**Exhibit 10.31**

 

**MEDICALCV,INC.**

 

**NON-QUALIFIEDSTOCK OPTION AGREEMENT**

 

No. of shares subject tooption: 100,000

Date of grant: August 19,2003

 

THIS OPTION AGREEMENT is entered into by and between MedicalCV, Inc., aMinnesota corporation (the “Company”), and Lawrence L. Horsch (the “Optionee”).

 

WI T N E S S E T H :

 

WHEREAS, the Company has agreed to grant Optionee an option to purchaseshares of its common stock outside the Company’s stock option plans; and

 

WHEREAS, the Board of Directors of the Company (“Board”) has authorizedand approved the grant of the following option (“Option”) on the terms setforth in this Agreement,

 

NOW, THEREFORE, in consideration of the mutual covenants hereinafterset forth and for other good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, the parties hereto have agreed,and do hereby agree, as follows:

 

1.                                       Nature of the Option. This Option is not intended to qualify as an Incentive Stock Optionwithin the meaning of Section 422 of the United States Internal Revenue Code of1986, as amended.  This Option is notgranted pursuant to the Company’s 2001 Equity Incentive Plan.

 

2.                                       Grant of Option.  TheCompany grants to the Optionee, subject to the terms and conditions herein setforth, the right and option to purchase from the Company all or a part of anaggregate of 100,000 shares of Stock (the “Shares”) at the purchase price of$0.70 per share, such Option to be exercised as hereinafter provided.

 

3.                                       Terms and Conditions.  Itis understood and agreed that the Option evidenced hereby is subject to thefollowing terms and conditions:

 

(a)                                  Expiration Date. Except as hereinafter provided, this Option shall expire ten years afterthe date of grant specified above.

 

(b)                                 Exercise of Option.  Subjectto the terms of this Agreement regarding the exercisability of this Option,this Option shall be exercisable cumulatively, to the extent it is vested, asset forth in Schedule A.  Any exerciseshall be accompanied by a written notice to the Company specifying the numberof shares of Stock as to which the Option is being exercised.  Notation of any partial exercise shall bemade by the Company on Schedule A.  ThisOption may not be exercised for a fraction of a Share, and must be exercisedfor no fewer than one hundred (100) shares of Stock, or such lesser number ofshares as may be vested.  Except upon aChange of Control as defined in Section 8 of this Agreement, if Optionee ceasesto serve as the Company’s Chairman for any reason, this Option shall terminatewith respect to non-vested option shares (as specified in Section 3(b) hereof).

 

(c)                                  Payment of Purchase Price Upon Exercise.  Atthe time of any exercise, the Exercise Price of the Shares as to which thisOption is exercised shall be paid in cash to the Company.

 

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(d)                                 Nontransferability. This Option shall not be transferable other than by will or by the lawsof descent and distribution.  During thelifetime of the Optionee, this Option shall be exercisable only by the Optioneeor by the Optionee’s guardian or legal representative.  No transfer of this Option by the Optioneeby will or by the laws of descent and distribution shall be effective to bindthe Company unless the Company is furnished with written notice thereof and acopy of the will and/or such other evidence as the Board may determinenecessary to establish the validity of the transfer.

 

(e)                                  Acceleration of Option Upon Change in Control.  Inthe event of a Change in Control, as defined in Section 8, the provisions ofSection 3(b) and Schedule A hereof pertaining to vesting shall cease to applyand this Option shall become immediately vested and fully exercisable withrespect to all Shares; provided, however, that the provisions of thisSubsection 3(e) shall not apply unless the Optionee has been engaged by theCompany as Chairman of the Board for a period equal to or exceeding onecalendar year.  No acceleration ofvesting shall occur under this Subsection 3(e) in the event a survivingcorporation or its parent assumes this Option or in the event the survivingcorporation or its parent substitutes an option agreement with substantiallythe same terms as provided in this Agreement. Nothing in this Subsection 3(e) shall limit the Committee’s authority tocancel this Option in accordance with Section 5.

 

(f)                                    Subject to Lock Up. Optionee understands that the Company at a future date may file aregistration or offering statement (the “Registration Statement”) with theSecurities and Exchange Commission to facilitate an underwritten public offeringof its securities.  The Optionee agrees,for the benefit of the Company, that should such an underwritten publicoffering be made and should the managing underwriter of such offering require,the undersigned will not, without the prior written consent of the Company andsuch underwriter, during the Lock Up Period as defined herein: sell, transferor otherwise dispose of, or agree to sell, transfer or otherwise dispose ofthis Option or any of the Shares acquired upon exercise of this Option during theLock Up Period; or sell or grant, or agree to sell or grant, options, rights orwarrants with respect to any of the Shares acquired upon exercise of thisOption.  The foregoing does not prohibitgifts to donees or transfers by will or the laws of descent to heirs orbeneficiaries provided that such donees, heirs and beneficiaries shall be boundby the restrictions set forth herein. The term “Lock Up Period” shall mean the lesser of (x) 180 days or (y)the period during which Company officers and directors are restricted by themanaging underwriter from effecting any sales or transfers of the Shares.  The Lock Up Period shall commence on theeffective date of the Registration Statement.

 

(g)                                 Not An Employment Contract.  TheOption will not confer on the Optionee any right with respect to employment orcontinuance of service with the Company or any Subsidiary, nor will itinterfere in any way with any right the Company or any Subsidiary wouldotherwise have to terminate or modify the terms of Optionee’s service at anytime.

 

(h)                                 No Rights as Shareholder.  TheOptionee shall have no rights as a shareholder of the Company with respect toany Shares prior to the date of issuance to the Optionee of a certificate forsuch Shares.

 

(i)                                     Compliance with Law and Regulations. This Option and the obligation of the Company to sell and deliver Shareshereunder shall be subject to all applicable laws, rules and regulations(including, but not limited to, federal securities laws) and to such approvalsby any government or regulatory agency as may be required.  This Option shall not be exercisable, andthe Company shall not be required to issue or deliver any certificates forShares of Stock prior to the completion of any registration or qualification ofsuch Shares under any federal or state law, or any rule or regulation of anygovernment body which the Company shall, in its sole discretion, determine tobe necessary or advisable.

 

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Moreover, this Option may not be exercised if its exercise or thereceipt of Shares of Stock pursuant thereto would be contrary to applicablelaw.

 

(j)                                     Withholding.  All deliveries anddistributions under this Agreement are subject to withholding of all applicabletaxes.  At the election of the Optionee,and subject to such rules and limitations as may be established by theCommittee from time to time, such withholding obligations may be satisfiedthrough the surrender of shares of Stock which the Optionee already owns, or towhich the Optionee is otherwise entitled hereunder.

 

(k)                                  Adjustments.  Subject to any requiredaction by the shareholders of the Company, the number of shares of common stockcovered by the Option, as well as the price per share of common stock coveredby the Option, shall be proportionately adjusted for any increase or decreasein the number of issued shares of common stock resulting from a stock split,reverse stock split, stock dividend, combination or reclassification of thecommon stock, or any other increase or decrease in the number of issued sharesof outstanding common stock effected without receipt of consideration by theCompany.  No other issuance by theCompany of shares of stock or any class, or securities convertible into sharesof stock of any class, shall affect, and no adjustment by reason thereof shallbe made with respect to, the number or price of shares of common stock subjectto the Option.

 

4.                                       Death of Optionee. Upon the death of Optionee prior to the expiration of the Option, thefollowing provisions shall apply:

 

(a)                                  If the Optionee is at the time of his deathengaged by the Company or a Subsidiary and has been in continuous service (asdetermined by the Committee in its sole discretion) since the Date of Grant ofthe Option, then the Option may be exercised by the Optionee’s estate or by aperson who acquired the right to exercise the Option by will or the laws ofdescent and distribution, for one (1) year following the date of the Optionee’sdeath or until the expiration date of the Option, whichever date is earlier,but only to the extent the Optionee was vested in and entitled to exercise theOption at the time of death.

 

(b)                                 If the Optionee dies within three (3) monthsafter termination of Optionee’s service with the Company or a Subsidiary theOption may be exercised for nine (9) months following the date of Optionee’sdeath or the expiration date of the Option, whichever date is earlier, by theOptionee’s estate or by a person who acquires the right to exercise the Optionby will or the laws of descent or distribution, but only to the extent the Optioneewas vested in and entitled to exercise the Option at the time of termination.

 

5.                                       Termination of Relationship for Misconduct.  Ifthe Board or the Committee reasonably believes that the Optionee has committedan act of misconduct or breached Optionee’s letter agreement with the Company,it may suspend the Optionee’s right to exercise this option pending adetermination by the Board or the Committee. If the Board or the Committee determines that the Optionee has committedan act of misconduct or breached Optionee’s letter agreement with the Company,neither the Optionee nor the Optionee’s estate shall be entitled to exerciseany option whatsoever.  For purposes ofthis Section 5, an act of misconduct shall include embezzlement, fraud,dishonesty, nonpayment of an obligation owed to the Company, breach offiduciary duty or deliberate disregard of the Company’s rules resulting inloss, damage or injury to the Company, or if the Optionee makes an unauthorizeddisclosure of any Company trade secret or confidential information, engages inany conduct constituting unfair competition with respect to the Company, orinduces any party to breach a contract with the Company,   In making such determination, the Board orthe Committee shall act fairly and shall give the Optionee an opportunity toappear and present evidence on the Optionee’s behalf at a hearing before theBoard or the Committee.

 

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6.                                       Restrictions on Transfer.

 

(a)                                  Securities Law Restrictions. Regardless of whether the offering and sale of common stock under thisAgreement have been registered under the Securities Act of 1933 (the “Act”) orhave been registered or qualified under the securities laws of any state, theCompany at its discretion may impose restrictions upon the sale, pledge or othertransfer of such common stock (including the placement of appropriate legendson stock certificates or the imposition of stop-transfer instructions) if, inthe judgment of the Company, such restrictions are necessary or desirable inorder to achieve compliance with the Act, the securities laws of any state orany other law.

 

(b)                                 Investment Intent at Grant. Optionee represents and agrees that the Shares to be acquired uponexercising this Agreement will be acquired for investment, and not with a viewto the sale or distribution thereof.

 

(c)                                  Investment Intent at Exercise.  Inthe event that common stock issued under this Agreement is not registered underthe Act but an exemption is available which requires an investmentrepresentation or other representation, Optionee shall represent and agree atthe time of exercise that the common stock being acquired upon exercising theOption is being acquired for investment, and not with a view to the sale ordistribution thereof, and shall make such other representations as are deemednecessary or appropriate by the Company and its counsel.

 

(d)                                 Legends.  All certificates evidencingShares issued under this Agreement in an unregistered transaction shall bearthe following legend (and such other restrictive legends as are required ordeemed advisable under the provisions of any applicable law):

 

“THE SHARES REPRESENTEDHEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATIONTHEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANYAND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

(e)                                  Removal of Legends.  If,in the opinion of the Company and its counsel, any legend placed on a stockcertificate representing Shares issued under this Agreement is no longerrequired, the holder of such certificate shall be entitled to exchange suchcertificate for a certificate representing the same number of shares of commonstock but without such legend.

 

(f)                                    Administration.  Anydetermination by the Company and its counsel in connection with any of thematters set forth in this section shall be conclusive and binding on Optioneeand all other persons.

 

7.                                       Heirs and Successors. This Agreement shall be binding upon, and inure to the benefit of, theCompany and its successors and assigns, and upon any person acquiring, whetherby merger, consolidation, purchase of assets or otherwise, all or substantiallyall of the Company’s assets and business. If any rights exercisable by the Optionee or benefits deliverable to theOptionee under this Agreement have not been exercised or delivered,respectively, at the time of the Optionee’s death, such rights shall beexercisable by his Designated Beneficiary. The “Designated Beneficiary” shall be the beneficiary or beneficiariesdesignated by the Optionee in a writing filed with the Committee in such formand at such time as the Committee shall require.  If a deceased Optionee fails to designate a beneficiary, or ifthe Designated Beneficiary does not survive the Optionee, any rights that wouldhave been exercisable by the Optionee and any benefits distributable to theOptionee shall be exercised by or

 

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distributed to the legalrepresentative of the estate of the Optionee. If a deceased Optionee designates a beneficiary and the DesignatedBeneficiary survives the Optionee but dies before the Designated Beneficiary’sexercise of all rights under this Agreement or before the complete distributionof benefits to the Designated Beneficiary under this Agreement, then any rightsthat would have been exercisable by the Designated Beneficiary shall beexercised by the legal representative of the estate of the DesignatedBeneficiary, and any benefits distributable to the Designated Beneficiary shallbe distributed to the legal representative of the estate of the DesignatedBeneficiary.

 

8.                                       Change in Control.  Theterm “Change in Control” shall mean:

 

(a)                                  the acquisition by any person or group deemeda person under Sections 3(a)(9) and 13(d)(3) of the Exchange Act (other thanthe Company and its subsidiaries as determined immediately prior to that date)of beneficial ownership, directly or indirectly (with beneficial ownershipdetermined as provided in Rule 13d-3, or any successor rule, under the ExchangeAct), of a majority of the total combined voting power of all classes of Stockof the Company having the right under ordinary circumstances to vote at anelection of the Board, if such person or group deemed a person prior to suchacquisition was not a beneficial owner of at least five percent (5%) of suchtotal combined voting power of the Company;

 

(b)                                 the date of approval by the stockholders ofthe Company of an agreement providing for the merger or consolidation of theCompany with another corporation or other entity where (x) stockholders of theCompany immediately prior to such merger or consolidation would notbeneficially own following such merger or consolidation shares entitling suchstockholders to a majority of all votes (without consolidation of the rights ofany class of stock to elect directors by a separate class vote) to which allstockholders of the surviving corporation would be entitled in the election ofdirectors, or (y) where the members of the Board, immediately prior to suchmerger or consolidation, would not, immediately after such merger orconsolidation, constitute a majority of the board of directors of the survivingcorporation; or

 

(c)                                  the sale of all or substantially all of theassets of the Company.

 

9.                                       Notices.  Any notice hereunder to theCompany shall be addressed to it at its principal executive offices, located at9725 South Robert Trail, Inver Grove Heights, Minnesota 55077, Attention: ChiefExecutive Officer; and any notice hereunder to the Optionee shall be addressedto the Optionee at the address last appearing in the Company’s records; subjectto the right of either party to designate at any time hereunder in writing someother address.

 

10.                                 Counterparts. This Agreement may be executed in two counterparts each of which shallconstitute one and the same instrument.

 

11.                                 Governing Law. This Agreement shall be governed by and construed in accordance with thelaws of the State of Minnesota, except to the extent preempted by federal law,without regard to the principles of comity or the conflicts of law provisionsof any other jurisdiction.

 

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INWITNESS WHEREOF, MedicalCV, Inc. has caused this Agreement to be executed byits Chief Executive Officer and the Optionee has executed this Agreement, bothas of the day and year first above written.

 
|   | **MEDICALCV, INC.**                        |
|--------|--------------------------------------------|
|   |                                       |
|   |                                       |
|   | /s/ Blair P. Mowery                        |   |
|   | By Blair P. Mowery                         |
|   | Its President and Chief  Executive Officer |
|   |                                       |
|   |                                       |
|   | **OPTIONEE**                               |
|   |                                       |
|   |                                       |
|   | /s/ Lawrence L. Horsch                     |   |
|   | Lawrence L. Horsch                         |
|   |                                       |
|   | 1404 Hilltop Ridge                         |
|   | Houlton, WI 54082                          |
|        |                                            |  |  |

 

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**SCHEDULEA**

** **

**OPTIONAND VESTING DATA**

** **
| Name of Optionee:                    | Lawrence L. Horsch |
|--------------------------------------|--------------------|
| Number of Shares Subject  to Option: | 100,000            |
| Date of Grant:                       | August 19, 2003    |
| Vests in Full:                       | August 19, 2007    |

 

***The foregoingvesting schedule may be accelerated upon the occurrence of the performancemeasures set forth below.***

 
| **EVENT**                                                                                                                                                                                                           |   | **AGGREGATE  NUMBER OF  SHARES EXERCISABLE** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|
|                                                                                                                                                                                                                |   |                                         |
| The Company completes the  sale of $6.0 million of debt or equity financing  between August 19, 2003 and January 31, 2004                                                                                      |   | 33,333                                       |
|                                                                                                                                                                                                                |   |                                         |
| The board of directors of  the Company determines in good faith that any new product under development  as of August 19, 2003 is authorized to move to the next phase of development  on or before August 19, 2004. |   | 33,333                                       |
|                                                                                                                                                                                                                |   |                                         |
| The bid price of the  common stock of the Company exceeds $1.50 for at least ten consecutive  trading days between August 19, 2003 and August 19, 2004.                                                             |   | 33,334                                       |

 

The above vesting schedule assumes an ongoing relationship with theCompany.  Your rights to exercise theunvested portion of your option will cease upon termination of yourrelationship with the Company, subject to Change in Control provisions setforth in Section 8 of the Agreement. Reference is made to relevant sections of the Agreement between you andthe Company for your rights to exercise the vested portion of your option inthe event of termination of your relationship with the Company during yourlifetime or upon death.  The abovevesting schedule is in all respects subject to the terms of those documents.

 
| **OPTIONEE**           | **MEDICALCV, INC.**                        |
|------------------------|--------------------------------------------|
|                   |                                       |
|                   |                                       |
| /s/ Lawrence L. Horsch |                                       | /s/ Blair P. Mowery |   |
| Lawrence L. Horsch     | By Blair P. Mowery                         |
|                   | Its President and Chief  Executive Officer |
|                        |                                            |  |  |

 

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NOTATIONSAS TO PARTIAL EXERCISE

 
| **Date of  Exercise** |   | **Number of  Purchased  Shares** |   | **Balance of  Shares on  Option** |   | **Authorized  Signature** |   | **Date** |   |
|-----------------------|--------|----------------------------------|--------|-----------------------------------|--------|---------------------------|--------|----------|--------|
|                  |   |                             |   |                              |   |                      |   |     |   |
|                  |   |                             |   |                              |   |                      |   |     |   |
|                  |   |                             |   |                              |   |                      |   |     |   |

 

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