**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

**FORM 10-QSB/A**

 
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31,  2005** |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                      |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                   |

 

**CommissionFile Number 0-33295**

 

**MedicalCV, Inc.**

(Exact Name ofSmall Business Issuer as Specified in Its Charter)

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

 

**9725South Robert Trail**

**InverGrove Heights, Minnesota 55077**

**(651)452-3000**

(Address ofPrincipal Executive Offices and Issuer’s

Telephone Number,including Area Code)

 

Check whether theissuer:  (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

Yes  ý No  o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

Yes  o No  ý

 

As of September 13,2005, the issuer had outstanding 11,353,333 shares of common stock and 17,785shares of convertible preferred stock.

 

Transitional SmallBusiness Disclosure Format (check one)   oYes   ý No

 

 

----

 

**EXPLANATORY NOTE**

 

We arefiling this Quarterly Report on Form 10-QSB/A for the quarterly period endedJuly 31, 2005, to conform note 6 to the financial statements to disclose theamounts of our restructuring charges that have been included in discontinuedoperations consistent with the presentation contained in our Annual Report onForm 10-KSB/A for the fiscal year ended April 30, 2005, and to report amaterial weakness in our internal control over financial reporting.

 

Therevision to note 6 had no effect on our financial statements. This Form10-QSB/A amends only Part I, Items 1 and 3. The remaining items are unaffectedby this revision, have not been updated and are not reproduced in this Form10-QSB/A. In addition, this Form 10-QSB/A contains currently-datedcertifications from our Chief Executive Officer and Chief Financial Officer, asrequired by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. Thecertifications of our Chief Executive Officer and Chief Financial Officer areattached to this Form 10-QSB/A as Exhibits 31.1, 31.2, 32.1 and 32.2.

 

TABLE OF CONTENTS

 
| PART I       | FINANCIAL INFORMATION |                                                                                                                           |
|-------------------|-----------------------|--------------------------------------------------------------------------------------------------------------------------------|
|              |                  |                                                                                                                           |
|              | ITEM 1                | Financial Statements                                                                                                           |   |
|              |                  | Balance Sheets at July 31, 2005 (unaudited)  and April 30, 2005                                                      |   |
|              |                  | Statements of Operations for the  three-month periods ended July 31, 2005 (unaudited) and July 31,  2004 (unaudited) |   |
|              |                  | Statements of Cash Flows for the  three-month periods ended July 31, 2005 (unaudited) and July 31,  2004 (unaudited) |   |
|              |                  | Notes to Financial Statements                                                                                                  |   |
|              | ITEM 3                | Controls and Procedures                                                                                                        |   |
|              |                  |                                                                                                                           |   |
| SIGNATURES        |                  |                                                                                                                           |
| INDEX TO EXHIBITS |                  |                                                                                                                           |

 

2

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**PART I**

 

**FINANCIAL INFORMATION**

 

**ITEM 1****                                                        FINANCIALSTATEMENTS**

 

**MEDICALCV, INC.**

**BalanceSheets**

 
| ** **                                                                                                                                                                                                      | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                      | ** ** | **2005**          | ** ** | **2005**           | ** ** |
| ** **                                                                                                                                                                                                      | ** ** | **(unaudited)**   | ** ** | ** **         | ** ** |
| **ASSETS**                                                                                                                                                                                                      |       |              |       |               |       |
| Current  assets:                                                                                                                                                                                                |       |              |       |               |       |
| Cash  and cash equivalents                                                                                                                                                                                      |       | $                 | 8,883,804  |               | $          | 10,637,796 |   |
| Prepaid  expenses and other assets                                                                                                                                                                              |       | 191,384           |       | 199,978            |       |
| Current  assets of discontinued operations                                                                                                                                                                      |       | 432,182           |       | 875,648            |       |
| Total  current assets                                                                                                                                                                                           |       | 9,507,370         |       | 11,713,422         |       |
|                                                                                                                                                                                                            |       |              |       |               |       |
| Property,  plant and equipment, net                                                                                                                                                                             |       | 1,010,317         |       | 827,791            |       |
| Deferred  financing costs, net                                                                                                                                                                                  |       | 56,407            |       | 58,226             |       |
| Other  long-term assets                                                                                                                                                                                         |       | 30,798            |       | 30,798             |       |
| Non-current  assets of discontinued operations                                                                                                                                                                  |       | 367,799           |       | 367,799            |       |
| Total  assets                                                                                                                                                                                                   |       | $                 | 10,972,691 |               | $          | 12,998,036 |   |
|                                                                                                                                                                                                            |       |              |       |               |       |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIT**                                                                                                                                                                  |       |              |       |               |       |
| Current  liabilities:                                                                                                                                                                                           |       |              |       |               |       |
| Accounts  payable                                                                                                                                                                                               |       | $                 | 108,550    |               | $          | 399,588 |   |
| Current  portion of related party lease obligations                                                                                                                                                             |       | 314,005           |       | 311,155            |       |
| Accrued  expenses                                                                                                                                                                                               |       | 267,908           |       | 179,095            |       |
| Current  liabilities of discontinued operations                                                                                                                                                                 |       | 16,300            |       | 202,595            |       |
| Total  current liabilities                                                                                                                                                                                      |       | 706,763           |       | 1,092,433          |       |
| Fair  value of puttable warrants                                                                                                                                                                                |       | 21,538,671        |       | 27,992,609         |       |
| Related  party lease obligations, less current portion                                                                                                                                                          |       | 2,786,564         |       | 2,824,977          |       |
| Total  liabilities                                                                                                                                                                                              |       | $                 | 25,031,998 |               | $          | 31,910,019 |   |
|                                                                                                                                                                                                            |       |              |       |               |       |
| Commitments  and contingencies                                                                                                                                                                                  |       |              |       |               |       |
|                                                                                                                                                                                                            |       |              |       |               |       |
| 5%  series A redeemable convertible preferred stock; $.01 par value; 19,000  shares authorized; 17,785 and 18,035 shares issued and outstanding as of July 31,  2005 and April 30, 2005, respectively |       | —            |       | —             |       |
|                                                                                                                                                                                                            |       |              |       |               |       |
| Shareholders’  deficit:                                                                                                                                                                                    |       |              |       |               |       |
| Common  stock; $.01 par value; 95,000,000 shares authorized; 11,353,333 and  10,849,583 shares issued and outstanding as of July 31, 2005 and April 30,  2005, respectively                           |       | 108,533           |       | 108,496            |       |
| Additional  paid-in capital                                                                                                                                                                                     |       | 23,387,565        |       | 23,386,478         |       |
| Accumulated  deficit                                                                                                                                                                                            |       | (37,555,405       | )          | (42,406,957        | )          |
| Total  shareholders’ deficit                                                                                                                                                                               |       | (14,059,307       | )          | (18,911,983        | )          |
| Total  liabilities and shareholders’ deficit                                                                                                                                                               |       | $                 | 10,972,691 |               | $          | 12,998,036 |   |

 

The accompanying notesare an integral part of these financial statements.

 

3

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**MEDICALCV, INC.**

**Statements of Operations**

**(unaudited)**

 
|                                                 | ** ** | **Three months ended July 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|
|                                                 | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Operating expenses,  continuing operations:          |       |                                 |       |   |   |
| Sales and marketing                                  |       | $                                    | 105,217    |   | $ | — |   |
| General and  administrative                          |       | 763,329                              |       | 868,785 |   |
| Research and  Development                            |       | 403,225                              |       | — |   |
| Engineering and  regulatory                          |       | —                               |       | 312,210 |   |
| Total operating  expenses                            |       | 1,271,771                            |       | 1,180,995 |   |
| Loss from operations                                 |       | (1,271,771                           | )          | (1,180,995 | ) |
| Other income (expense):                              |       |                                 |       |   |   |
| Decrease in warrant  liability                       |       | 6,453,938                            |       | — |   |
| Interest income                                      |       | 68,962                               |       | 2,840 |   |
| Interest expense                                     |       | (79,036                              | )          | (180,420 | ) |
| Other income (expense)                               |       | 1,060                                |       | 312 |   |
| Total other income  (expense)                        |       | 6,444,924                            |       | (177,268 | ) |
|                                                 |       |                                 |       |   |   |
| Income (loss) from  continuing operations            |       | 5,173,153                            |       | (1,358,263 | ) |
| Income (loss) from  discontinued operations          |       | (102,969                             | )          | 103,607 |   |
| Net Income (loss)                                    |       | $                                    | 5,070,184  |   | $ | (1,254,656 | ) |
|                                                 |       |                                 |       |   |   |
| Basic and dilutive loss  to common shareholders      |       |                                 |       |   |   |
| Net income (loss)                                    |       | $                                    | 5,070,184  |   | $ | (1,254,656 | ) |
| Convertible preferred  stock dividends               |       | (218,633                             | )          | — |   |
| Net income (loss) to  common shareholders            |       | $                                    | 4,851,551  |   | $ | (1,254,656 | ) |
|                                                 |       |                                 |       |   |   |
| Earning (loss) per  share - Continuing operations    |       |                                 |       |   |   |
| Basic                                                |       | $                                    | 0.47       |   | $ | (0.14 | ) |
| Diluted                                              |       | (0.06                                | )          | (0.14 | ) |
|                                                 |       |                                 |       |   |   |
| Earning (loss) per  share - Discontinured operations |       |                                 |       |   |   |
| Basic                                                |       | (0.01                                | )          | 0.01 |   |
| Diluted                                              |       | (0.01                                | )          | 0.01 |   |
|                                                 |       |                                 |       |   |   |
| Earnings (loss) per  share                           |       |                                 |       |   |   |
| Basic                                                |       | 0.44                                 |       | (0.13 | ) |
| Diluted                                              |       | (0.07                                | )          | (0.13 | ) |
|                                                 |       |                                 |       |   |   |
| Weighted average shares  used                        |       |                                 |       |   |   |
| Basic                                                |       | 11,024,420                           |       | 9,489,670 |   |
| Diluted                                              |       | 21,393,743                           |       | 9,489,670 |   |

 

The accompanying notesare an integral part of these financial statements.

 

4

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**MEDICALCV,INC.**

**Statementsof Cash Flows**

**(unaudited)**

 
| ** **                                                                                                  | ** ** | **Three months ended July 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                                                      |       |                                 |       |   |   |
| Net income (loss)                                                                                           |       | $                                    | 5,070,184  |   | $ | (1,254,656 | ) |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities:                       |       |                                 |       |   |   |
| Depreciation                                                                                                |       | 56,248                               |       | 80,247 |   |
| Increase (decrease) in  warrant liability                                                                   |       | (6,453,938                           | )          | — |   |
| Provision for inventory  obsolescence                                                                       |       | —                               |       | 10,250 |   |
| Stock-based  compensation                                                                                   |       | —                               |       | 452 |   |
| Interest and other  income (expense) related to issued warrants and amortization of loan  origination costs |       | —                               |       | 14,294 |   |
| Changes in assets and  liabilities:                                                                         |       |                                 |       |   |   |
| Accounts receivable                                                                                         |       | —                               |       | 111,245 |   |
| Inventories                                                                                                 |       | —                               |       | (3,115 | ) |
| Prepaid expenses and  other assets                                                                          |       | 453,788                              |       | 52,535 |   |
| Accounts payable                                                                                            |       | (291,039                             | )          | (191,802 | ) |
| Accrued expenses                                                                                            |       | (97,482                              | )          | 363,692 |   |
| Net cash used in  operating activities                                                                      |       | (1,262,239                           | )          | (816,858 | ) |
|                                                                                                        |       |                                 |       |   |   |
| Cash flows from  investing activities:                                                                      |       |                                 |       |   |   |
| Purchase of property,  plant and equipment                                                                  |       | (238,682                             | )          | (7,129 | ) |
| Proceeds from the sale  of property, plant and equipment                                                    |       | —                               |       | (152,500 | ) |
| Net cash used in  investing activities                                                                      |       | (238,682                             | )          | (159,629 | ) |
|                                                                                                        |       |                                 |       |   |   |
| Cash flows from  financing activities:                                                                      |       |                                 |       |   |   |
| Payments of term debt                                                                                       |       | —                               |       | (500,000 | ) |
| Deferred financing  costs                                                                                   |       | —                               |       | 10,920 |   |
| Proceeds from the  issuance of common stock and warrants, net of offering costs                             |       | —                               |       | 2,002,907 |   |
| Preferred dividend paid                                                                                     |       | (218,633                             | )          | — |   |
| Proceeds from option  exercise                                                                              |       | 1,125                                |       | — |   |
| Principal payments  under related party lease obligations                                                   |       | (35,563                              | )          | (37,928 | ) |
| Net cash provided by  (used in) financing activities                                                        |       | (253,071                             | )          | 1,475,899 |   |
|                                                                                                        |       |                                 |       |   |   |
| Net increase (decrease)  in cash and cash equivalents                                                       |       | (1,753,992                           | )          | 499,412 |   |
| Cash and cash  equivalents at beginning of year                                                             |       | 10,637,796                           |       | 659,856 |   |
| Cash and cash  equivalents at end of period                                                                 |       | $                                    | 8,883,804  |   | $ | 1,159,268 |   |
|                                                                                                        |       |                                 |       |   |   |
| Supplemental disclosure  of cash flow information:                                                          |       |                                 |       |   |   |
|                                                                                                        |       |                                 |       |   |   |
| Cash paid for interest                                                                                      |       | $                                    | 79,035     |   | $ | 112,829 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

5

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**MEDICALCV,INC.**

 

**Notesto Financial Statements**

 

**(1)****                                 Basisof Financial Statement Presentation**

 

The accompanyingunaudited financial statements included herein have been prepared by MedicalCV, Inc.(the “Company”) in accordance with accounting principles generally accepted inthe United States of America for interim financial information and pursuant tothe rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant to suchrules and regulations.  These interim financial statements should beread in conjunction with the financial statements and the notes theretoincluded in the Company’s Annual Report on Form 10-KSB, as amended, forthe fiscal year ended April 30, 2005.

 

The balance sheet as of July 31,2005, the statements of operations for the three months ended July 31, 2005and 2004, and the statements of cash flows for the three months ended July 31,2005 and 2004 include, in the opinion of management, all adjustments,consisting solely of normal recurring adjustments, necessary for a fairpresentation of the financial results for the respective interim periods andare not necessarily indicative of results of operations to be expected for theentire fiscal year ending April 30, 2006.

 

**(2)****                                 GoingConcern**

 

The Company’s financialstatements for the quarter ended July 31, 2005, have been prepared on agoing concern basis, which contemplates the realization of assets andsettlement of liabilities and commitments in the normal course ofbusiness.  The Company has sustained losses and negative cash flows from operationsin recent years and expects these conditions to continue for the foreseeablefuture.  At July 31, 2005, the Company had an accumulated deficit of$37,555,405.  Although the Company raised funds through the sale ofconvertible preferred stock in the last quarter of fiscal year 2005, the levelof cash required for operations during fiscal year 2006 is difficult topredict, and management anticipates that development of its new products willrequire additional capital by October 2006.  These matters raisesubstantial doubt about the Company’s ability to continue as a goingconcern.  Management intends to seek additional debt or equity financingas it continues development of new products.  However, the Company may notbe able to obtain such financing on acceptable terms or at all.  If theCompany is unable to obtain such additional financing, it will be required tosignificantly revise its business plans and drastically reduce operatingexpenditures such that it may not be able to develop or enhance its products,gain market share in the United States of America or respond to competitivepressures or unanticipated requirements, which could seriously harm itsbusiness, financial position and results of operations.

 

The Company is subject torisks and uncertainties common to medical technology-based companies, includingrapid technological change, new product development and acceptance, actions ofcompetitors and regulators, dependence on key personnel and market penetration.

 

**(3)****                                 Stock-BasedCompensation**

 

The Company accounts forstock-based employee compensation arrangements in accordance with theprovisions of Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” and related interpretations and complies with thedisclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123,“Accounting for Stock-Based Compensation” and SFAS No. 148 “Accounting forStock-Based Compensation-Transition and Disclosure, an amendment of SFASStatement No. 123.”

 

In December 2004,the Financial Accounting Standards Board (FASB) issued a revised FAS No. 123,“Share-Based Payment (revised 2004)” (FAS No. 123R), which supersedes APB No. 25and amends FAS No. 123 to require companies to expense the value ofstock-based compensation plans. Additionally, FAS 123R, once adopted, disallowsthe use of the prospective transition method permitted by FAS No. 148. FAS123R is effective as of the beginning of the first interim or annual reportingperiod that begins after June 15, 2005 (i.e., the beginning of the Company’sfiscal year 2006).

 

6

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For purposes of the proforma disclosures below, the estimated fair value of the options is amortizedto expense over the options’ vesting period.  Had compensation cost forthe Company’s stock options been recognized based on the fair value at thegrant date consistent with the provisions of SFAS No. 123, the Company’snet income (loss) would have been adjusted to the pro forma amounts indicatedbelow:

 
| ** **                                                    | ** ** | **Three months ended July 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Net income (loss) to  common shareholders                     |       | $                                    | 4,851,551  |   | $ | (1,254,656 | ) |
| Less:  Pro forma  stock based employee compensation cost |       | (382,181                             | )          | (43,501 | ) |
|                                                          |       |                                 |       |   |   |
| Net income (loss) — pro  forma                           |       | $                                    | 4,469,370  |   | $ | (1,298,157 | ) |
|                                                          |       |                                 |       |   |   |
| Basic earnings (loss)  per share                              |       |                                 |       |   |   |
| As  reported                                                  |       | $                                    | .44        |   | $ | (.13 | ) |
| Pro  forma                                                    |       | .41                                  |       | (.13 | ) |
|                                                          |       |                                 |       |   |   |
| Diluted earnings (loss)  per share                            |       |                                 |       |   |   |
| As  reported                                                  |       | (.07                                 | )          | (.14 | ) |
| Pro  forma                                                    |       | (.09                                 | )          | (.14 | ) |

 

**(4)****                                 Earnings(loss) per Share**

 

Earnings (loss) per shareis computed under the provisions of SFAS No. 128, “Earnings Per Share.”  Basic earnings (loss) per common share iscomputed using net income (loss) and the weighted-average number of shares ofcommon stock outstanding.  Diluted earnings(loss) per share reflects the potential dilution of securities that could sharein the earnings of an entity.  Dilutednet loss per common share does not differ from basic net loss per common sharein the three-month period ended July 31, 2004 since the potentiallydilutive shares are anti-dilutive to net loss per share.  Potentiallydilutive shares excluded from the calculation of diluted net loss per sharerelated to outstanding stock options and warrants totaling 5,151,188 in 2005and outstanding stock options and warrants totaling 1,761,714 in 2004**.**

 

| ** **                                                                      | ** ** | **Three months ended July 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Net income (loss) to  common shareholders for basic (loss) earnings per share   |       | $                                    | 4,851,551  |   | $ | (1,254,656 | ) |
|                                                                            |       |                                 |       |   |   |
| Effect of dilutive  securities:                                                 |       |                                 |       |   |   |
|                                                                            |       |                                 |       |   |   |
| Decrease in warrant  liability                                                  |       | (6,453,938                           | )          | — |   |
|                                                                            |       |                                 |       |   |   |
| Net income (loss) to  common shareholders for diluted (loss) earnings per share |       | $                                    | (1,602,387 | ) | $ | (1,254,656 | ) |

 

| ** **                                                     | ** ** | **Three months ended July 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Weighted average shares  for basic (loss) earnings per share   |       | 11,024,420                           |       | 9,489,670 |   |
| Effect of dilutive  securities:                                |       |                                 |       |   |   |
| Shares  issuable under warrant agreements                      |       | 10,369,323                           |       | — |   |
| Weighted average shares  for diluted (loss) earnings per share |       | 21,393,743                           |       | 9,489,670 |   |

 

The Company restateddilutive earnings (loss) per share from continuing operations for the threemonths ended July 31, 2005, to correct a computational error.  The effect of the restatement was to decreasedilutive earnings per share from continuing operations by $0.30.  This change had no impact on net incomeavailable to common shareholders for the three months ended July 31, 2005, ortotal shareholder deficit at July 31, 2005.

 

**(5)****                                 DiscontinuedOperations**

 

On November 18,2004, the Company’s board of directors voted to authorize management to ceaseproduction of heart valves but to continue marketing the valves while exploringthe merits of possible strategic alternatives for the heart valve business,including, but not limited to, a joint venture with another party or the saleof the business.  Following exploration of a number of alternatives,management concluded in April 2005 that an orderly winding up of the valvebusiness was the Company’s best alternative.  On April 6, 2005, theCompany’s board authorized management to discontinue sales of heart valveseffective April 30, 2005, and to seek a buyer for the related productionequipment.

 

As a result of theCompany’s discontinuance of the heart valve business, the Company made adetermination during the fourth quarter of fiscal year 2005 that the remainingassets of the heart valve operations should be considered “held for sale”pursuant to SFAS No. 144, “Accounting for Impairment or Disposal ofLong-Lived Assets.”  (SFAS No. 144)  Pursuant to SFAS No. 144,the Company ceased depreciation of property and equipment held for sale andevaluated whether any of the long-lived assets of the discontinued heart valvebusiness were impaired.  Based upon the estimated selling prices of theseassets, management concluded that the carrying value of these assets was not

 

7

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impaired.  As of July 31,2005 and April 30, 2005, the carrying value of the remaining net assets ofthe heart valve business is reported as assets of discontinued operations onthe Company’s balance sheet.  In connection with this decision todiscontinue the sale of heart valves, the Company reduced the carrying value ofcertain excess inventories, resulting in a provision recorded during fiscalyear 2005 of $2,573,656.  This provision was included in the 2005 lossfrom discontinued operations.

 

Valve business revenueand loss before income taxes included in discontinued operations are asfollows:

 

| ** **                         | ** ** | **For Three Months Ended July 31,** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Revenues                           |       | $                                        | 338,333    |   | $ | 795,503 |   |
|                               |       |                                     |       |   |   |
| Income (loss) before  income taxes |       | $                                        | (102,969   | ) | $ | 103,607 |   |

 

The carrying amounts andmajor classes of the assets and liabilities, which are presented as assets andliabilities of discontinued operations on the accompanying balance sheet as of July 31,2005 and April 30, 2005, are as follows:

 
| ** **                                                                                                                  | ** ** | **July 31, 2005** | ** ** | **April 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                  |       |                   |       |                    |       |
| Accounts receivable,  net of allowance of $13,974 and $196,521 at July 31, 2005 and April 30,  2005, respectively |       | $                      | 364,913    |                    | $          | 557,291 |   |
| Inventories                                                                                                                 |       | —                 |       | 228,665                 |       |
| Prepaid expenses                                                                                                            |       | 67,269                 |       | 89,692                  |       |
| Total  current assets of discontinued operations                                                                            |       | $                      | 432,182    |                    | $          | 875,648 |   |
|                                                                                                                        |       |                   |       |                    |       |
| Property, plant and  equipment, net                                                                                         |       | $                      | 188,145    |                    | $          | 188,145 |   |
| Other long-term assets                                                                                                      |       | 179,654                |       | 179,654                 |       |
| Total  non-current assets of discontinued operations                                                                        |       | $                      | 367,799    |                    | $          | 367,799 |   |
|                                                                                                                        |       |                   |       |                    |       |
| **LIABILITIES**                                                                                                             |       |                   |       |                    |       |
| Accounts payable                                                                                                            |       | $                      | 6,000      |                    | $          | 192,295 |   |
| Accrued expenses                                                                                                            |       | 10,300                 |       | 10,300                  |       |
| Total  current liabilities of discontinued operations                                                                       |       | $                      | 16,300     |                    | $          | 202,595 |   |
|                                                                                                                        |       |                   |       |                    |       |
| Net assets of  discontinued operations                                                                                      |       | $                      | 783,681    |                    | $          | 1,040,852 |   |

 

**(6)****                                 Restructuringand Severance Charges**

 

In the quarter ended July 31,2004 (the first quarter of fiscal year 2005), the Company restructured itsexecutive management team, resulting in the termination of two employees, whichresulted in a charge of approximately $182,000 to general and administrativeexpenses.  This charge represented the amount of future severance paymentsdue to these former employees.  During the quarter ended October 31,2004, the Company terminated an additional five employees in an effort toreduce operating costs.  This restructuring resulted in additionalseverance costs of approximately $46,000, of which $20,000 is included ingeneral and administrative expenses and $26,000 (restated) is included indiscontinued operations. In the quarter ended January 31, 2005, theCompany terminated an additional eleven employees resulting in approximately $48,000of severance costs, of which $16,000 is included in general and administrativeexpenses and $32,000 (restated) is included in discontinued operations. Duringthe quarter ended April 30, 2005, the Company terminated two additionalemployees resulting in approximately $32,000 of severance costs charged togeneral and administrative expenses. During the quarter ended July 31,2005 (the first quarter of fiscal year 2006) the Company entered into aseparation agreement with an employee, resulting in a charge to general andadministrative expense for severance pay of $40,382. The Company expects to payall amounts due to these former employees by September 30, 2005.  Asof July 31, 2005, $27,802 remained accrued but not paid.

 

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| ** **                                           | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|-----------|------------|
| Restructuring charges  fiscal year 2005              |       | $         | 308,000    |   |
| Cash usage fiscal year  2005                         |       | (283,166  | )          |
| Balance as of April 30,  2005                   |       | $         | 24,834     |   |
| Severance charges first  quarter of fiscal year 2006 |       | 40,382    |       |
| Cash usage first  quarter of fiscal year 2006        |       | (37,414   | )          |
| Balance as of July 31,  2005                    |       | $         | 27,802     |   |

 

**(7)****                                 EquitySale**

 

During the fourth quarterof fiscal year 2004 and the first quarter of fiscal year 2005, the Companycompleted the private sale of 2,730,763 units for $1.47 per unit.  Eachunit consisted of one share of common stock and one five-year warrant topurchase a common share for $1.60 per share.  Proceeds from the offering,net of offering costs of $452,892, were $3,561,330.  In addition to cashcommissions included in the offering costs, the Company issued to the private placementagent and finder five-year warrants to purchase an aggregate of 218,461 unitsat $1.8375 per unit.  As a result of anti-dilution adjustments through July 31,2005, these warrants are exercisable for 599,137 units at $0.67 per unit.

 

**PreferredStock**

 

On April 1, 2005,under the terms of a Securities Purchase Agreement with accredited investors,the Company issued 18,035 shares of 5% Series A Convertible PreferredStock to such investors, warrants for the purchase of 27,052,500 shares ofcommon stock to such investors exercisable at $0.50 per share, and warrants forthe purchase in the aggregate of 1,635,960 shares of common stock to theplacement agent and finder exercisable at $0.50 per share. These warrants havea term of five years. The preferred stock, which is non-voting, has astated value of $1,000 and accrues cumulative dividends at a rate of 5 percentof this stated value annually.  Dividends are payable quarterly but may,at the option of the Company, be added to the stated value rather than paid incash, if certain conditions are met.  Each share of preferred stock is convertibleinto the number of shares of common stock equal to the $1,000 stated valuedivided by $0.50, subject to anti-dilution adjustments.  As a result, the18,035 preferred shares sold may be converted into 36,070,000 shares of commonstock, subject to anti-dilution adjustments. As of July 31, 2005, there were 17,785 preferred sharesoutstanding.

 

In certain circumstances,the Company may have the option to require the preferred stockholders toconvert their shares into common stock.  In the event of a fundamentaltransaction, as defined, the preferred shareholders have the right to requirethe Company to redeem the preferred shares at their stated value, including anyaccrued but unpaid dividends.  In the event of certain defaults, thepreferred shareholders have the right to require the Company to redeem thepreferred shares at 110 percent their stated value, including any accrued butunpaid dividends.  As a result of these redemption provisions, thecarrying value of these preferred shares is considered to be redeemable and isreported as a “mezzanine” instrument on the Company’s balance sheet beginningon April 30, 2005.  The aggregate liquidation value of theseredeemable preferred shares at July 31, 2005 was $17,959,116. However, the carrying value of this redeemable preferred stock is zero, net ofa discount associated with the warrants issued to the shareholders, theplacement agent and the finder, as described below.

 

The Company is requiredto register the common shares underlying the preferred stock conversion optionand the purchaser warrants.  If the Company does not meet certainregistration deadlines, the preferred stockholders will be entitled toliquidated damages, as defined.  In the event of a fundamentaltransaction, as defined, the warrants issued to the preferred shareholders, theplacement agent and the finder, all provide the warrant holders with the rightto put the warrants to the Company for cash in an amount equal to the fairvalue of the warrants, as determined using the Black Scholes option pricingmodel.  As a result of this put right, the warrants are reported at theirfair value as a liability on the Company’s balance sheet beginning on April 30,2005, and future changes in the fair value of the warrant will result incharges or benefits to the Company’s results of operations. The fair value ofthese warrants upon closing of the preferred stock sale was $22,271,047. Because the fair value of these warrants at April 30, 2005, exceeded theproceeds received in the preferred stock and warrant issuances, the excess ofthe fair value of the warrants over the proceeds received (including theconverted debt) was recognized as an interest charge of 

 

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$4,266,047 uponclosing.  During the period between closing and April 30, 2005, thefair value of these warrants increased to $27,992,609.  The Companyreported this $5,721,562 increase in fair value as other expense in the fourthquarter of fiscal year 2005. During the quarter ended July 31, 2005, thefair value of these warrants decreased to $21,538,671.  The Companyreported this $6,453,938 decrease in fair value as a decrease in warrantliability in other income (expense) in the first quarter of fiscal year 2006.

 

The Company obtainedgross cash proceeds of $13,603,000 at the closing (net of $30,000 in legal feeswhich were withheld by the lead investor).  The Company also converted$4,402,000 of indebtedness into the above-referenced securities.  TheCompany incurred cash offering costs of $817,980, including agent commissions,a finder’s fee and out-of-pocket expense reimbursements to certain thirdparties.  The Company also paid legal and administrative expenses of $18,086incurred by PKM Properties, LLC (“PKM”) in this transaction.  PKM is an entity controlled by Paul K.Miller.  Mr. Miller serves on our Board of Directors and is ourlargest shareholder.

 

**(8)****                                 SegmentInformation**

 

The Company views itsoperations and manages its business as one segment, the manufacturing andmarketing of cardiothoracic surgery devices.  Factors used to identify theCompany’s single operating segment include the organizational structure of theCompany and the financial information available for evaluation by chiefoperating decision maker.

 

The following tablesummarizes net sales by geographic area:

 

| ** **    | ** ** | **Three Months Ended July 31,** | ** ** |
|---------------|------------|--------------------------------------|------------|
| ** **    | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **    | ** ** | **(unaudited)**                      | ** ** |
| Europe        |       | $                                    | 279,435    |   | $ | 353,316 |   |
| Middle East   |       | —                               |       | 257,332 |   |
| Far East      |       | —                               |       | 7,703 |   |
| United States |       | 58,898                               |       | 168,548 |   |
| Other         |       | —                               |       | 8,604 |   |
| **TOTALS**    |       | $                                    | 338,333    |   | $ | 795,503 |   |

 

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**ITEM 3****                                                        CONTROLSAND PROCEDURES**

 

**Restatement ofPreviously Issued Financial Statements**

 

As described in Note 16 to the financial statementsset forth in our Annual Report on Form 10-KSB/A for the year ended April 30,2005, we identified errors in the presentation of our previously issuedstatements of operations. As a result of these errors, we have restated ourfinancial statements for the the quarter ended October 31, 2004 and the yearended April 30, 2005.

 

**Evaluation of Disclosure Controls andProcedures**

 

We maintain disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934, as amended (the “Exchange Act”)) that are designed to ensure thatinformation required to be disclosed by us in the reports we file or submitunder the Exchange Act is recorded, processed, summarized, and reported, withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms and that such information is accumulated and communicated to ourmanagement, including our principal executive officer and principal financialofficer, to allow timely decisions regarding required disclosure.

 

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofour company’s disclosure controls and procedures as of the end of the periodcovered in this Quarterly Report on Form 10-QSB/A. Based on this evaluation andbecause of the material weakness described below, our Chief Executive Officerand Chief Financial Officer have concluded that our disclosure controls andprocedures were not effective as of the end of the period covered in thisQuarterly Report on Form 10-QSB/A. To address the material weakness describedbelow, we have expanded our disclosure controls and procedures to includeadditional analysis and other procedures over the preparation of the financialstatements included in this report. Accordingly, our management has concludedthat the financial statements included in this report fairly present in allmaterial respects our financial position, results of operations and cash flowsfor the periods presented in conformity with generally accepted accountingprinciples.

 

**Material Weakness in Internal Control OverFinancial Reporting**

 

A material weakness is a control deficiency or acombination of control deficiencies that result in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. Our management has concludedthat, as of July 31, 2005, we did not maintain effective controls over thepreparation, review, presentation and disclosure of our statement ofoperations. Specifically, our controls did not prevent or detect the incorrectpresentation of certain expenses as part of continuing operations rather thanas part of discontinued operations, in accordance with generally acceptedaccounting principles. This control deficiency resulted in the restatement ofour financial statements for the quarter ended October 31, 2004 and the yearended April 30, 2005. Additionally, this control deficiency could result in a misstatementof the presentation and disclosure of our statement of operations that wouldresult in a material misstatement in our annual or interim financial statementsthat would not be prevented or detected. Accordingly, management determinedthat this control deficiency constitutes a material weakness in our internalcontrol over financial reporting as of July 31, 2005.

 

**Changes in Internal Control Over FinancialReporting**

 

There was no change in our internal control overfinancial reporting that occurred during our quarter ended July 31, 2005 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**Plan for Remediation of Material Weakness**

 

We have developed a plan to address this materialweakness that includes adding additional professional accounting personnel. Onan interim basis, we engaged a senior financial consultant in February 2006 toprovide an immediate expansion in our technical finance and accountingresources. This individual will be retained until additional accountingpersonnel have been employed. We will continue to assess the adequacy andappropriateness of our financial staff and adjust accordingly as changes in ourbusiness warrant. Management believes that our plan to address this materialweakness, when fully implemented, will remediate this material weakness.Although we are not certain when the material weakness will be remediated, wewill need a period of time over which to demonstrate that these controls arefunctioning appropriately to conclude that we have adequately remediated thematerial weakness.

 

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**SIGNATURES**

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to be signedon its behalf by the undersigned, thereunto duly authorized, on March 20, 2006.

 
|   | MedicalCV, Inc. |
|--------|----------------------|
|   |                 |   |
|   | By                   | /s/ Marc P. Flores |   |
|   |                 | Marc P. Flores |
|   |                 | President and Chief  Executive Officer |
|   |                 |   |
|   | By                   | /s/ John H. Jungbauer |   |
|   |                 | John H. Jungbauer |
|   |                 | Vice President, Finance  and   Chief Financial Officer |

 

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**INDEX TO EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                      |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                |       | Amended Non-Qualified Stock Option Agreement issued  to John H. Jungbauer, dated November 18, 2004. *                                                                                                                           |
|                |       |                                                                                                                                                                                                                                 |
| 10.2                |       | Lease Termination Agreement entered into by and  between PKM Properties, LLC and the Company, dated June 29, 2005. *                                                                                                            |
|                |       |                                                                                                                                                                                                                                 |
| 10.3                |       | Employment Agreement by and between Marc P. Flores  and the Company, dated August 9, 2005 (incorporated by reference to our Current  Report on Form 8-K/A, filed August 9, 2005 (File No. 000-33295)).           |
|                |       |                                                                                                                                                                                                                                 |
| 10.4                |       | Employment Agreement by and between John H.  Jungbauer and the Company, dated August 9, 2005 (incorporated by  reference to our Current Report on Form 8-K/A, filed August 9, 2005  (File No. 000-33295)).       |
|                |       |                                                                                                                                                                                                                                 |
| 10.5                |       | Form of Non-Qualified Stock Option Agreement  Issued to Executive Officers and Other Key Employees (incorporated by  reference to our Current Report on Form 8-K/A, filed August 9, 2005  (File No. 000-33295)). |
|                |       |                                                                                                                                                                                                                                 |
| 31.1                |       | Chief Executive Officer Certification pursuant to Exchange  Act Rule 13a-14(a).                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                 |
| 31.2                |       | Chief Financial Officer Certification pursuant to Exchange  Act Rule 13a-14(a).                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                 |
| 32.1                |       | Chief Executive Officer Certification pursuant to 18  U.S.C. Section 1350.                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                 |
| 32.2                |       | Chief Financial Officer Certification pursuant to 18  U.S.C. Section 1350.                                                                                                                                                      |

 

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* Previously filed.

 

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