase warrants. However, the Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of subjective assumptions including the expected stock price volatility and appropriate adjustments for restrictions on exercising the options. Because our warrants have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, this model does not necessarily provide a reliable single measure of the fair value of its warrants. Assumptions used in valuing the Series A and Series B warrants included an expected term of 2.5 years, volatility of 43.54%, and an equivalent bond yield of 4.36%.

Effective for financial statements issued for fiscal periods beginning after December 15, 2008, or interim periods therein, ASC 815 (formerly, EITF 07-05) requires that warrants and convertible instruments with certain conversion or exercise price protection features be recorded as derivative liabilities on the balance sheet based on the fair value of the instruments.

The warrants we issued on December 28, 2007 possess features covered by ASC 815. The warrants provide for cashless exercise after one year. They also provided that if before January 1, 2009, we issued any additional shares of common stock at a price per share less than $1.81 (or the adjusted warrant exercise price then in effect) or without consideration, then the exercise price would adjust to the price per share paid for the additional shares of common stock upon each such issuance.

To reflect the cumulative effect of adopting ASC 815, the Company reduced Additional Paid in Capital by $6,321,081, increased its Accumulated Deficiency by $35,081,114 and recorded a liability of $41,402,196 as of January 1, 2009. The amount of the liability was determined by reference to the fair value of the warrants on that date under FASB ASC 820

23

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


(formerly SFAS 157).

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:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and must be used to measure fair value whenever available.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability. For example, level 3 inputs would relate to forecasts of future earnings and cash flows used in a discounted future cash flows method.

We concluded there was insufficient trading frequency and volume in MedPro's shares to use the Level 1 inputs to value our warrants in a Black-Scholes calculation under ASC 820 as of January 1, 2009. In particular, we considered that nearly 99% of our outstanding common shares were restricted securities that could not be traded in public markets through January 4, 2009, and our stock continued to trade sporadically thereafter. We also considered the volatility of the trading price, and the time it would take the market to absorb an influx of over 19,000,000 shares underlying the warrants based on then current trading volumes. Accordingly, we used level 2 inputs and level 3 inputs for purposes of our ASC 815 and ASC 820 analysis.

The liability for the warrants exchanged for $3,000,000 of cash and a total of 1,571,523 shares of new Series C Stock in March 24, 2009 was recomputed using the Black-Scholes method with updated inputs, and the difference was recorded as income from the decline in debt due to the reduction in fair value of the outstanding warrants at March 24, 2009, immediately before the exchange. The valuation difference on these warrants was $21,237,919, which accounts for the substantial portion of the total gain of $21,603,185 reported for the year ended December 31, 2009.

As of August 12, 2009, the Company's registration statement became effective, terminating the cashless exercise feature. A total of 1,025,882 Series A and B warrants remained outstanding at December 31, 2009, and all of the derivative liability had been written off or recognized as gain.

All of the warrants we issued in 2010 possess cashless exercise and anti-dilution features covered by ASC 815.

The following factors were used to value the warrants which were issued beginning in the first quarter of 2010 through the current date:

 
Warrants Issue with Debt
 
 
Grant Date
2/26/2010
3/31/2010
4/30/2010
6/3/2010
6/30/2010
8/5/2010
Totals
Stock Price at Issue
$
3.40

$
3.10

$
3.00

$
3.00

$
3.00

$
2.70

 
Exercise Price
$
4.00

$
4.00

$
3.00

$
3.00

$
3.00

$
3.00

 
Warrants Granted in Connection with Debt
212,500

112,500

208,334

50,001

75,002

83,335

741,672

Warrant Term in Years
5

5

5

5

5

5

 
 
 
 
 
 
 
 
 
3/31/2010
 
 
 
 
 
 
 
Volatility
48.000
%
48.000
%
 
 
 
 
 
Risk Free Rate of Return
2.3
%
2.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 

24

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


Value at Issue
$
284,868

$
128,086

 
 
 
 
$
412,954

Change in Value During the Quarter
$
(42,928
)

 
 
 
 
$
(42,928
)
Value at Quarter End
$
241,940

$
128,086

 
 
 
 
$
370,026

 
 
 
 
 
 
 
 
6/30/2010
 
 
 
 
 
 
 
Volatility
42.26
%
42.26
%
42.26
%
42.26
%
42.26
%
 
 
Risk Free Rate of Return
1.79
%
1.79
%
1.79
%
1.79
%
1.79
%
 
 
 
 
 
 
 
 
 
 
Value at Issue/Prior Quarter End
$
241,940

$
128,086

$
261,803

$
60,901

$
88,199

 
$
780,929

Change in Value During the Quarter
$
(58,660
)
$
(29,840
)
$
(20,796
)
$
(2,578
)

 
$
(111,874
)
Value at Quarter End
$
183,280

$
98,246

$
241,007

$
58,323

$
88,199

 
$
669,055

 
 
 
 
 
 
 
 
9/30/2010
 
 
 
 
 
 
 
Volatility
34.79
%
34.79
%
34.79
%
34.79
%
34.79
%
34.79
%
 
Risk Free Rate of Return
1.27
%
1.27
%
1.27
%
1.27
%
1.27
%
1.27
%
 
 
 
 
 
 
 
 
 
Value at Issue/Prior Quarter End
$
183,280

$
98,246

$
241,007

$
58,323

$
88,199

$
82,631

$
751,686

Change in Value During the Quarter
$
(82,378
)
$
(43,907
)
$
(87,004
)
$
(20,966
)
$
(31,577
)
$
(19,071
)
$
(284,903
)
Value at Quarter End
$
100,902

$
54,339

$
154,003

$
37,357

$
56,622

$
63,560

$
466,783

 
 
 
 
 
 
 
 
12/31/2010
 
 
 
 
 
 
 
Volatility
69.618
%
69.618
%
69.618
%
69.618
%
69.618
%
69.618
%
 
Risk Free Rate of Return
2.01
%
2.01
%
2.01
%
2.01
%
2.01
%
2.01
%
 
 
 
 
 
 
 
 
 
Change in Value
$
200,987

$
107,237

$
190,699

$
46,040

$
68,472

$
77,605

$
691,040

Value at Quarter End
$
301,889

$
161,576

$
344,702

$
83,397

$
125,094

$
141,165

$
1,157,823

 
 
 
 
 
 
 
 
3/31/2011
 
 
 
 
 
 
 
Volatility
72.148
%
72.148
%
72.148
%
72.148
%
72.148
%
72.148
%
 
Risk Free Rate of Return
2.24
%
2.24
%
2.24
%
2.24
%
2.24
%
2.24
%
 
 
 
 
 
 
 
 
 
Change in Value
$
(108,199
)
$
(57,508
)
$
(117,557
)
$
(28,279
)
$
(42,416
)
$
(47,338
)
$
(401,297
)
Value at Quarter End
$
193,690

$
104,068

$
227,145

$
55,118

$
82,678

$
93,827

$
756,526

 
 
 
 
 
 
 
 
6/30/2011
 
 
 
 
 
 
 

25

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


Volatility
82.902
%
82.902
%
82.902
%
82.902
%
82.902
%
82.902
%
 
Risk Free Rate of Return
0.81
%
0.81
%
0.81
%
0.81
%
0.81
%
0.81
%
 
 
 
 
 
 
 
 
 
Change in Value
$
59,469

$
31,755

$
59,873

$
14,459

$
23,142

$
26,025

$
214,723

Value at Quarter End
$
253,159

$
135,823

$
287,018

$
69,577

$
105,820

$
119,852

$
971,249

 
 
 
 
 
 
 
 
9/30/2011
 
 
 
 
 
 
 
Volatility
76.266
%
76.266
%
76.266
%
76.266
%
76.266
%
76.266
%
 
Risk Free Rate of Return
0.42
%
0.42
%
0.42
%
0.42
%
0.42
%
0.42
%
 
 
 
 
 
 
 
 
 
Change in Value
$
(39,820
)
$
(21,214
)
$
(38,454
)
$
(9,270
)
$
(15,360
)
$
(17,227
)
$
(141,345
)
Value at Quarter End
$
213,339

$
114,609

$
248,564

$
60,307

$
90,460

$
102,625

$
829,904

 
 
 
 
 
 
 
 
12/31/2011
 
 
 
 
 
 
 
Volatility
106.735
%
106.735
%
106.735
%
106.735
%
106.735
%
106.735
%
 
Risk Free Rate of Return
0.36
%
0.36
%
0.36
%
0.36
%
0.36
%
0.36
%
 
 
 
 
 
 
 
 
 
Change in Value
$
133,395

$
71,258

$
128,210

$
30,980

$
47,727

$
52,280

$
463,850

Value at Quarter End
$
346,734

$
185,867

$
376,774

$
91,287

$
138,187

$
154,905

$
1,293,754

 
 
 
 
 
 
 
 
3/31/2012
 
 
 
 
 
 
 
Volatility
113.393
%
113.393
%
113.393
%
113.393
%
113.393
%
113.393
%
 
Risk Free Rate of Return
0.51
%
0.51
%
0.51
%
0.51
%
0.51
%
0.51
%
 
 
 
 
 
 
 
 
 
Change in Value
$
48,329

$
26,145

$
50,069

$
12,241

$
18,361

$
20,848

$
175,993

Value at Quarter End
$
395,063

$
212,012

$
426,843

$
103,528

$
156,548

$
175,753

$
1,469,747

 
 
 
 
 
 
 
 
6/30/2012
 
 
 
 
 
 
 
Volatility
98.53
%
98.53
%
98.53
%
98.53
%
98.53
%
98.53
%
 
Risk Free Rate of Return
0.41
%
0.41
%
0.41
%
0.41
%
0.41
%
0.41
%
 
 
 
 
 
 
 
 
 
Change in Value
$
(161,017
)
$
(85,543
)
$
(158,492
)
$
(38,116
)
$
(57,260
)
$
(63,742
)
$
(564,170
)
Value at Quarter End
$
234,046

$
126,469

$
268,351

$
65,412

$
99,288

$
112,011

$
905,577








26

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





Liabilities measured at fair value on a recurring or non-recurring basis as of June 30, 2012 and December 31, 2011 were as follows:
 
Level 1
Level 2
Level 3
Total
2012
 
 
 
 
Derivative liabilities
$

$
905,577

$

$
905,577

Total Liabilities at Fair Value
$

$
905,577

$

$
905,577

 
 
 
 
 
2011
 
 
 
 
Derivative liabilities
$

$
1,293,754

$

$
1,293,754

Total Liabilities at Fair Value
$

$
1,293,754

$

$
1,293,754

 
 
 
 
 
Note- No assets or other liabilities were measured at fair value during 2012 or 2011.

The following table summarizes the terms and values of the Company’s stock purchase warrants outstanding at June 30, 2012 and December 31, 2011:

27

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


Warrant
Holder
 
Exercise
Price
 
Warrants
Outstanding
 
Weighted
Average
Remaining
Life
 
Shares
Exercisable
 
Black-Scholes
Valuation
2012 Warrant Details
 
 
 
 
 
 
 
 
 
 
February 26, 2010
 
$
4.00

 
212,500

 
2.91
 
212,500

 
$
395,063

March 31, 2010
 
$
4.00

 
112,500

 
3.00
 
112,500

 
$
212,012

April 30, 2010
 
$
3.00

 
208,334

 
3.08
 
208,334

 
$
426,844

June 3, 2010
 
$
3.00

 
50,001

 
3.18
 
50,001

 
$
103,527

June 30, 2010
 
$
3.00

 
75,002

 
3.25
 
75,002

 
$
156,548

August 5, 2010
 
$
3.00

 
83,335

 
3.35
 
83,335

 
$
175,753

A Warrants
 
$
1.81

 
512,941

 
0.75
 
512,941

 
$
203,777

B Warrants
 
$
1.99

 
512,941

 
0.75
 
512,941

 
$
164,994

AA Warrants
 
$
1.81

 
453,795

 
0.75
 
453,795

 
$
180,280

 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
 
 
2,221,349

 
1.50
 
2,221,349

 
$
2,018,798

Weighted average exercise price
 
 
 
 
 
 
 
 
 
$
2.40

 
 
 
 
 
 
 
 
 
 
 
2011 Warrant Details
 
 
 
 
 
 
 
 
 
 
February 26, 2010
 
$
4.00

 
212,500

 
3.17
 
212,500

 
$
346,734

March 31, 2010