Summary of MEDPRO SAFETY PRODUCTS, INC.

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 six months ended June 30, 2009 should be read in conjunction with our audited financial statements and the notes to those financial statements that are included elsewhere in this report. References in this Management's Discussion and Analysis or Plan of Operations to "us," "we," "our," and similar terms refers to MedPro Safety Products, Inc. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Words such as "anticipate," "estimate," "plan," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions are used to identify forward-looking statements.

Overview

MedPro Safety Products, Inc. has developed and acquired a portfolio of medical device safety products incorporating proprietary needlestick prevention technologies that deploy with minimal or no user activation. We believe that the Federal Needlestick Safety and Prevention Act, which requires the use of passive prevention devices, has fostered substantial market demand for products similar to those we are developing.

Our present strategy focuses on developing and commercializing five products in four related product segments: clinical, phlebotomy, pharmaceutical, and intravenous. Our objective is to enter into strategic partnership agreements with major medical products distribution partners, which whenever possible would be fixed minimum volume contracts. We have entered into two such agreements for three of our products. In addition, we are discussing the terms of a similar distribution arrangement with potential partners for a proprietary safety syringe product with an "anti-blunting" feature and a prefilled pharmaceutical safety syringe. Our product development plans also include a needleless intravenous line based on patents and designs we control.

Our financial results and operations in future periods will depend upon our ability to enter into and fulfill distribution agreements for our products currently under development so that we can generate sustained revenues from our portfolio of products and technologies. Our operations are currently funded principally from the proceeds from the sales of securities described below and borrowing from commercial lenders and related parties.

While we expect to realize significant revenue from the launch of the first of two models of our blood collection product, the amount of revenue realized in the next several fiscal quarters depends on how soon we can complete our production arrangements so we can commence product delivery. We expect to begin product assembly and delivery in 2009, but the products will not be launched by the distributor until the fourth quarter of 2009. As a result, we expect to record revenue from the sale of products in the fourth quarter of 2009.

On December 28, 2007, we completed a reverse takeover merger with Dentalserv.com (DSRV), a Nevada corporation with nominal assets and no active business whose shares were registered under the Securities Exchange Act. The reverse takeover merger was a condition to a $13 million investment by four institutional investors. On that date, the following transactions occurred concurrently:

· The 5,625,550 shares of DSRV common stock then outstanding were combined into approximately 1,406,400 common shares in a 1-for-4 reverse stock split.

· Our predecessor, MedPro, Inc., merged into DSRV. The combined company issued 11,284,754 of its common shares to former shareholders of our predecessor corporation in the merger and 593,931 common shares as a financial advisory fee. The combined company, a Nevada corporation, changed its name from "Dentalserv.com" to "MedPro Safety Products, Inc."

· Four funds invested $13 million and received newly issued shares of Series A Convertible Preferred Stock and warrants to purchase our common stock. We received approximately $11.6 million in proceeds from the sale of these securities, net of offering fees and expenses.

We accounted for these transactions as capital transactions in which we issued:

· Approximately 1,406,400 shares of common stock to the DRSV shareholders for the net monetary assets of the shell corporation;

· 6,668,229 shares of Series A Stock and four series of warrants to purchase a total of 25,286,690 common shares to the investors for $13,000,000; and

· 593,931 shares of common stock and warrants to purchase 533,458 shares of common stock and also paid $1,040,000 in cash as an advisory fee.

We valued the warrants according to the Black-Scholes method, based on the assumptions described in Note 11 of the Notes to Financial Statements as of December 31, 2008. We also increased the retained deficit by $3,975,120 and increased additional paid in capital by the same amount effective on December 28, 2007 to reflect the intrinsic value of the right to convert the Series A Stock into common stock. The $3,975,120 was determined based on the relative estimated fair value of the embedded conversion feature in the preferred shares and the detachable warrants. This amount would normally be amortized over the period between the issue date and the conversion date, but because the Series A Stock is convertible immediately upon issuance, the entire amount was charged to retained earnings as a deemed dividend and an increase to additional paid in capital.

In August 2008, we amended the then outstanding Series J warrants to give Vision Opportunity Master Fund, Ltd. ("VOMF"), our largest preferred stockholder and the sole holder of J warrants, the right to purchase 1,493,779 shares of newly designated Series B Stock at a purchase price of $8.72. Each share of Series B Stock converts into 4 shares of common stock. The original Series J warrants had given VOMF the right to purchase 5,975,116 shares of common stock at a purchase price of $2.18 no later than December 31, 2008. VOMF and Vision Capital Advantage Fund ("VCAF"), an affiliate to whom VOMF transferred a portion of its holdings in September 2008, exercised the J warrants in full in September and October 2008, and we received $13,025,000 in cash for our issuance of 1,493,779 shares of Series B Stock.

In March 2009, we completed transactions in which VOMF and VCAF exercised a portion of their Series C Warrants for cash and also exchanged the balance of their Series C Warrants plus all of their Series A and Series B Warrants for shares of newly designated Series C Stock. Each share of Series C Stock converts into 10 shares of common stock. The two funds acquired 1,571,523 shares of Series C Stock as a result of the warrant exercise and exchange. The exchange of warrants for Series C Stock was the equivalent of a cashless exercise of the warrants at an assumed market value of $13.00 per common share. The warrant exercise and exchange reduced the total common shares issuable to the two Vision Funds by 2,570,462 common shares, and we received cash proceeds of $2,760,000 ($3,000,000 less $240,000 in fees to SC Capital).

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 are described below.

Revenue Recognition

We recognize sales and associated cost of sales when delivery has occurred and collectability is probable. There have been minimal returns for credit, so no reserve for product returns has been established. We provide for probable uncollected amounts through a charge to earnings and a credit to the allowance for doubtful accounts based on our assessment of the current status of individual accounts. We have fully reserved our only receivable from the sale of the Needlyzer devices to a customer in Africa.

Valuation of Inventory

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.

Valuation of Intangible Assets

Our intangible assets consist principally of intellectual properties such as regulatory product approvals and patents. We amortize our intangible assets over their estimated useful lives, which is the period over which we expect the asset to contribute to our cash flows. Because products that incorporate our Vacu-Mate, Key-Lok, Syringe Guard and Winged Safety set proprietary technologies are currently not in production for distribution, we have not begun to amortize these patents. We expect to use the straight line method to amortize these intellectual properties over their estimated period of benefit, ranging from one to ten years, when our products are placed in full production and we can better evaluate market demand for our technology. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or indicate that impairment exists. Once our intellectual property has been placed into productive service, we expect to utilize a net present value of future cash flows analysis to calculate carrying value after an impairment determination. As of June 30, 2009, future expected revenue for our patented technologies is expected to exceed carrying value of these properties by a substantial amount, and therefore no impairment has been recorded. Additionally, since revenue recorded to date on our Vacuette and winged technologies have not been related to manufacture of saleable units for human use, no amortization has been recorded.

Valuation of Warrants as Derivative Liabilities

We originally recorded warrants issued in connection with the sale of our Series A preferred stock as equity, and the value of the warrants was reflected in Additional Paid in Capital based on a Black-Scholes formula calculation. Effective for financial statements issued for fiscal periods beginning after December 15, 2008, or interim periods therein, EITF 07-05 requires that warrants and convertible instruments with certain conversion or exercise price protection features be recorded as derivative liabilities on the balance sheet based on the fair value of the instruments. See Note 10 for a full discussion of our outstanding warrants and the recording of derivative liabilities during 2009. If any of the assumptions used to value our warrants change significantly, it could result in material changes to our assets, liabilities, shareholders' equity and results of operations from quarter to quarter.

Income Taxes

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.

Share-based Employee Compensation

We account for share-based compensation in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123(R) "Share-Based Payment (Revised 2004)." As required by SFAS 123R, share-based compensation expense is estimated for equity awards at fair value at the grant date. We determine the fair value of equity awards using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires various highly judgmental assumptions including the expected dividend yield, stock price volatility and expected term of the award. If any of the assumptions used in the model change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period. See Note 12 to the June 30, 2009 Financial Statements for further discussion of share-based employee compensation.

Results of Operations for the Six months ended June 30, 2009 and 2008

MedPro recorded net income of $13,943,765 for the six months ended June 30, 2009, as compared to a loss of $(1,820,587) for the six months ended June 30, 2008. Losses from operations were $(6,258,845) for the first two quarters of 2009 and $(1,609,493) for the same period in 2008. The net losses for these periods included net other income of $20,202,610 for 2009 and net other expense of $(211,094) for 2008. Net other income / (expense) included interest expense of $(141,083) and $(307,734) for the 2009 and 2008 periods, respectively. As a result of the implementation of EITF 07-05 as of January 1, 2009, other income for the first six months of 2009 included $20,320,832 for the change in fair value of derivative liabilities associated with our stock purchase warrants. We recorded other income at March 31, 2009 to reflect the following events during the first quarter of 2009: (i) the exchange of warrants to purchase 18,285,692 shares of common stock and $3,000,000 in cash for preferred stock, and (ii) a decrease in the market price of our common stock. In the second quarter we recorded other expense of $(1,929,325) to reflect the increase in the valuation of the derivative liability from $1,250,909 at March 31, 2009 to $3,180,234 as of June 30, 2009.

The most substantial differences in the losses from operations between 2009 and 2008 were increases in payroll costs (including share-based compensation), product development costs, advertising and promotion costs, professional and insurance costs, qualified profit sharing costs and travel expenses. Other income/(expense) reflected a $20,320,832 increase in income from the net decline in the derivative liability from January 1, 2009 to June 30, 2009. Other expenses, net, declined $92,872 from 2008 to 2009. Interest expense declined $166,651 and other income declined $73,779.

Professional and insurance costs increased $140,322 over the same period in 2008 primarily from patent work, FDA and SEC compliance, and appropriate insurance coverage. Compensation expense increased to $4,509,676 for the six months ended June 30, 2009 compared to $492,392 for the 2008 period. Payroll was higher in 2009 than in 2008 due to the addition of four new full time employees in late 2008 and one new employee in the first quarter of 2009. Most of the increase came from the $3,645,000 of compensation expense recognized during the first half of 2009 from share-based options granted in August 2008. Share-based compensation recorded for options granted on May 27, 2009 added $6,505 to this total for a combined share-based compensation amount of $3,651,505.

Travel expenses decreased slightly ($28,230) in 2009, reflecting increased focus on manufacturing and product-focused activities and less travel to meet with customers and suppliers. Our suppliers are predominantly within 125 miles of our offices, reducing air travel. Product development costs were $354,053 higher in 2009 than 2008. Advertising and promotion costs were $275,729 for the first half of 2009 due to the engagement of an investor relations firm in June of 2008. Finally, our profit sharing plan established in September 2008 resulted in costs of $36,804 in 2009 versus no such costs for the same period in 2008.

We recorded no product sales in the first half of 2009 compared to sales of $19,553 for the six months ended June 30, 2008. The decline in sales was principally due to our decision to discontinue sales of the Safe-Mate device in April 2008 and no 2009 sales of the Needlyzer device, as we focused exclusively on developing our passive needlestick prevention products.

Other revenue recorded in the first six months of 2009 included $12,045 of revenue from recognition of income from customer advances for specific product enhancement requests.

Total operating expenses were $6,258,845 during the first six months of 2009 compared to $1,575,820 for the same period in 2008. The $4,683,025 increase during 2009 reflected the activity in product development, higher salary expense, and higher professional fees in connection with the new products, and SEC compliance costs. Other income and expenses in both periods included interest income of $22,861 and $43,499 for 2009 and 2008, respectively. Net other income/(expense) were $20,202,610 and $(211,094) in 2009 and 2008, respectively. Interest expense declined from $307,734 in the first six months of 2008 to $141,083 for the first two quarters of 2009. This was primarily due to paying off shareholder notes and bank debt during 2008 and early 2009.

Liquidity and Capital Resources

Total assets were $20,362,052 as of June 30, 2009 and $22,757,649 as of December 31, 2008. The $2,395,597 decrease in total assets reflects the impact of the second quarter operating loss of $(5,133,035) on the balance sheet. The Company added $107,161 of fixed assets in the second quarter of 2009. Total fixed asset additions in 2009 totaled $311,576. Decreases in current assets of $2,647,887 reflect the consumption of cash funding losses and supporting debt service. Depreciation and amortization totaled $59,286 in the first half of 2009. The remaining differences in total assets consist primarily of cash used to pay debt.

In March 2009, preferred shareholders exchanged warrants and cash for Series C Preferred Stock. We received cash proceeds of $3,000,000, less $240,000 of issuance costs, which increased our assets, equity and available cash. Some of the cash was used to fund operating losses in the first six months of 2009.

Total liabilities of $10,014,128 as of June 30, 2009 were $750,199 greater than the $9,263,929 as of December 31, 2008. MedPro paid off or settled various accounts payable, accrued interest and shareholder debt during 2009. Current liabilities have increased by $1,884,853 since the end of 2008. Overall bank debt has declined by $879,431 during the six months ended June 30, 2009. Technology transfer payment obligations were reduced by $1,000,000, and $469,924 of net shareholder payables were paid off in 2009. Accounts payable were $136,777 lower at June 30, 2009 than at December 31, 2008. Other debts and deferred revenue declined by $30,494 in the first half of 2009.

We recorded derivative liabilities as of January 1, 2009 pursuant to EITF 07-05. Our opening liabilities increased by $41,402,195 based on the fair value of our warrants with cashless exercise and certain price protection features. Due to the decline in the trading price of our stock during the first quarter, we recorded gain of $22,250,157 to reflect the decreased value of the derivative liabilities. Of the remaining $19,152,038 of derivative liability, $17,901,129 was credited to Additional Paid in Capital when we issued preferred stock in exchange for warrants and cash. The derivative liability totaled $1,250,909 at March 31, 2009, representing 1,025,882 Series A and B warrants that remained outstanding. The derivative liability was increased by $1,929,325 in the second quarter of 2009 to $3,180,234, reflecting a change in valuation of the warrants based on the market value of our stock that has been recorded as other expense on the statement of operations. The entire derivative liability will be recorded as income when the registration of the shares underlying the warrants becomes effective and the cashless exercise feature of the warrants expires.

The additions to fixed assets during the first six months of 2009 totaled $311,576 and included $77,546 of office leasehold improvements, $171,856 of new equipment, $26,444 of new office equipment and $35,730 of new furniture.

The $11,593,000 in net proceeds from our private placement of the Series A Stock and warrants in December 2007 and the $15,785,000 of net cash proceeds from stock purchase warrant exercises during 2008 and 2009 provided working capital and will continue to be the principal source of funding for our operations through December 31, 2009. We had $9,129,461 in cash at June 30, 2009. Other sources of funds include revenues from the sale of our medical safety products, including anticipated revenues from the sale of blood collection products we expect to launch in the fourth quarter of 2009, and the commitment for funding made by our Chairman. In addition, our Series A Stockholders have the right to fund our future financing needs, but we can seek alternative financing if they do not exercise their rights.

In July 2008, we entered into two new agreements with a worldwide medical products company to manufacture and distribute three of our medical safety products, replacing an earlier agreement for the distribution of our tube-activated blood collection system. Both agreements continue for five years from the date we make an initial commercial shipment of the product. The distributor has agreed to purchase minimum annual quantities of both models of the safety needles and our winged blood collection set over the five-year term of the contract, for royalties totaling over $43 million under both agreements.

These arrangements originally provided that we would receive program fees upon delivering an automation plan for the production line for the Vacuette product and the initial production design plan for the Wing product. The arrangements also provide for up to $8.7 million in capital for equipment, engineering, and tooling necessary to build the production lines. The balance was to be payable in installments upon the achievement of certain milestones leading to validation of the final production lines. We received initial payments totaling $2.7 million on October 3, 2008 upon delivery and acceptance of the automation plan and the initial design plan by the distributor.

As of the date of this filing, we are negotiating modifications to our agreement to allow the distributor to redesign and build computerized automation lines for our three products at its own plant in Austria. Although no new contract has been finalized, by agreement of the parties we applied the $2,700,000 payment in October 2008 to the full $1,000,000 program fee for each project pursuant to our prior arrangement and allocated the remaining $700,000 to pay our out-of-pocket costs incurred on behalf of the distributor, which had exceeded $700,000 through June 30, 2009. Of the total $700,000 allocated to expenses incurred on behalf of our customer, $452,855 was expended for equipment and has been recorded as a prepaid item with an offsetting amount of deferred revenue. The balance of $235,100 was booked as income in late 2008 and $12,045 was booked as income in the first quarter of 2009.

We expect the definitive agreement to transfer responsibility for completing the automation line to the distributor will not provide for further payments to us for building production lines. These payments were intended to reimburse us for the cost of equipment, molds and fixtures acquired on behalf of our customer, which we would no longer have to incur. Instead, we will bill only for any services requested by the distributor and will pass both costs incurred for time, materials and third party payments on to the distributor as incurred at their request. Certain ongoing product design and enhancements will remain our responsibility as the owner of the technology and be performed at our expense.

On September 30, 2008, we exercised an option to purchase patents and related rights to anti-blunting syringe technology from a related party. The purchase price is $3,345,000 payable in cash, our assumption of $1,500,000 of technology transfer payment obligations, and the contingent issuance of 690,608 shares of our common stock. Our obligation to issue the stock portion of the purchase price is contingent upon our collecting $5,000,000 in revenue from the sale of products utilizing the technology, the sale or license of all or part of the product to a third party or a change in control of the Company.

Our current credit agreement with one lender included a $5,000,000 term loan and a $1,500,000 revolving line of credit. As of June 30, 2009, the amount payable on the term note was $3,194,444 and the revolving line of credit had been repaid in full. The term loan bears interest at the prime rate plus 2% and matures on August 1, 2011. We pay monthly principal payments of approximately $138,889 plus interest. We also have a $1,500,000 term note with a second lender that bears interest at 3.65%, payable monthly, and matures on March 31, 2010. It is secured by an interest bearing $1,500,000 deposit account.

The credit agreement contains various usual and customary terms and conditions of a revolving line of credit and term loan facility, including limitations on the payment of cash dividends and other restricted payments, limitations on the incurrence of additional debt, and prohibitions on a merger or the sale of assets. Prior financial covenants under the term loan and revolver have been replaced with cross-collateral agreements and a pledge of our intangible assets.

We estimate that funding our continued development and launches of our planned products, meeting current capital support requirements, and pursuing other projects as may be determined by the Board of Directors for the six nine months will not require any additional funding in addition to our cash on hand and the payments due us under our distribution agreements. Whether we commit resources to optional projects will depend upon our cash position from time to time. Our primary cash requirements will be to fund (a) launching our blood collection products for distribution, (b) continuing development of our safety syringe products and other medical device safety products based on the technology for which we hold rights, and (c) increasing our administrative capability as needed to support expanded day-to-day operations.

We will require additional funding to complete the development of and launch all of the safety products for which we currently own intellectual property rights.
In addition, development or production costs may increase beyond the amounts on which we have based our current funding assumptions. If we cannot find sources of additional funds on reasonable terms, we may be forced to limit our product . . .