**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC 20549**

----

**FORM 10-QSB**

**ý****                        QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THEQUARTERLY PERIOD ENDED JANUARY 31, 2002**

**o****                        TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

**Commission FileNumber  0-33295**

**MedicalCV, Inc.**

(Exact Name of Small Business Issuer as Specified in Its Charter)

 

| **Minnesota**                     |   | **41-1717208**      |
|-----------------------------------|--------|---------------------|
| (State or Other Jurisdiction      |   | (I.R.S. Employer    |
| of Incorporation or Organization) |   | Identification No.) |
|                              |   |                |

**9725 South Robert Trail**

**Inver Grove Heights, Minnesota 55077**

**(651) 452-3000**

(Address of PrincipalExecutive Offices and Issuer’s

Telephone Number, includingArea Code)

 

Check whether the issuer:  (1) filed all reports required to be filed by Section 13 or 15(d)of the Exchange Act during the past 12 months (or such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý  No o

As of March 15, 2002, the issuer had outstanding7,843,834 shares of common stock.  Thisnumber includes 1,500,000 units, each consisting of one share of common stockand one redeemable Class A Warrant, sold in the issuer’s initial publicoffering.

 

**TABLE OF CONTENTS**

                                                                                                                                                                                                                 
| PART I     | FINANCIAL INFORMATION |                                                                                                                                            |
|------------|-----------------------|-------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                  |                                                                                                                                            |
|       | ITEM 1                | Financial Statements                                                                                                                            |   |
|       |                  | Consolidated Balance Sheet  at January 31, 2002 (unaudited) and  April 30, 2001                                                                 |   |
|       |                  | Consolidated  Statement of Operations for the three and nine month periods ended January  31, 2002 (unaudited) and January 31, 2001 (unaudited) |   |
|       |                  | Consolidated  Statement of Cash Flows for the nine month periods ended January 31, 2002  (unaudited) and January 31, 2001 (unaudited)           |   |
|       |                  | Notes to  Consolidated Financial Statements                                                                                                     |   |
|       | ITEM 2                | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                     |   |
|       |                  |                                                                                                                                            |   |
| PART II    | OTHER INFORMATION     |                                                                                                                                            |
|       |                  |                                                                                                                                            |
|       | ITEM 1                | Legal Proceedings                                                                                                                               |   |
|       | ITEM 2                | Changes in Securities and Use of  Proceeds                                                                                                      |   |
|       | ITEM 3                | Defaults upon Senior Securities                                                                                                                 |   |
|       | ITEM 4                | Submission of Matters to a Vote of Security  Holders                                                                                            |   |
|       | ITEM 5                | Other Information                                                                                                                               |   |
|       | ITEM 6                | Exhibits and Reports on Form 8-K                                                                                                                |   |
|       |                  |                                                                                                                                            |   |
| SIGNATURES |                  |                                                                                                                                            |
|            |                       |                                                                                                                                                 |  |  |  |  |

 

 

i

----

 

 

**PART I**

ITEM1                     Financial Statements

**MEDICALCV, INC.**

**ConsolidatedBalance Sheet**

 
|                                                                                                                             |   | **January 31, 2002** |            | **April 30,  2001** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|-----------------|---------------------|--------|
|                                                                                                                             |   | **(unaudited)**      |            |                |   |
| **ASSETS**                                                                                                                       |   |                 |            |                |   |
| Current assets:                                                                                                                  |   |                 |            |                |   |
| Cash and cash equivalents                                                                                                        |   | $                    | 4,444,584       |                | $      | 111,977 |   |
| Trade accounts receivable, net                                                                                                   |   | 1,189,089            |            | 1,125,560           |   |
| Inventories                                                                                                                      |   | 2,306,276            |            | 2,172,035           |   |
| Prepaid expenses and other assets                                                                                                |   | 58,625               |            | 127,354             |   |
| Total current assets                                                                                                             |   | 7,998,574            |            | 3,536,926           |   |
| Property, plant and equipment, net                                                                                               |   | 1,340,873            |            | 1,446,382           |   |
| Deferred financing costs, net of accumulated amortization of $273,225 and $111,415, respectively                                 |   | 133,241              |            | 233,936             |   |
| Other assets                                                                                                                     |   | 1,395                |            | 1,394               |   |
| Total assets                                                                                                                     |   | $                    | 9,474,083       |                | $      | 5,218,638 |   |
|                                                                                                                             |   |                 |            |                |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                   |   |                 |            |                |   |
| Current liabilities:                                                                                                             |   |                 |            |                |   |
| Convertible subordinated bridge notes, net of unamortized discounts  of $471,060                                                 |   | $                    | 28,940          |                | $      | —— |   |
| Current portion of long-term debt                                                                                                |   | 42,197               |            | 42,460              |   |
| Current portion of capital lease obligations                                                                                     |   | 50,175               |            | 61,552              |   |
| Accounts payable                                                                                                                 |   | 542,536              |            | 511,340             |   |
| Accrued expenses                                                                                                                 |   | 385,695              |            | 314,524             |   |
| Total current liabilities                                                                                                        |   | 1,049,543            |            | 929,876             |   |
| Long-term debt, less current portion                                                                                             |   | 2,844,505            |            | 1,786,987           |   |
| Capital lease obligations, less current portion                                                                                  |   | 72,470               |            | 72,504              |   |
| Total liabilities                                                                                                                |   | 3,966,518            |            | 2,789,367           |   |
|                                                                                                                             |   |                 |            |                |   |
| Shareholders’ equity:                                                                                                       |   |                 |            |                |   |
| Preferred stock, $.01 par value; 5,000,000 shares authorized; no  shares issued and outstanding                                  |   |                 |            |                |   |
| Common stock; $.01 par value; 95,000,000 shares authorized; 7,843,834  and 6,343,834 shares issued and outstanding, respectively |   | 78,438               |            | 63,438              |   |
| Additional paid-in capital                                                                                                       |   | 16,389,637           |            | 10,490,378          |   |
| Deferred stock-based compensation                                                                                                |   | (10,352              | )               | (16,824             | )      |
| Accumulated deficit                                                                                                              |   | (10,950,158          | )               | (8,107,721          | )      |
| Total shareholders’ equity                                                                                                  |   | 5,507,565            |            | 2,429,271           |   |
| Total liabilities and shareholders’ equity                                                                                  |   | $                    |  9,474,083 |                | $      |  5,218,638 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

 

1

----

 

**MEDICALCV, INC.**

**Consolidated Statement of Operations**

**(unaudited)**

 
|                                                          |   | **Three Months Ended** |             | **Nine  Months Ended** |   |
|---------------------------------------------------------------|--------|------------------------|------------------|------------------------|--------|
|                                                          |   | **January 31, 2002**   |             | **January  31, 2001**  |   | **January  31, 2002** |   | **January  31, 2001** |   |
| Net sales                                                     |   | $                      | 735,260          |                   | $      | 833,442 |   | $ | 2,207,475 |   | $ | 2,145,944 |   |
| Cost of goods sold                                            |   | 578,904                |             | 535,984                |   | 1,536,277 |   | 1,402,057 |   |
| Gross profit                                                  |   | 156,356                |             | 297,458                |   | 671,198 |   | 743,887 |   |
| Operating expenses:                                           |   |                   |             |                   |   |   |   |   |   |
| Sales and marketing                                           |   | 574,994                |             | 227,032                |   | 1,511,966 |   | 951,326 |   |
| General and administrative                                    |   | 607,256                |             | 336,438                |   | 1,311,971 |   | 808,868 |   |
| Engineering and regulatory                                    |   | 211,397                |             | 180,540                |   | 581,895 |   | 652,204 |   |
| Total operating expenses                                      |   | 1,393,647              |             | 744,010                |   | 3,405,832 |   | 2,412,398 |   |
| Loss from operations                                          |   | (1,237,291             | )                | (446,552               | )      | (2,734,634 | ) | (1,668,511 | ) |
| Other (expense) income:                                       |   |                   |             |                   |   |   |   |   |   |
| Interest expense                                              |   | (75,198                | )                | (9,703                 | )      | (174,735 | ) | (69,823 | ) |
| Interest income                                               |   | 16,790                 |             | 1,434                  |   | 32,988 |   | 13,959 |   |
| Other income                                                  |   | 12,529                 |             | 12,936                 |   | 33,944 |   | 48,355 |   |
| Total other (expense) income                                  |   | (45,879                | )                | 4,667                  |   | (107,803 | ) | (7,509 | ) |
|                                                          |   |                   |             |                   |   |   |   |   |   |
| Net loss                                                      |   | $                      |  (1,283,170 | )                      | $      |  (441,885 | ) | $ |  (2,842,437 | ) | $ |  (1,676,020 | ) |
| Basic and diluted net loss per share                          |   | $                      |  (.17       | )                      | $      |  (.07 | ) | $ | (.42 | ) | $ |  (.29 | ) |
|                                                          |   |                   |             |                   |   |   |   |   |   |
| Shares used in computing basic and diluted net loss per share |   | 7,419,921              |             | 6,193,834              |   | 6,702,530 |   | 5,803,834 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

 

 

2

----

 

**MEDICALCV, INC.Consolidated Statement of Cash Flows**

**(unaudited)**
|                                                                                                     |   | **Nine  Months Ended January 31,** |       |
|----------------------------------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                                                     |   | **2002**                           |       | **2001** |   |
| Cash flows from operating activities:                                                                    |   |                               |       |   |   |
| Net loss                                                                                                 |   | $                                  | (2,842,437 | ) | $ | (1,676,020 | ) |
| Adjustments to reconcile net loss to net cash used in Operating  activities:                             |   |                               |       |   |   |
| Depreciation                                                                                             |   | 217,571                            |       | 223,811 |   |
| Amortization                                                                                             |   | 190,750                            |       | 50,386 |   |
| Provision for doubtful accounts                                                                          |   | 113,623                            |       | 25,820 |   |
| Provision for inventory obsolescence                                                                     |   | 24,445                             |       |   |   |
| Stock-based compensation                                                                                 |   | 20,639                             |       |   |   |
| Changes in assets and liabilities:                                                                       |   |                               |       |   |   |
| Accounts receivable                                                                                      |   | (111,152                           | )          | (22,786 | )  |
| Inventories                                                                                              |   | (158,686                           | )          | (331,751 | ) |
| Prepaid expenses and other assets                                                                        |   | 68,728                             |       | (1,734 | ) |
| Accounts payable                                                                                         |   | 31,196                             |       | (8,854 | ) |
| Accrued expenses                                                                                         |   | 71,171                             |       | 51,677 |   |
| Other assets                                                                                             |   |                               |       | 2,406 |   |
| Net cash used in operating activities                                                                    |   | (2,374,152                         | )          | (1,687,045 | ) |
| Cash flows from investing activities:                                                                    |   |                               |       |   |   |
| Purchase of property, plant and equipment                                                                |   | (77,266                            | )          | (312,107 | ) |
| Loan to UROPACE                                                                                          |   | (66,000                            | )          |   |   |
| Net cash used in investing activities                                                                    |   | (143,266                           | )          | (312,107 | ) |
| Cash flows from financing activities:                                                                    |   |                               |       |   |   |
| Borrowings on bank line of credit                                                                        |   | 1,570,000                          |       | 1,070,000 |   |
| Principal payments on bank line of credit                                                                |   | (475,000                           | )          | (1,980,000 | ) |
| Principal payments on other long-term debt                                                               |   | (40,620                            | )          | (13,012 | ) |
| Issuance of convertible subordinated bridge notes, net                                                   |   | 438,885                            |       |   |   |
| Principal payments under capital lease obligations                                                       |   | (46,207                            | )          | (72,960 | ) |
| Proceeds from issuance of common stock, net                                                              |   | 5,402,417                          |       | 2,925,000 |   |
| Proceeds from issuance of warrants                                                                       |   | 550                                |       |   |   |
| Net cash provided by financing activities                                                                |   | 6,850,025                          |       | 1,929,028 |   |
| Net (decrease) increase in cash and cash equivalents                                                     |   | 4,332,607                          |       | (70,124 | ) |
| Cash and cash equivalents at beginning of year                                                           |   | 111,977                            |       | 93,095 |   |
| Cash and cash equivalents at end of period                                                               |   | $                                  | 4,444,584  |   | $ | 22,971 |   |
| Non-cash investing and financing activities:                                                             |   |                               |       |   |   |
| Land special assessments due in future years, net                                                        |   | 54,000                             |       |   |   |
| Capital lease obligation incurred for the purchase of fixed assets                                       |   | 34,796                             |       |   |   |
| Discount on convertible subordinated bridge notes related to warrants  and beneficial conversion feature |   | 497,125                            |       |   |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

 

3

----

 

**MEDICALCV, INC.**

** **

**Notes to Consolidated Financial Statements**

(1)                                  Basis ofFinancial Statement Presentation

The accompanying unauditedconsolidated financial statements included herein have been prepared byMedicalCV, Inc. (the Company) in accordance with accounting principlesgenerally accepted in the United States of America for interim financialinformation and pursuant to the rules and regulations of the Securities andExchange Commission.  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to such rulesand regulations.  These consolidatedinterim financial statements should be read in conjunction with theconsolidated financial statements and the notes thereto included in theCompany’s Registration Statement on Form SB-2, as amended.

The consolidated balancesheet as of January 31, 2002, the consolidated statement of operations for thethree and nine months ended January 31, 2002 and 2001, and the consolidatedstatement of cash flows for the nine months ended January 31, 2002 and 2001include, in the opinion of management, all adjustments, consisting solely ofnormal recurring adjustments, necessary for a fair presentation of thefinancial results for the respective interim periods and are not necessarilyindicative of results of operations to be expected for the entire fiscal yearending April 30, 2002.

(2)           Net Loss Per Share:

 

Netloss per share is computed under the provisions of SFAS No. 128, “EarningsPer Share.” Basic net loss per common share is computed using net loss and theweighted-average number of shares of common stock outstanding. Diluted earningsper share reflect the potential dilution of securities that could share in theearnings of an entity. Diluted net loss per common share does not differ frombasic net loss per common share in the three and nine-month periods endedJanuary 31, 2002 and 2001 since the potentially dilutive shares areanti-dilutive.  Potentially dilutiveshares excluded from the calculation of diluted net loss per share relate tooutstanding stock options and warrants aggregating 2,030,390 and 1,051,840 shares of theCompany’s common stock at January 31, 2002 and 2001, respectively.

 

(3)           Inventories

 
|            |   | **January  31, 2002** |      | **April 30,  2001** |   |
|-----------------|--------|-----------------------|-----------|---------------------|--------|
|            |   | **(unaudited)**       |      |                |   |
| Raw materials   |   | $                     | 505,035   |                | $      | 664,990 |   |
| Work-in-process |   | 536,878               |      | 423,570             |   |
| Finished goods  |   | 1,264,363             |      | 1,083,475           |   |
|            |   | $                     | 2,306,276 |                | $      | 2,172,035 |   |

 

(4)           Recently Issued AccountingPronouncements

 

InAugust 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.144, “Accounting for the Disposal of Long-Lived Assets” which addressaccounting and financial reporting for long-lived assets.  This statement is effective for the Companyon May 1, 2002.  The adoption of thisstatement is not expected to have a material impact on the financial positionor results of operations of the Company.

 

InJune 2001, the FASB issued SFAS No. 141, “Business Combinations,” whichaddresses accounting and financial reporting for business combinations.  Also in June 2001, the FASB issued SFAS No.142, “Goodwill and Other Intangible Assets,” which addresses how intangibleassets acquired individually or with a group of other assets, except for thoseacquired in a business combination, should be accounted for in financialstatements upon their acquisition and also addresses how goodwill and otherintangible assets should be accounted for after they have been initiallyrecognized in the financial statements. Both of these statements are effective in their

 

4

----

 

entiretyfor the Company on May 1, 2002.  Theadoption of these statements will not have a material impact on the currentfinancial position or the results of operations of the Company.

 

(5)           Convertible Subordinated Bridge Notes

 

OnAugust 21, 2001, the Company sold units of convertible subordinated bridgenotes (Notes) with an aggregate principal amount of $500,000 and redeemablewarrants to purchase an aggregate of 500,000 shares of the Company’s commonstock for total proceeds of $500,500. Each unit consisted of a $25,000 principal amount 10% convertiblesubordinated bridge note and redeemable warrants to purchase 25,000 shares ofthe Company’s common stock at a price of $6.50 per share.  The Notes are unsecured and are due inAugust 2002, but may be converted into shares of the Company’s common stock atany time before repayment at a price of $4.50 per share.  The Company has the option to prepay theNotes without premium or penalty.  Ifthe fair value of the Company’s common stock or units equals or exceeds $8.50per share, for ten consecutive trading days, the Company may, at is option,redeem the outstanding warrants for $0.01 each.  The warrants are immediately exercisable and have a term of fiveyears.

 

Theallocated fair value of the warrants of $308,236 and the value of thebeneficial conversion feature of $188,889 as of August 21, 2001 are accountedfor as a discount on the convertible subordinated bridge notes.  This discount, which is presented as areduction of the face value of the Notes on the consolidated balance sheet, isbeing amortized as part of interest expense over the one-year life of the Notesusing the effective interest method.  As of January 31, 2002, the aggregate unamortized balance of thediscount was $471,060.  The notes werecalled for prepayment in early March 2002.

 

(6)           Segment Information

 

TheCompany views its operations and manages its business as one segment, themanufacturing and marketing of mechanical heart valves.  Factors used to identify the Company’ssingle operating segment include the organizational structure of the Companyand the financial information available for evaluation by chief operatingdecision maker.

 

Thefollowing table summarizes net sales by geographic area:

 
|        |   | **Three  Months Ended January 31,** |        | **Nine  Months Ended January 31,** |   |
|-------------|--------|-------------------------------------|-------------|------------------------------------|--------|
|        |   | **2002**                            |        | **2001**                           |   | **2002** |   | **2001** |   |
| Europe      |   | $                                   | 474,405     |                               | $      | 579,139 |   | $ | 1,419,245 |   | $ | 1,264,577 |   |
| South Asia  |   | 109,320                             |        | 156,940                            |   | 366,060 |   | 428,390 |   |
| Middle East |   | 16,000                              |        | 67,430                             |   | 101,371 |   | 204,951 |   |
| Far East    |   | 109,825                             |        | 26,218                             |   | 284,129 |   | 156,568 |   |
| Africa      |   |                                |        | 3,715                              |   |   |   | 43,715 |   |
| US          |   | 11,700                              |        | ——                       |   | 11,700 |   | —— |   |
| Other       |   | 14,010                              |        |                               |   | 24,970 |   | 47,743 |   |
| **TOTALS**  |   | **$**                               | **735,260** | ** **                         | **$**  | **833,442** | ** ** | **$** | **2,207,475** | ** ** | **$** | **2,145,944** | ** ** |

 

 

(7)           Initial Public Offering

 

OnNovember 27, 2001, the Company issued 1,500,000 units, each consisting of oneshare of common stock and one redeemable Class A Warrant, in its initial publicoffering at a price of $4.50 per unit for gross proceeds of $6,750,000.  After offering costs, the Company receivednet proceeds of $5,402,417.  Each ClassA Warrant becomes exercisable, and may be transferred separately from thecommon stock, 18 months after the effectiveness of the initial publicoffering.  When each Class A Warrantbecomes exercisable, the holder will be entitled to purchase, at any time untilthree years after the effectiveness of the offering, one share of common stockat an exercise price of $6.50 per share, subject to customary anti-dilutionadjustments.  The Company may

 

5

----

 

redeemthe Class A Warrants for $0.01 per warrant at any time once they become exercisable,upon ten business days’ written notice, if the closing price of the Company’scommon stock or units exceeds $8.50, subject to customary anti-dilutionadjustments, for any ten consecutive trading days before such notice.

 

6

----

 

ITEM 2                                                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*The following discussion contains various forward-lookingstatements within the meaning of Section 21E of the Exchange Act.  Although we believe that, in making any suchstatement, our expectations are based on reasonable assumptions, any suchstatement may be influenced by factors that could cause actual outcomes andresults to be materially different from those projected.  When used in the following discussion, thewords “anticipates,” “believes,” “expects,” “intends,” “plans,” “estimates” andsimilar expressions, as they relate to us or our management, are intended toidentify such forward-looking statements. These forward-looking statements are subject to numerous risks anduncertainties that could cause actual results to differ materially from thoseanticipated.  Factors that could causeactual results to differ materially from those anticipated, certain of whichare beyond our control, are set forth in this document and in our CautionaryStatement filed as Exhibit 99 to our Quarterly Report for the period endedOctober 31, 2001.*

*Our actual results, performance or achievements could differmaterially from those expressed in, or implied by, forward-lookingstatements.  Accordingly, we cannot becertain that any of the events anticipated by forward-looking statements willoccur or, if any of them do occur, what impact they will have on us.  We caution you to keep in mind the cautionsand risks described in this document and in our Cautionary Statement and torefrain from attributing undue certainty to any forward-looking statements,which speak only as of the date of the document in which they appear.*

**Overview**

We manufacture and marketmechanical heart valves known as the Omnicarbon Series 3000 and Series4000.  Our heart valves are used totreat heart valve failure caused by the aging process, heart diseases,prosthetic heart valve failure and congenital defects.  To date, we have distributed the Omnicarbon3000 and 4000 heart valves primarily in Europe, South Asia, the Middle East andthe Far East.  In fiscal year 2001, wederived 57.2% of our net sales from Europe. As an innovator of heart valve technology, we have more than 30 years ofexperience in developing, manufacturing and marketing five generations of heartvalves, and we have sold more than 135,000 heart valves worldwide.

On July 26, 2001, the FDAgave us notice of premarket approval to sell our Omnicarbon 3000 heart valve inthe U.S., the largest geographic market for mechanical heart valves.  In anticipation of FDA premarket approval,we invested in our sales and marketing infrastructure, including adding salesmanagement to our staff in fiscal year 2001 and recruiting field salesrepresentatives to call on domestic surgery centers in the U.S.  Based upon our Omnicarbon heart valve’s 17years of implants in patients in Europe, we believe that we can establish acompetitive position in the mechanical heart valve industry in the U.S. andleverage this position into other critical areas of cardiothoracicsurgery.  We also expect that ourability to market the Omnicarbon 3000 heart valve in the U.S. will favorablyaffect our international sales, as many cardiovascular surgeons and others whomake purchasing decisions are aware of the FDA’s rigorous premarket approvalprocess and consider it to be a validation of the safety and efficacy ofmedical devices.  Our company had itsfirst implant of the Omnicarbon 3000 heart valve in the U. S. in December 2001,representing a major milestone for our company.

The worldwide heart valvemarket is dynamic and highly competitive. In addition, technology and competitive offerings, such as new tissueheart valves, place increased pressure on us as we seek to increase our marketshare and revenue.  For more informationregarding these risks, you should review our Cautionary Statement.

On November 27, 2001, weissued 1,500,000 units, each consisting of one share of common stock and oneredeemable Class A Warrant, in our initial public offering at a price of $4.50per unit, for gross proceeds of $6,750,000. After offering costs, we received net proceeds of $5,402,417.

 

7

----

 

**QuartersEnded January 31, 2001 and 2002**

Our operating results,expressed as a percentage of total revenue, were as follows:
|                         |   | **Three Months Ended January 31,** |   | **Nine Months Ended January 31,** |   |
|------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                         |   | **2002**                           |   | **2001**                          |   | **2002** |   | **2001** |   |
| Net sales                    |   | 100.0                              | %      | 100.0                             | %      | 100.0 | % | 100.0 | % |
| Cost of goods sold           |   | 78.7                               | %      | 64.3                              | %      | 69.6 | % | 65.3 | % |
|                         |   |                               |   |                              |   |   |   |   |   |
| Gross profit                 |   | 21.3                               | %      | 35.7                              | %      | 30.4 | % | 34.7 | % |
|                         |   |                               |   |                              |   |   |   |   |   |
| Operating expenses:          |   |                               |   |                              |   |   |   |   |   |
|                         |   |                               |   |                              |   |   |   |   |   |
| Sales and marketing          |   | 78.2                               | %      | 27.2                              | %      | 68.5 | % | 44.4 | % |
| General and administrative   |   | 82.6                               | %      | 40.4                              | %      | 59.4 | % | 37.7 | % |
|                         |   |                               |   |                              |   |   |   |   |   |
| Engineering and regulatory   |   | 28.8                               | %      | 21.7                              | %      | 26.4 | % | 30.4 | % |
|                         |   |                               |   |                              |   |   |   |   |   |
| Total operating expenses     |   | 189.6                              | %      | 89.3                              | %      | 154.3 | % | 112.5 | % |
|                         |   |                               |   |                              |   |   |   |   |   |
| Loss from operations         |   | (168.3                             | )%     | (53.6                             | )%     | (123.9 | )% | (77.8 | )% |
|                         |   |                               |   |                              |   |   |   |   |   |
| Other (expense) income:      |   |                               |   |                              |   |   |   |   |   |
| Interest expense             |   | (10.2                              | )%     | (1.2                              | )%     | (7.9 | )% | (3.3 | )% |
| Interest income              |   | 2.3                                | %      | 0.2                               | %      | 1.5 | % | 0.7 | % |
| Other income                 |   | 1.7                                | %      | 1.6                               | %      | 1.5 | % | 2.3 | % |
|                         |   |                               |   |                              |   |   |   |   |   |
| Total other (expense) income |   | (6.2                               | )%     | 0.6                               | %      | (4.9 | )% | (0.3 | )% |
|                         |   |                               |   |                              |   |   |   |   |   |
| Net loss                     |   | (174.5                             | )%     | (53.0                             | )%     | (128.8 | )% | (78.1 | )% |

 

8

----

 

# **Critical Accounting Policies**

# **Thepreparation of our financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the amounts reported in the consolidated financial statements andaccompanying notes.  We believe ourestimates and assumptions are reasonable; however, actual results and the timingof the recognition of such amounts could differ from those estimates.  The Company has identified the followingcritical accounting policies and estimates utilized by management in thepreparation of the Company’s financial statements: revenue recognition,deferred income tax assets, the accounts receivable allowance for doubtfulaccounts, and inventory obsolescence. Actual amounts could differ significantly from management’s estimates.**

 

# ***Revenue Recognition***.  The Companyrecognizes revenue using guidance from SEC Staff Accounting Bulletin No. 101“Revenue Recognition in Financial Statements.” Revenue from the sale of its mechanical heart valves is recognizedprovided that the Company has received a purchase order, the price is fixed,title has transferred, collection of the resulting receivable is probable andthere are no remaining obligations. Transfer of title occurs for substantiallyall sales upon shipment. The Company’s products are not subject to any customeracceptance process. There are no rights of return unless the product does notperform according to specifications.

 

# ***Deferred Income Tax Assets***.  In assessing therealizability of the Company’s deferred tax assets, management considerswhether it is more likely than not that its deferred income tax assets will berealized.  The ultimate realization ofdeferred income tax assets is dependent on the generation of future taxableincome, which must occur prior to the expiration of the Company’s net operatingloss and credit carryforwards, which comprise the majority of the deferred tax assets.  The Company has established a valuationallowance to fully offset its deferred tax assets due to the inherentuncertainty of predicting the sufficiency of future taxable income necessary torealize these deferred tax assets, particularly in light of the Company’srecent history of significant operating losses.  In addition, future utilization of available net operating losscarryforwards may be limited under Internal Revenue Code 382 as a result offuture changes in ownership.

 

# ***Account Receivable Allowance***.  In determiningthe adequacy of the allowance for doubtful accounts, management considers anumber of factors, including the aging of the receivable portfolio, customerpayment trends, financial condition of the customer and economic conditions inthe customer’s country.

 

# ***Inventory Obsolescence***.  In determiningthe appropriate carrying value of its inventories, management considers anumber of factors, including the aging of the inventory, recent sales trends,industry market conditions and economic conditions.

 

9

----

 

**Results of Operations for the Threeand Nine Months Ended January 31, 2002 and 2001**

*NetSales*.  Net sales in the third quarter of fiscalyear 2002 decreased to $735,260 from $833,442 in the third quarter of the prioryear. This decrease was attributable primarily to lower unit sales in Europe,the Middle East and southern Asia. Net sales in Europe were negatively impactedby the reorganization we undertook in our distribution network in several majormarkets during the third quarter of fiscal year 2002.  We believe this reorganization will enable us to increasenon-U.S. revenues in the future.

Net sales in the nine month period ended January 31,2002 increased 2.9 percent to $2,207,475 from $2,145,944 in the same period oneyear ago.  The increase in thenine-month period was attributable to higher Omnicarbon sales partially offsetby the expected decline in sales of the Omniscience heart valve which is anearlier generation product.  We havefocused our sales and marketing efforts on the Omnicarbon product line due toits superior clinical performance and market acceptance.

In the first nine months of fiscal years 2002 and2001, the vast majority of our sales were denominated in U.S. dollars.  Fluctuations in foreign currency exchangerates have not subjected us to significant losses or gains on outstanding tradeaccounts receivable.  All of ourdistributors are required to pay for products in U.S. dollars, other than ourJapanese distributor, which pays in yen. We recognize that a strong U.S. dollar can adversely affect unit salespayable in currencies other than U.S. dollars for our foreign distributors.

*GrossProfit.*  Gross profit as a percentage of net salesdeclined to 21.3 percent in the third quarter of fiscal year 2002 from 35.7percent in the third quarter one year ago. Fiscal year-to-date gross profit margins were 30.4 percent compared to34.7 percent in the same period last year. We have expended considerable resources in developing our new carbonmanufacturing process technologies utilized in manufacturing the Omnicarbon4000 heart valve which is currently sold outside the U.S. market.  Gross profit margins in the quarter andyear-to-date periods were unfavorably impacted by non-recurring costsassociated with these development activities. In particular, fiscal year-to-date cost of sales reflected higherOmnicarbon 4000 production costs during the first and second quarters of fiscalyear 2002 when we were operating at lower production volumes due to theextensive development work  we conductedin connection with our carbon manufacturing process. In addition, the lowergross profit margin in the third quarter of fiscal year 2002 reflected the impactof the fixed cost component of cost of sales on lower revenues in thequarter.  Our strategy is to obtain FDAapproval of this proprietary pyrolitic carbon manufacturing process in order tomarket the Omnicarbon 4000 in the U.S. Due to its lower manufacturing cost, we believe the Omnicarbon 4000 willgenerate significantly higher gross profit margins when sold in the U.S. thanthe Omnicarbon 3000 heart valve.

*Salesand Marketing*.  Sales and marketing expenses in the thirdquarter of fiscal year 2002 were $574,994 or 78.2 percent of net sales comparedto $227,032 or 27.2 percent of net sales in the same period last year.  For the three quarters ended January 31,2002 sales and marketing expenses totaled $1,511,966 or 68.5 percent of netsales, compared to $951,326 or 44.4 percent of net sales in the prioryear.  The increase in spending in thequarter and fiscal year-to-date period was related to expanded Omnicarbonmarketing efforts in the U.S. and international markets.  Our overall marketing strategy is to promotethe superior clinical results of the Omnicarbon heart valve and the technicalstrengths of our company in designing and manufacturing mechanical heartvalves.

*Generaland Administrative*.  General and administrative expenses for thethird quarter of fiscal year 2002 were $607,256 or 82.6 percent of net salescompared to $336,438 or 40.4 percent of net sales in the same period lastyear.  For the three quarters endedJanuary 31, 2002, general and administrative expenses totaled $1,311,971 or 59.4percent of net sales compared to $808,868 or 37.7 percent of net sales for thesame period last year.  The increase wasprimarily attributable to increased legal and audit fees associated withoperating as a public company, increased stock based compensation, and salaryand related expenses associated with strengthening the executive managementstaff.

*Engineeringand Regulatory*.  Engineering and regulatory expenses for thethird quarter of fiscal year 2002 were $211,397 or 28.8 percent of net salescompared to $180,540 or 21.7 percent of net sales in the same period one yearago.  For the three quarters endedJanuary 31, 2002, engineering and regulatory expenses totaled $581,895 or 26.4percent of net sales compared to $652,204 or 30.4 percent in the same period inthe prior year.  The decrease in fiscalyear-to-date

 

10

----

 

spending was attributableto shifting priorities from new product development to installation of newequipment and processes for the production of the Omnicarbon 4000 heart valve.

*Other(Expense) Income*.  Interest expense totaled $75,198 in thethird quarter of fiscal year 2002 compared to $9,703 in the same quarter lastyear.  Fiscal year-to-date interestexpense totaled $174,735 as compared to $69,823 in the comparable period lastyear.  The increase in fiscal year 2002interest expense was attributable to maintaining a higher level of bankborrowings combined with the impact of the convertible bridge note financing inthe current year.

*IncomeTax Provision*.  In light of our recent history of operatinglosses, we recorded a valuation allowance to fully offset our deferred taxassets in fiscal year 2000.  We havecontinued to provide a full valuation allowance through the third quarter of fiscalyear 2002 due to the inherent uncertainty of predicting the sufficiency offuture taxable income necessary to realize our deferred tax assets.

*Lossfrom Operations*.  As of January 31, 2002, we had anaccumulated deficit of $10,950,158.  Wehave incurred losses in each of the last five fiscal years.  Since 1994, we have invested in developing abileaflet heart valve, a proprietary pyrolytic carbon coating process andobtaining premarket approval from the FDA to market our Omnicarbon 3000 heartvalve in the U.S.  Our strategy has beento invest in technology to better position ourselves competitively once FDApremarket approval was obtained.  Weexpect cumulative net losses to continue at least through fiscal year 2003because of anticipated spending necessary to market the Omnicarbon 3000 heartvalve in the U.S. and to establish and maintain a strong marketing organizationfor domestic and foreign markets.

 

**Liquidity and CapitalResources**

Cash and cash equivalents increased to $4,444,584 atJanuary 31, 2002, from $111,977 at April 30, 2001.  The increase in cash was attributable to completion of ourinitial public offering in November 2001. Net cash used in operating activities was $1,071,257 in the thirdquarter of fiscal year 2002 and $2,374,152 for the nine-month period endedJanuary 31, 2002.

We invested $77,266 in property, plant, and equipmentin the nine month period ending January 31, 2002, compared to $312,107 in thesame period last year.  Our investmentin property, plant, and equipment over the last three years related primarilyto the development of our proprietary pyrolytic carbon manufacturingprocess.  As described in Commitmentsand Contingent Liabilities, we loaned $154,000 to UROPACE during fiscal year2001 and an additional $66,000 in the first three quarters of fiscal year 2002.

Net cash provided by financing activities was$6,850,025 in the first nine-months of fiscal year 2002.  We completed our initial public offeringearly in the third quarter ending January 31, 2002 which generated net proceedsof $5,402,417.  In the second quarter offiscal year 2002, the primary source of cash from financing activities was ourincreased borrowings of $787,399 on our line of credit and the proceeds of$500,000 from the sale of 10% convertible bridge notes described below.  Net cash provided by financing activitieswas $1,929,028 in the first nine months of fiscal year 2001.  In the first quarter of fiscal year 2001, weobtained proceeds of $2,925,000 from the issuance of 1,170,000 shares of ourcommon stock in a private placement. In the first nine months of fiscal year2001 we made $1,980,000 of principal payments on our bank line of creditpartially offset by $1,070,000 of additional borrowings on our bank line ofcredit.

Since March 1992, our primary source of funding hasbeen private sales of equity securities, which totaled $9,775,704 in gross cashproceeds through our initial public offering on November 27, 2001.  We have also funded our operations throughsecured equipment financing term loans and equipment leases.  In addition, we financed our operationssince fiscal year 2000 through a bank line of credit secured by our realestate, tangible and intangible property and a guarantee by a principalshareholder.  This line of credit willexpire in November 2002.  Amountsborrowed under this line of credit generally bear interest at the primerate.  As of January 31, 2002, we hadborrowed the maximum amount available of $2,500,000 under this line of credit.

 

11

----

 

As part of our credit agreement with Associated BankMinnesota, we were required to maintain a minimum tangible net worth of notless than $3,000,000, measured as of the last day of each fiscal quarter.  At April 30, 2000 and 2001, we failed to complywith the minimum tangible net worth covenant. On August 24, 2001, Associated Bank Minnesota waived such covenantdefaults, and we amended our credit agreement, which now provides that we mustmaintain a minimum tangible net worth of not less than $1,000,000, measured asof the last day of each calendar month.

In August 2001, we sold $500,000 principal amount of10% convertible subordinated bridge notes due August 2002, along with five-yearwarrants to purchase 500,000 shares of common stock at an exercise price of$6.50 per share.  The unsecured notesmay be converted into shares of our common stock at any time before repaymentat a price of $4.50 per share.  We mayrequire conversion of the notes into common stock at a price of $6.50 per shareif the closing price of our common stock or units equals or exceeds $8.50,subject to customary anti-dilution adjustments, for ten consecutive tradingdays.  We intend to repay the bridgenotes in the fourth quarter of fiscal 2002.

We expect to continue developing our business and tobuild market share in the U.S. now that we have FDA premarket approval of ourOmnicarbon 3000 heart valve for sales in the U.S.  These activities will require significant expenditures todevelop, train and supply marketing materials to our independent salesrepresentatives and to build our sales and marketing infrastructure.  As a result, we anticipate that our salesand marketing and general and administrative expenses will continue toconstitute a material use of our cash resources.  Although we have no commitment for these expenditures, wecurrently anticipate spending between $3,900,000 and $4,100,000 in fiscal year2002 and between $4,200,000 and $4,700,000 in fiscal year 2003.  In addition, we project capital expendituresof approximately $200,000 for fiscal year 2002 and between $350,000 and$600,000 for fiscal year 2003 to increase manufacturing capacity in certainfunctions and make necessary improvements to our corporate facility.  The actual amounts and timing of our capitalexpenditures will vary depending upon the speed at which we are able to expandour distribution capability in domestic and international markets.

We expect that our operating losses and negativeoperating cash flow will continue in fiscal years 2002 and 2003 as we expandour manufacturing capabilities, continue increasing our corporate staff tosupport the U.S. roll-out of our Omnicarbon 3000 heart valve, and add marketingprograms domestically and internationally to build awareness of and createdemand for our Omnicarbon heart valves. We expect that additional financing will be required following fiscalyear 2003.  We intend to refinance ourbank debt before November 2002 to give us additional borrowing capacity andflexibility in funding the growth of our business.  We may also seek to obtain additional financing through the saleof equity or debt securities. Our capital requirements may vary depending uponthe timing and the success of the implementation of our business plan,regulatory, technological and competitive developments, or if:

•                  our manufacturing and development costsor projections prove to be inaccurate,

•                  we determine to license or developadditional technologies,

•                  we experience substantial delays inobtaining FDA clearance of our proprietary carbon coating process for heartvalves sold in the U.S. market, or

•                  we make acquisitions.

We cannot assure you that we will be able to raisesufficient capital on terms that we consider acceptable, or at all.  If we are unable to obtain adequate funds onacceptable terms, our ability to fund the expansion of our business or respondto competitive pressures would be significantly impaired, we would be requiredto revise our business plans and reduce operating expenditures.

 

12

----

 

**Commitmentsand Contingent Liabilities**

 

*Sulzer Carbomedics.* In July 1998,we entered into a three-year supply agreement with Sulzer Carbomedics, thesource of certain raw material components used in the manufacture of ourOmnicarbon 3000 heart valves.  Thesupply agreement was extended for an additional two years in March 2001.  The agreement provides that we purchase aminimum number of raw material units each calendar year through 2003.  Under the terms of the agreement, we arerequired to compensate Sulzer Carbomedics for any purchase shortfalls up to amaximum of $200,000 per year.  We didnot meet the minimum purchase requirements in calendar years 1999, 2000 or2001.  In addition, we do not believe wewill meet the minimum purchase requirement for calendar year 2002.  As a result, we expensed $239,907 in fiscalyear 2000, and $108,174 in fiscal year 2001. We expensed $15,657 in the third quarter of fiscal year 2002 and made noadjustment to the provision in the third quarter of fiscal 2001.  We expensed $115,657 in the first ninemonths of fiscal year 2002 and $41,533 in the first nine months of fiscal year2001.  These charges were reflected incost of goods sold.  Future purchaseshortfalls could adversely affect our ongoing relationship with SulzerCarbomedics.

*UROPACE*.  In July 1995, we established a wholly-ownedsubsidiary, UROPACE, Inc., to commercialize technology for treating femaleurinary incontinence.  On November 1,2000, we completed the spin-off of UROPACE to our existing shareholders.  The separation was effected by transferringfrom our company to UROPACE all assets, tangible and intangible, relating tothe development of female urinary incontinence technology.  Our shareholders of record on September 15,2000 received one share of common stock of UROPACE for each 6.882 shares of ourcommon stock they held on that date. The assets transferred to UROPACE had no book value at November 1, 2000,and the operations of UROPACE before the spin-off had no revenues and minimalexpenses during fiscal year 2000 and fiscal year 2001.  As a part of this spin-off, we agreed toloan UROPACE up to $356,250 at a variable interest rate.  Principal and interest on the note will bepayable in installments equal to 5% of UROPACE’s future annual net sales untilthe note and interest is paid in full. At January 31, 2002, we had loaned UROPACE $220,000.  Due to the development stage of UROPACE andthe uncertainty associated with the collection of this amount, we have recordedan allowance for the entire balance of the loan, with the corresponding expenseincluded in other (expense) income in the Consolidated Statement of Operations.

*Convertible Subordinated BridgeNotes*.  In August 2001, we sold $500,000 principal amount of10% convertible subordinated bridge notes due August 2002, along with five-yearwarrants to purchase 500,000 shares of common stock at an exercise price of$6.50 per share.  The unsecured notesmay be converted into shares of our common stock at any time before repayment ata price of $4.50 per share.  We may requireconversion of the notes into common stock at a price of $6.50 per share if theclosing price of our common stock or units equals or exceeds $8.50, subject tocustomary anti-dilution adjustments, for ten consecutive trading days.

*Bank Line of Credit*.  We financed our operations since fiscal year 2000through a bank line of credit secured by our real estate, tangible andintangible property and a guarantee by a principal shareholder.  This line of credit will expire in November2002.  Amounts borrowed under this lineof credit generally bear interest at the prime rate.  As of January 31, 2002, we had borrowed the maximum amountavailable of $2,500,000 under this line of credit.

As part of our credit agreement with Associated BankMinnesota, we were required to maintain a minimum tangible net worth of notless than $3,000,000, measured as of the last day of each fiscal quarter.  At April 30, 2000 and 2001, we failed tocomply with the minimum tangible net worth covenant.  On August 24, 2001, Associated Bank Minnesota waived suchcovenant defaults, and we amended our credit agreement, which now provides thatwe must maintain a minimum tangible net worth of not less than $1,000,000,measured as of the last day of each calendar month.  We required the proceeds from our November 2001 public offeringto continue to meet our minimum tangible net worth requirement through April30, 2002.  As of January 31, 2002, wehad utilized our line of credit in full.

As of January 31, 2002 we were in compliance with allcovenants or other requirements set forth in our bank credit agreement.  Further, we do not have any rating downgradetriggers that would accelerate the maturity dates of our debt.  A downgrade in our credit rating couldadversely affect our ability to renew existing, or obtain access to new, creditfacilities in the future and could increase the cost of such facilities.

 

13

----

 

### ***Dakota Electric Association. ***We were indebted to Dakota Electric Association in theprincipal amount of $170,701. Payments are due in monthly installments throughMay 2009, with interest at 5.75 percent, collateralized by our lightingequipment and rooftop air-conditioning units.

 

## ***Dakota County***. We owe Dakota County for special land assessments with principal andinterest due at 8 percent in semi-annual installments through May 2010.

 

## ***Operating & Capital Leases***. MedicalCV leases certain manufacturing equipment under various operatingand capital leases.  The operatingleases expire at various dates through fiscal year 2003.  The capital leases run into fiscal year 2004with implicit interest rates ranging from 5.6 to 16.2 percent.  The capital leases are collaterized by theunderlying equipment with a total original cost of $567,680.

 

## ***Clinical Studies***. We entered into an agreement with several large non-U.S. hospitals toconduct clinical studies regarding certain aspects of our Omnicarbon heartvalve’s clinical performance.  Theagreement runs through fiscal year 2006. The clinical study payments are tied to purchases of our product.

 

 

*Consulting*.  In November 2001, we entered into a separationagreement and release with Adel A. Mikhail, Ph.D., who was our founder andserved as our President and Chief Executive Officer from March 1992 until June15, 2001, when he retired.  Dr. Mikhailcontinues to serve as Chairman of our Board of Directors.  As part of the agreement, we agreed toretain Dr. Mikhail as an independent consultant for a period of two years.  Dr. Mikhail receives a $6,000 per monthretainer.  The agreement expires in June2003.

 

 
| ***Summary of Contractual Obligations.*** |   |      |      | **Payments Due By Period** |   |
|-------------------------------------------|--------|-----------|-----------|----------------------------|--------|
|                                      |   | **TOTAL** |      | **Less than One Year**     |   | **Two to Three Years** |   | **Four or More Years** |   |
| Sulzer  Carbomedics                       |   | $         | 200,000   |                       | $      | 200,000 |   | $ |    |   | $ |   |   |
| UROPACE Loan                              |   | 136,250   |      | 136,250                    |   |   |   |   |   |
| Convertible  Subordinated Bridge Notes    |   | 500,000   |      | 500,000                    |   |   |   |   |   |
| Bank Line of  Credit                      |   | 2,500,000 |      | 2,500,000                  |   |   |   |   |   |
| Dakota Electric  Association              |   | 170,702   |      | 19,272                     |   | 42,041 |   | 109,389 |   |
| Dakota County                             |   | 216,000   |      | 24,000                     |   | 48,000 |   | 144,000 |   |
| Operating Leases                          |   | 49,727    |      | 26,669                     |   | 23,058 |   |   |   |
| Capital Leases                            |   | 122,645   |      | 67,690                     |   | 54,955 |   |   |   |
| Clinical Studies                          |   | 496,004   |      | 124,001                    |   | 248,002 |   | 124,001 |   |
| Consulting                                |   | 99,000    |      | 72,000                     |   | 27,000 |   |   |   |
| TOTAL  CONTRACTUAL OBLIGATIONS            |   | $         | 4,490,327 |                       | $      | 3,669,881 |   | $ | 443,056 |   | $ | 377,390 |   |
|                                      |   |      |      |                       |   |   |   |   |   |

 

 

14

----

 

**RecentAccounting Pronouncements**

 

In August 2001, the Financial Accounting Standards Board (FASB) issuedSFAS No. 144, “Accounting for the Disposal of Long-Lived Assets” whichaddresses accounting and financial reporting for long-lived assets.  This statement is effective for us on May 1,2002.  The adoption of this statement isnot expected to have a material impact on our financial position or results ofoperations.

 

In June 2001, the FASB issued SFAS No. 141, “BusinessCombinations,” which addresses accounting and financial reporting for businesscombinations.  Also in June 2001, theFASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” whichaddresses how intangible assets acquired individually or with a group of otherassets, except for those acquired in a business combination, should beaccounted for in financial statements upon their acquisition and how goodwilland other intangible assets should be accounted for after they have beeninitially recognized in the financial statements.  Both of these statements are effective in their entirety for ourcompany on May 1, 2002.  The adoption ofthese statements will not have a material impact on our current financialposition or our results of operations.

**Qualitativeand Quantitative Disclosures about Market Risk**

 

We develop our productsin the U.S. and market our products globally. Because we continue to derive our revenue primarily from sources outsideof the U.S., our financial results could be affected by many factors, such aschanges in currency exchange rates or weak economic conditions in foreignmarkets.  Substantially all of our salesare denominated in U.S. dollars.  Astrengthening of the U.S. dollar could make our products less competitive inforeign markets.  We do not currentlyparticipate in any currency hedging activities to mitigate this risk.  We intend to assess the need to usefinancial instruments to hedge our exchange rate exposure on an ongoingbasis.  Our interest income and expensesare sensitive to changes in the general level of U.S. interest rates,particularly since our investments are in short-term instruments and our long-termdebt and available line of credit require interest payments calculated atvariable rates.  Based on the currentnature and levels of our investments and debt, however, we believe that wecurrently have no material market risk exposure.

Our general investing policy is to limit market andcredit risk and the risk of principal loss. All liquid investments with original maturities of three months or lessare considered to be cash equivalents.

 

15

----

 

**PART II**                 OTHERINFORMATION

ITEM 1                   LegalProceedings

 

                                As of March 15, 2002, we were not aparty to any material litigation.

 

ITEM 2                   Changesin Securities and Use of Proceeds

 

(c)                                  On November 27,2001, we issued a five-year warrant to purchase 150,000 units at $6.75 per unitto the underwriter of our initial public offering for cash consideration of$50.  The warrant will becomeexercisable on November 20, 2003, and then may be exercised for a period offour years.  We issued the warrant in aprivate placement transaction.  Webelieve that this transaction was exempt from registration under Section 4(2)of the Securities Act.

(d)                                   OurRegistration Statement on Form SB-2 (File No. 333-68884) was declared effectiveby the SEC on November 20, 2001.

 

                                                  We registeredan aggregate offering amount of 1,725,000 units with an estimated aggregateoffering price of $7,762,500 (based on an offering price per unit of$4.50).  We sold 1,500,000 units at aprice of $4.50 per unit, resulting in gross proceeds of $6,750,000.  On January 10, 2002, we deregistered 225,000units which our underwriter did not purchase pursuant to its over-allotmentoption.

 

                                                  Through January31, 2002, we had incurred total expenses of $1,347,583 in connection with ourinitial public offering.  Such expensesrepresent:  (1) $675,000 in underwritingdiscounts and commissions paid to our underwriter, (2) $202,500 in expensespaid to our underwriter, (3) $197,436 in fees and expenses paid to ourattorneys, (4) $131,910 in fees and expenses paid to our accountants, (5)$68,547 paid to our financial printer, (6) $10,000 in NASDAQ listing fees, (7)$53,846 in blue sky filing fees and expenses, (8) $4,744 in SEC registrationfees, and (9) $3,600 in transfer agent fees.

 

                                                  None of theforegoing expenditures represent direct or indirect payments to our directors,officers or their associates, to persons owning 10% or more of any class of ourequity securities, or to our affiliates.

 

                                                  After deductingthe total expenses of our initial public offering, our net proceeds wereapproximately $5,402,417.

 

                                                  We estimatethat we used $1,246,000 of the initial public offering net proceeds throughJanuary 31, 2002.  Such uses of proceedsrepresent: (1) $883,000 to fund sales and marketing initiatives includinggeneral and administrative supporting infrastructure, and $142,000 forengineering and regulatory expenses, partially offset by grofit profit andother income of $99,000, (2) $228,000 to fund working capital requirements, (3)$67,000 to purchase capital equipment, and (4) $25,000 to fund UROPACE borrowings.

 

ITEM 3                   Defaultsupon Senior Securities

 

                                Not applicable.

 

ITEM 4                   Submissionof Matters to a Vote of Security Holders

 

                                Not applicable.

 

16

----

 

ITEM5                   OtherInformation

 

Certain shares, options andwarrants beneficially owned by our officers, directors, significantshareholders and employees are subject to an escrow agreement with theCommissioner of Commerce for the State of Minnesota.  The depositors entered into this escrow agreement as a conditionof the registration of the units sold in our initial public offering.  The term of escrow runs through November 20,2004.

 

Our prospectus reported thatsubstantially all of the shares, options and warrants held by the followingpersons were subject to the escrow agreement. As a result of changes in our state securities registrations subsequentto our initial public offering, fewer shares became subject to the escrowagreement.  The 1,664,845 shares subjectto the escrow agreement are reported below.

 
| *Name of Shareholder*                           |   | *Securities Subject to Escrow Agreement*                                                    |
|-------------------------------------------------|--------|---------------------------------------------------------------------------------------------|
| Paul K. Miller:                                 |   | 918,830 shares, an option to purchase 7,000 shares and warrants to  purchase 100,000 shares |
| Adel A. Mikhail, Ph.D.:                         |   | 83,500 shares and a  warrant to purchase 240,000 shares                                     |
| Graphite Enterprise Trust  PLC:                 |   | none                                                                                        |
| Graphite Enterprise Trust  Limited Partnership: |   | none                                                                                        |
| Salvador  Mercé Vives:                     |   | 3,020 shares                                                                                |
| Mercé V. Electromedicina S.L.:             |   | 6,215 shares                                                                                |
| Hilmar Siebecker:                               |   | none                                                                                        |
| N.G.C. Medical S.p.A.:                          |   | none                                                                                        |
| Richard A. DeWall, M.D.:                        |   | 34,280 shares and options  to purchase 14,500 shares                                        |
| Blair P. Mowery:                                |   | 15,000 shares                                                                               |
| Salvador  Mercé Cervelló:             |   | 5,000 shares and an option  to purchase 7,000 shares                                        |
| Allen R. Seck:                                  |   | 10,000 shares and warrants  to purchase 100,000 shares                                      |
| Norman Dann:                                    |   | 20,000 shares and an  option to purchase 7,000 shares                                       |
| Ronald M. Bosrock:                              |   | options to purchase 17,000  shares                                                          |
| George M. Wettstaedt:                           |   | 8,000 shares                                                                                |
| Gene E. Stobbs:                                 |   | 37,500 shares                                                                               |
| Shelley Johnson:                                |   | 31,000 shares                                                                               |

 

 

 

ITEM6                   Exhibits and Reportson Form 8-K

 

                                (a)           Exhibits

 

                                                None.

 

                                (b)           Reports on Form 8-K

 

The registrant filed noCurrent Reports on Form 8-K during the quarter ended January 31, 2002.

 

 

17

----

 

**SIGNATURES**

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
|                       | MedicalCV,  Inc. |
|----------------------------|------------------|
|                       |             |   |
|                       |             |   |
|                       |             |   |
| Date:  March 15, 2002 | By               | /s/  Blair P. Mowery |
|                       |             | Blair  P. Mowery |
|                       |             | President  and Chief Executive Officer |
|                       |             |   |
|                       | By               | /s/  Jules L. Fisher |
|                       |             | Jules  L. Fisher |
|                       |             | Chief  Financial Officer |

 

 

18

----