** **

** **

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC 20549**

** **

**FORM 10-QSB**

**ý****     QUARTERLY REPORTUNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THEQUARTERLY PERIOD ENDED OCTOBER 31, 2002**

**o****     TRANSITION REPORTUNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

**CommissionFile Number  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 December 16, 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 public offering.

Transitional Small BusinessDisclosure Format (check one)  o Yes  ý No

 

 

 

----

 

**TABLE OF CONTENTS**

 
| PART I         | FINANCIAL INFORMATION |                                                                                                                                           |
|----------------|-----------------------|------------------------------------------------------------------------------------------------------------------------------------------------|
|           |                  |                                                                                                                                           |   |
|           | ITEM 1                | Financial  Statements                                                                                                                          |   |
|           |                  | Consolidated Balance Sheet  at October 31, 2002 (unaudited) and April 30, 2002                                                                 |   |
|           |                  | Consolidated  Statement of Operations for the three and six-month periods ended October 31,  2002 (unaudited) and October 31, 2001 (unaudited) |   |
|           |                  | Consolidated  Statement of Cash Flows for the six-month periods ended October 31, 2002 (unaudited)  and October 31, 2001 (unaudited)           |   |
|           |                  | Notes to  Consolidated Financial Statements                                                                                                    |   |
|           | ITEM 2                | Management’s Discussion and Analysis or Plan of  Operation                                                                                |   |
|           | ITEM 3                | Controls and Procedures                                                                                                                        |   |
|           |                  |                                                                                                                                           |   |
| 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     |                  |                                                                                                                                           |
| CERTIFICATIONS |                  |                                                                                                                                           |

 

----

 

**PART I**

**ITEM 1   FINANCIAL STATEMENTS**

**MEDICALCV,INC.**

**Consolidated Balance Sheet**

(unaudited)

 
|                                                                                                 |   | **October  31, 2002** |      | **April 30,  2002** |   |
|------------------------------------------------------------------------------------------------------|--------|----------------------------|-----------|---------------------|--------|
| **ASSETS**                                                                                           |   |                       |      |                |   |
| Current assets:                                                                                      |   |                       |      |                |   |
| Cash and cash equivalents                                                                            |   | $                          | 210,032   |                | $      | 2,781,675 |   |
| Trade and accounts receivable, net                                                                   |   | 965,845                    |      | 1,258,616           |   |
| Inventories                                                                                          |   | 2,785,066                  |      | 2,322,535           |   |
| Prepaid expenses and other assets                                                                    |   | 143,267                    |      | 78,993              |   |
| Total current assets                                                                                 |   | 4,104,210                  |      | 6,441,819           |   |
|                                                                                                 |   |                       |      |                |   |
| Property, plant and equipment, net                                                                   |   | 1,498,115                  |      | 1,575,153           |   |
| Deferred financing costs, net                                                                        |   | 8,916                      |      | 72,860              |   |
| Other assets                                                                                         |   |                       |      | 1,394               |   |
| Total assets                                                                                         |   | $                          | 5,611,241 |                | $      | 8,091,226 |   |
|                                                                                                 |   |                       |      |                |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                        |   |                       |      |                |   |
| Current liabilities:                                                                                 |   |                       |      |                |   |
| Current portion of long-term debt                                                                    |   | $                          | 2,540,118 |                | $      | 2,542,460 |   |
| Current portion of capital lease obligations                                                         |   | 49,782                     |      | 59,854              |   |
| Accounts payable                                                                                     |   | 753,167                    |      | 589,520             |   |
| Accrued expenses                                                                                     |   | 552,417                    |      | 491,760             |   |
| Total current liabilities                                                                            |   | 3,895,484                  |      | 3,683,594           |   |
|                                                                                                 |   |                       |      |                |   |
| Long-term debt, less current portion                                                                 |   | 314,230                    |      | 339,523             |   |
| Capital lease obligations less current portion                                                       |   | 18,339                     |      | 42,069              |   |
| Total liabilities                                                                                    |   | 4,228,053                  |      | 4,065,186           |   |
|                                                                                                 |   |                       |      |                |   |
| 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  shares issued and outstanding |   | 78,438                     |      | 78,438              |   |
| Additional paid-in capital                                                                           |   | 16,382,811                 |      | 16,362,050          |   |
| Deferred stock-based compensation                                                                    |   | (6,482                     | )         | (9,062              | )      |
| Accumulated deficit                                                                                  |   | (15,071,579                | )         | (12,405,386         | )      |
| Total shareholders’ equity                                                                      |   | 1,383,188                  |      | 4,026,040           |   |
| Total liabilities and shareholders’ equity                                                      |   | $                          | 5,611,241 |                | $      | 8,091,226 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

 

3

----

 

**MEDICALCV, INC.**

**ConsolidatedStatement of Operations**

**(unaudited)**

 
|                                                          |   | **Three  Months Ended October 31,** |       | **Six Months  Ended October 31,** |   |
|---------------------------------------------------------------|--------|-------------------------------------|------------|-----------------------------------|--------|
|                                                          |   | **2002**                            |       | **2001**                          |   | **2002** |   | **2001** |   |
| Net sales                                                     |   | $                                   | 425,769    |                              | $      | 830,864 |   | $ | 1,244,101 |   | $ | 1,472,215 |   |
| Cost of goods sold                                            |   | 391,657                             |       | 462,214                           |   | 869,526 |   | 900,563 |   |
| Gross profit                                                  |   | 34,112                              |       | 368,650                           |   | 374,575 |   | 571,652 |   |
| Operating expenses:                                           |   |                                |       |                              |   |   |   |   |   |
| Sales and marketing                                           |   | 653,263                             |       | 487,129                           |   | 1,408,850 |   | 936,972 |   |
| General and administrative                                    |   | 553,778                             |       | 362,125                           |   | 1,091,369 |   | 761,525 |   |
| Engineering and regulatory                                    |   | 300,554                             |       | 163,373                           |   | 501,671 |   | 370,497 |   |
| Total operating expenses                                      |   | 1,507,595                           |       | 1,012,627                         |   | 3,001,890 |   | 2,068,994 |   |
| Loss from operations                                          |   | (1,473,483                          | )          | (643,977                          | )      | (2,627,315 | ) | (1,497,342 | ) |
| Other (expense) income:                                       |   |                                |       |                              |   |   |   |   |   |
| Interest expense                                              |   | (38,643                             | )          | (57,331                           | )      | (77,623 | ) | (99,537 | ) |
| Interest income                                               |   | 1,642                               |       | 16,055                            |   | 12,661 |   | 16,197 |   |
| Other income                                                  |   | 10,157                              |       | 6,775                             |   | 26,084 |   | 21,414 |   |
| Total other expense                                           |   | (26,844                             | )          | (34,501                           | )      | (38,878 | ) | (61,926 | ) |
|                                                          |   |                                |       |                              |   |   |   |   |   |
| Net loss                                                      |   | $                                   | (1,500,327 | )                                 | $      | (678,478 | ) | $ | (2,666,193 | ) | $ | (1,559,268 | ) |
| Basic and diluted net loss per share                          |   | $                                   | (.19       | )                                 | $      | (.11 | ) | $ | (.33 | ) | $ | (.25 | ) |
|                                                          |   |                                |       |                              |   |   |   |   |   |
| Shares used in computing basic and diluted net loss per share |   | 7,843,834                           |       | 6,343,834                         |   | 7,843,834 |   | 6,343,834 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

 

 

4

----

 

**MEDICALCV, INC.**

 

**Consolidated Statement of Cash Flows**

(unaudited)

 
|                                                                                                       |   | **Six Months  Ended October 31,** |       |
|------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                                       |   | **2002**                          |       | **2001** |   |
| Cash flows from operating activities:                                                                      |   |                              |       |   |   |
| Net loss                                                                                                   |   | $                                 | (2,666,193 | ) | $ | (1,559,268 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:                               |   |                              |       |   |   |
| Depreciation                                                                                               |   | 174,806                           |       | 147,523 |   |
| Amortization                                                                                               |   | 63,944                            |       | 52,651 |   |
| Provision for doubtful accounts                                                                            |   | 80,793                            |       | 113,623 |   |
| Return of inventory                                                                                        |   | (92,000                           | )          |   |   |
| Provision for inventory obsolescence                                                                       |   | 116,028                           |       | 24,445 |   |
| Warrant expense related to purchase of technology                                                          |   | 12,361                            |       |   |   |
| Stock-based compensation                                                                                   |   | 10,980                            |       | 18,754 |   |
| Accretion of discount on convertible subordinated bridge notes                                             |   |                              |       | 5,094 |   |
| Changes in assets and liabilities:                                                                         |   |                              |       |   |   |
| Accounts receivable                                                                                        |   | 211,978                           |       | (85,405 | ) |
| Inventories                                                                                                |   | (486,559                          | )          | (186,767 | ) |
| Prepaid expenses and other assets                                                                          |   | (62,880                           | )          | (123,880 | ) |
| Accounts payable                                                                                           |   | 163,647                           |       | 180,751 |   |
| Accrued expenses                                                                                           |   | 60,657                            |       | 109,584 |   |
| Net cash used in operating activities                                                                      |   | (2,412,438                        | )          | (1,302,895 | ) |
|                                                                                                       |   |                              |       |   |   |
| Cash flows from investing activities:                                                                      |   |                              |       |   |   |
| Purchase of property, plant and equipment                                                                  |   | (97,768                           | )          | (45,006 | ) |
| Loan to UROPACE                                                                                            |   |                              |       | (41,000 | ) |
| Net cash used in investing activities                                                                      |   | (97,768                           | )          | (86,006 | ) |
|                                                                                                       |   |                              |       |   |   |
| Cash flows from financing activities:                                                                      |   |                              |       |   |   |
| Borrowings on bank line of credit                                                                          |   |                              |       | 1,522,305 |   |
| Borrowing on long-term debt                                                                                |   |                              |       | 500,000 |   |
| Principal payments on bank line of credit                                                                  |   |                              |       | (475,000 | ) |
| Principal payments on other long-term debt                                                                 |   | (27,635                           | )          | (25,033 | ) |
| Deferred financing costs                                                                                   |   |                              |       | (61,115 | ) |
| Principal payments under capital lease obligations                                                         |   | (33,802                           | )          | (26,849 | ) |
| Issuance of warrants                                                                                       |   |                              |       | 500 |   |
| Net cash (used in) provided by financing activities                                                        |   | (61,437                           | )          | 1,434,808 |   |
|                                                                                                       |   |                              |       |   |   |
| Net decrease in cash and cash equivalents                                                                  |   | (2,571,643                        | )          | 45,907 |   |
| Cash and cash equivalents at beginning of year                                                             |   | 2,781,675                         |       | 111,977 |   |
| Cash and cash equivalents at end of period                                                                 |   | $                                 | 210,032    |   | $ | 157,884 |   |
|                                                                                                       |   |                              |       |   |   |
| Non-cash investing and financing activities                                                                |   |                              |       |   |   |
| Land special assessments due in future years, net                                                          |   |                              |       | 54,000 |   |
| Discount on convertible subordinated bridge notes related to  warrants’ beneficial conversion feature |   |                              |       | 497,125 |   |
|                                                                                                       |   |                              |       |   |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

 

 

5

----

 

 

**MEDICALCV, INC.**

 

**Notes to Consolidated Financial Statements**

**(1)   Basis of FinancialStatement Presentation**

 

Theaccompanying unaudited consolidated financial statements included herein havebeen prepared by MedicalCV, Inc. (the Company) in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and pursuant to the rules and regulations of theSecurities and Exchange Commission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed or omittedpursuant to such rules and regulations. These consolidated interim financial statements should be read inconjunction with the consolidated financial statements and the notes theretoincluded in the Company’s Annual Report on Form 10-KSB for the fiscal yearended April 30, 2002.

 

Theconsolidated balance sheet as of October 31, 2002, the consolidated statementof operations for the three and six months ended October 31, 2002 and 2001, andthe consolidated statement of cash flows for the six months ended October 31,2002 and 2001 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, 2003.

 

Certainamounts previously reported have been reclassified to conform to their October31, 2002 presentation.  Thesereclassifications had no effect on net loss, cash flow or shareholders’ equityas previously reported.

 

**(2)           GoingConcern**

 

The Company’s consolidatedfinancial statements for the quarter ended October 31, 2002 have been preparedon a going concern basis, which contemplates the realization of assets andsettlement of liabilities and commitments in the normal course ofbusiness.  The Company has sustainedlosses and negative cash flows from operations in recent years and expectsthese conditions to continue for the foreseeable future.  At October 31, 2002, the Company had anaccumulated deficit of $15,071,579, and has insufficient funds to meet therequirements of its revolving line of credit, which now matures in February2003.  These matters raise substantialdoubt about the Company’s ability to continue as a going concern.

 

In November 2002, thematurity date of the Company’s revolving line of credit with Associated Bankwas extended to February 2003.  TheCompany also has obtained access to up to $500,000 of bridge financing.  The principle and interest on these notesare due and payable in 90 days of the note date or the date that the Companyrefinances its line of credit, whichever comes first.  On December 11, 2002, the Company also received a $60,000unsecured advance from an executive officer to fund working capitalrequirements.  The Company is currentlypursuing the refinancing of its revolving line of credit and is seeking otherfinancing to fund its operations and working capital requirements.  However, the Company cannot provide any assurancethat such additional financing will be available on terms acceptable to theCompany or at all.  The Company willneed to obtain additional capital prior to the maturity date of its revolvingline of credit to continue operations.

 

The Company is subject torisks and uncertainties common to rapidly growing medical technology-basedcompanies, including rapid technological change, dependence on one principalproduct, new product development and acceptance, actions of competitors,dependence on key personnel and United States market penetration.

 

**(3)           NetLoss 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 six-month periods endedOctober 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 3,616,390 and 1,650,640shares of the Company’s common stock at October 31, 2002 and 2001,respectively.

 

 

6

----

 

**(4)           Inventories**

 
|            |   | **October  31, 2002** |      | **April 30,  2002** |   |
|-----------------|--------|-----------------------|-----------|---------------------|--------|
|            |   | **(unaudited)**       |      | **(unaudited)**     |   |
| Raw materials   |   | $                     | 729,012   |                | $      | 436,855 |   |
| Work-in-process |   | 697,966               |      | 551,561             |   |
| Finished goods  |   | 1,358,088             |      | 1,334,119           |   |
|            |   | $                     | 2,785,066 |                | $      | 2,322,535 |   |

 

**(5)           Returnof Inventory**

 

        During the quarter ended July 31, 2002,the Company obtained inventories from two former international distributorswith an original cost to the Company of approximately $92,000.  The heart valves were sold to thesecustomers during fiscal year 2000 and the first half of fiscal year 2001.  Due to financial difficulties experienced bythese distributors, the Company provided allowances for the remaininguncollected accounts receivable balances in fiscal years 2001 and 2002.  The Company did not anticipate the return ofthese products at the time the uncollectible accounts were established.  Upon obtaining title to the heart valvesfrom these former distributors during the quarter ended July 31, 2002, theCompany increased its inventories and reduced cost of goods sold for itsoriginal cost of $92,000.

 

**(6)           NewAccounting Pronouncements**

 

In May 2002, the FinancialAccounting Standards Board (FASB) issued Statement of Financial AccountingStandards (SFAS) No. 145, “Rescission of SFAS Nos. 4, 44 and 64, Amendments toSFAS No. 13, and Technical Corrections as of April 30, 2002.”  The new standard amends existingauthoritative pronouncements to make various corrections, clarifying meanings,or describe their applicability under changed conditions.  SFAS No. 145 was adopted by the Companyeffective May 1, 2001.  The adoption ofSFAS No. 145 required the classification of the loss on early extinguishment ofconvertible subordinated bridge notes as a component of net loss from recurringoperations for the year ended April 30, 2002, versus being classified as anextraordinary item.

 

In June 2002, the FASB issuedSFAS No. 146, “Accounting for Exit or Disposal Activities”.  The new statement addresses the accountingfor costs associated with exit or disposal activities.  The provisions of the statement will beeffective for disposal activities initiated after December 31, 2002.  The adoption of SFAS No. 146 is not expectedto have a material impact on the Company’s financial position or results ofoperations.

 

**(7)           SegmentInformation**

 

TheCompany views its operations and manages its business as one segment, the manufacturingand marketing of mechanical heart valves. Factors used to identify the Company’s single operating segment includethe organizational structure of the Company and the financial informationavailable for evaluation by chief operating decision maker.

 

Thefollowing table summarizes net sales by geographic area:

 
|        |   | **Three  Months Ended October 31,** |        | **Six Months  Ended October 31,** |   |
|-------------|--------|-------------------------------------|-------------|-----------------------------------|--------|
|        |   | **2002**                            |        | **2001**                          |   | **2002** |   | **2001** |   |
| Europe      |   | $                                   | 239,244     |                              | $      | 503,998 |   | $ | 683,407 |   | $ | 944,840 |   |
| South Asia  |   | 99,190                              |        | 142,360                           |   | 223,290 |   | 256,740 |   |
| Middle East |   | 74,000                              |        | 41,184                            |   | 248,667 |   | 85,371 |   |
| Far East    |   | (25,125                             | )           | 132,362                           |   | 17,702 |   | 174,304 |   |
| Other       |   | 38,460                              |        | 10,960                            |   | 71,035 |   | 10,960 |   |
|        |   |                                |        |                              |   |   |   |   |   |
| **TOTALS**  |   | **$**                               | **425,769** | ** **                        | **$**  | **830,864** | ** ** | **$** | **1,244,101** | ** ** | **$** | **1,472,215** |   |

 

 

7

----

 

 

**(8)           SubsequentEvents**

 

In November 2002, the Company obtained a90-day extension on its revolving line of credit.  The line now matures on February 23, 2003, and bears interest at6.5 percent per year.

 

The Company also obtained temporary bridgefinancing for up to $500,000 from Paul K. Miller, a principal shareholder whoalso serves on the Board of Directors. In November 2002, the Company borrowed $275,000 under this agreement andissued warrants with a five-year term to purchase 16,500 shares of common stockat exercise prices ranging between $0.85 and $0.93 per share.  The principle and interest on these notesare due and payable in 90 days of the note date or the date that the Companyrefinances its line of credit, whichever comes first.  The bridge notes bear interest at 6 percent per year.

 

On December 11, 2002, the Company alsoreceived a $60,000 unsecured advance from an executive officer to fund workingcapital requirements.  This loan willbear interest at 6 percent per year and will be repaid within fourteen days.

 

 

8

----

 

**ITEM 2****            MANAGEMENT’S DISCUSSION AND ANALYSISOR PLAN OF OPERATION**

 

*The following discussion contains variousforward-looking statements within the meaning of Section 21E of the ExchangeAct.  Although we believe that, inmaking any such statement, our expectations are based on reasonableassumptions, any such statement may be influenced by factors that could cause actualoutcomes and results to be materially different from those projected.  When used in the following discussion, thewords**“anticipates,”“believes,”“expects,”“intends,”“plans,”“estimates” and similar expressions, as they relate to us or ourmanagement, are intended to identify such forward-looking statements.  These forward-looking statements are subjectto numerous risks and uncertainties that could cause actual results to differmaterially from those anticipated. Factors that could cause actual results to differ materially from thoseanticipated, certain of which are beyond our control, are setforth in this document and in our Annual Report on Form 10-KSB for the fiscalyear ended April 30, 2002, under the caption “Management’s Discussion andAnalysis or Plan of Operation-Cautionary Statement.”*

 

*Our actual results, performance orachievements could differ materially from those expressed in, or implied by,forward-looking statements. Accordingly, we cannot be certain that any of the events anticipated byforward-looking statements will occur or, if any of them do occur, what impactthey will have on us.  We caution you tokeep in mind the cautions and risks described**in this document and in our Cautionary Statement and to refrain from attributing unduecertainty to any forward-looking statements, which speak only as of the date ofthe document in which they appear.*

 

**Overview**

 

We manufactureand market mechanical heart valves known as the Omnicarbon Series 3000 andSeries 4000.  Our heart valves are usedto treat 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 2002, wederived 65.0 percent of our net sales from Europe.  As an innovator of heart valve technology, we have more than 30years of experience in developing, manufacturing and marketing five generationsof heart valves, and we have sold more than 135,000 heart valves worldwide.

 

On July 26, 2001,the FDA gave us notice of premarket approval to sell our Omnicarbon 3000 heartvalve in the U.S., the largest geographic market for mechanical heartvalves.  In anticipation of FDApremarket approval, we invested in our sales and marketing infrastructure,including adding sales management to our staff in fiscal year 2001 andrecruiting field sales representatives to call on domestic surgery centers inthe U.S.  While our sales of theOmnicarbon heart valve in the U.S. market have been below expectations to date,we believe that based upon ourOmnicarbon heart valve’s18 years of implantsin patients in Europe, we believe that we can establish a competitive positionin the mechanical heart valve industry in the U.S. and leverage this positioninto other critical areas of cardiothoracic surgery.  We also expect that our ability to market the Omnicarbon 3000heart valve in the U.S. will favorably affect our international sales, as manycardiovascular surgeons and others who make purchasing decisions are aware ofthe FDA’s rigorouspremarket approval process and consider it to be a validation of the safety andefficacy of medical devices.  Ourcompany had its first implant of the Omnicarbon 3000 heart valve in the U.S. inDecember 2001.

 

The worldwideheart valve market is dynamic and highly competitive.  In addition, technology and competitive offerings, such as newtissue heart valves, place increased pressure on us as we seek to increase ourmarket share and revenue.  We must raisesubstantial additional funding in order to continue to operate. For more information regarding theserisks, you should review our Cautionary Statement.

 

 

9

----

 

**QuartersEnded January 31, 2001 and 2002**

Our operating results,expressed as a percentage of total revenue, were as follows:

 
|                       |   | **Three  Months Ended October 31,** |   | **Six Months  Ended October 31,** |   |
|----------------------------|--------|-------------------------------------|--------|-----------------------------------|--------|
|                       |   | **2002**                            |   | **2001**                          |   | **2002** |   | **2001** |   |
| Net sales                  |   | 100.0                               | %      | 100.0                             | %      | 100.0 | % | 100.0 | % |
| Cost of goods sold         |   | 92.0                                | %      | 55.6                              | %      | 69.9 | % | 61.2 | % |
|                       |   |                                |   |                              |   |   |   |   |   |
| Gross profit               |   | 8.0                                 | %      | 44.4                              | %      | 30.1 | % | 38.8 | % |
|                       |   |                                |   |                              |   |   |   |   |   |
| Operating expenses:        |   |                                |   |                              |   |   |   |   |   |
|                       |   |                                |   |                              |   |   |   |   |   |
| Sales and marketing        |   | 153.4                               | %      | 58.6                              | %      | 113.3 | % | 63.6 | % |
| General and administrative |   | 130.1                               | %      | 43.6                              | %      | 87.7 | % | 51.7 | % |
| Engineering and regulatory |   | 70.6                                | %      | 19.7                              | %      | 40.3 | % | 25.2 | % |
|                       |   |                                |   |                              |   |   |   |   |   |
| Total operating expenses   |   | 354.1                               | %      | 121.9                             | %      | 241.3 | % | 140.5 | % |
|                       |   |                                |   |                              |   |   |   |   |   |
| Loss from operations       |   | (346.1                              | )%     | (77.5                             | )%     | (211.2 | )% | (101.7 | )% |
|                       |   |                                |   |                              |   |   |   |   |   |
| Other income (expense):    |   |                                |   |                              |   |   |   |   |   |
|                       |   |                                |   |                              |   |   |   |   |   |
| Interest expense           |   | (9.1                                | )%     | (6.9                              | )%     | (6.2 | )% | (6.8 | )% |
| Interest income            |   | 0.4                                 | %      | 1.9                               | %      | 1.0 | % | 1.1 | % |
| Other income               |   | 2.4                                 | %      | 0.8                               | %      | 2.1 | % | 1.5 | % |
|                       |   |                                |   |                              |   |   |   |   |   |
| Total other expense        |   | (6.3                                | )%     | (4.2                              | )%     | (3.1 | )% | (4.2 | )% |
|                       |   |                                |   |                              |   |   |   |   |   |
| Net loss                   |   | (352.4                              | )%     | (81.7                             | )%     | (214.3 | )% | (105.9 | )% |

 

 

**Critical Accounting Policies**

 

For discussion of critical accounting policiesand estimates, see our Annual Report on Form 10-KSB for the fiscal year endedApril 30, 2002.

 

**Results of Operations**

 

*Net Sales*.  Net sales in the second quarter of fiscal 2003decreased to $425,769 from $830,864 in the second quarter of the prior year.  The decrease was attributable primarily to lowerOmnicarbon unit sales to our two largest distributors in Europe and Asia asthey reduced their inventory levels in response to slow governmentreimbursement.

 

Net sales in the six-month period endedOctober 31, 2002, decreased to $1,244,101 from $1,472,215 in the same periodone year ago. The decrease in net sales in the six-month period is attributableto lower Omnicarbon unit sales to our two largest distributors in Europe andAsia, partially offset by increased unit sales in the Middle East.

 

In the first sixmonths of fiscal years 2003 and 2002, the vast majority of our sales were denominated in U.S.dollars.  Fluctuations in foreigncurrency exchange rates have not resulted in significant losses or gains onoutstanding trade accounts receivable. All of our distributors are required to pay for products in U.S.dollars, other than our Japanese distributor, which pays inJapanese yen, and oneEuropean customer, which pays in euros. We recognize that a strongU.S. dollar can adversely affect unit sales payable in currencies other thanU.S. dollars for our foreign distributors.

 

*Gross Profit.*  Gross profit as a percentageof net sales decreasedto 8.0 percent in thesecond quarteroffiscal 2003 from 48.2 percent in the secondquarter of the prior year.Fiscal year-to-date gross profit margins were 30.1 percent compared to 38.8percent in the same period last fiscal year. Gross profit margins in thecurrent quarter and year-to-date periods were negatively impacted by incurringhigher fixed costs on lower sales unit volumes, an unfavorable sales mix ininternational markets, and 

 

 

10

----

 

inventory obsolescence reserves. We have expended considerable resourcesin developing our new carbon manufacturing process technologies utilized inmanufacturing the Omnicarbon 4000 heart valve, which is currently sold outside the U.S. market. Our strategy is to obtain FDA approval of our proprietarypyrolytic carbonmanufacturing process in order to market the Omnicarbon 4000 in the U.S.  Due to its lower manufacturing cost, webelieve the Omnicarbon 4000 will generate significantly higher gross profitmargins when sold in the U.S. than the Omnicarbon 3000 heart valve.

 

*Sales and Marketing*.  Sales and marketingexpenses in the second quarter of fiscal 2003 were $653,263 or 153.4 percent of net sales compared to $487,129 or 58.6 percent of net sales in the second quarterof the prior year.  For the six-month periodending October 31, 2002, sales and marketing expenses totaled $1,408,850 or113.2 percent of net sales, compared to $936,972 or 63.6 percent of net salesin the same period last fiscal year. Theincreases in spendingrelated to expanded Omnicarbon marketing efforts in the U.S. and internationalmarkets.  Despite ourlower than expected sales to date in the U.S. market, we believe we canestablish a competitive position in the U.S. and leverage this position intoother areas of cardiothoracic surgery. Our overall marketing strategy is to promote the clinicalresults of the Omnicarbon heart valve and the technical strengths of ourcompany in designing and manufacturing mechanical heart valves.

 

*General and Administrative*.  General andadministrative expenses for the second quarter of fiscalyear 2003 were $553,778 or 130.1 percent of net sales, compared to $362,125 or 43.6 percent of net sales in the same period oneyear ago. For the six-month period ended October 31,2002, general andadministrative expenses totaled $1,091,369 or 87.7 percent of net sales,compared to $761,525 or 51.7 percent of net sales in the same period last year.The increasesfor the quarter andyear-to-date periods were primarily attributable to increased professional fees associated with operating as apublic company, and salary and related expenses associated with strengtheningthe executive management staff.

 

*Engineering and Regulatory*.  Engineering and regulatoryexpenses for the second quarterof fiscal 2003 were $300,554 or 70.6 percent of net sales compared to $163,373 or 19.7 percent of net sales in the second quarterof the prior fiscal year. For the six-month period ended October 31, 2002,engineering and regulatory expenses totaled $501,671 or 40.3 percent, comparedto $370,497 or 25.2 percent of net sales in the same period last year. The increase in the second quarter of this year was attributable toexpenses associated with the purchase and development of an annuloplastysurgical repair system and an IMA retractor device.

 

*Other (Expense) Income*.  Interest expense totaled$38,643 in thequarter ended October31, 2002, compared to $57,331 in the second quarter ofthe prior fiscal year. Fiscal year-to-dateinterest expense was $77,623, compared to $99,537 in the same period one yearago.

 

*Income Tax Provision*.  In light of our recenthistory of operating losses, we recorded a valuation allowance to fully offsetour deferred tax assets in fiscal year 2000.  We have continued to provide a full valuation allowance through the secondquarter of fiscal 2003 due to theinherent uncertainty of predicting the sufficiency of future taxable incomenecessary to realize our deferred tax assets.

 

*Loss from Operations*.  As of October31, 2002, we had an accumulated deficit of $15,071,579. We have incurred losses in each of the last six fiscal years.  Since 1994, we have invested in developing abileaflet heart valve, a proprietary pyrolytic carbon coating process and obtainingpremarket approval from the FDA to market our Omnicarbon 3000 heart valve inthe U.S.  Our strategy has been toinvest in technology to better position ourselves competitively once FDApremarket approval was obtained.  Weexpect cumulative net losses to continue into fiscal 2004 because of anticipated spending necessary tomarket the Omnicarbon 3000 heart valve in the U.S., and to establish and maintain a strongmarketing organization for domestic and foreign markets.

 

**Liquidityand Capital Resources**

 

Cash and cashequivalents decreasedto $210,032 at October31, 2002, from $2,781,675 at April 30, 2002. The decreasein cash in the current fiscal year was attributable primarily to funding operating losses and workingcapital requirements.  Net cash used in operating activities was $882,680 in the second quarter ended October 31, 2002, and $558,221 in the same period last year. Net cash used in operating activitiesfor the six-month period in fiscal 2003 was $2,412,438 compared to $1,302,895in the prior year.

 

Net cash used in operating activitiesincreased $324,459 in the quarter and $1,109,543 in the six-month period overthe same periods in the prior year due primarily to funding higher operatinglosses and increases in inventory . Inventories increased $254,189 in the current quarter and $486,559 inthe six-month period due primarily to carrying additional Omnicarbon 3000inventory to support the U.S. product launch.

 

 

11

----

 

Net cash used ininvesting activities was $97,768 and $86,006 for the six-monthperiods ended October 31, 2002 and 2001, respectively.  We invested $97,768 in property, plant, and equipment in thesix-month period ended October31, 2002, compared to $45,006 in the same period last fiscalyear.

 

Net cash used in financing activities was $61,437 in the six-month period ended October 31, 2002, and consisted ofprincipal payments on long-term debt and capital leases.  Inthe six-month period ended October 31, 2001, net cash provided by financingactivities was $1,434,808.  In that period, we borrowed an additional $1,522,305 on our bank line of credit,and $500,000 in convertible bridge notes, partially offset by $526,882 of principal payments on our bankline of credit, long-term debt, and capital leases combined with $61,115 indeferred financing costs.

 

From March 1992through July 2002, our primarysource of funding has been private sales of equity securities, which totaled$9,775,704 in gross cash proceeds.  Wehave also funded our operations through collateralized equipment financing term loans andequipment leases.  In addition, wefinanced our operations since fiscal year 2000 through a bank line of credit collateralized by our real estate, tangible andintangible property and a guarantee by a principal shareholder.  This line of credit, which wasscheduled to mature in November2002, has been extended to February 2003.  Amounts borrowedunder this line of credit currently bear interest at 6.5 percent per year.  Asof October 31, 2002, we had borrowed the maximumamount available of $2,500,000 under this line of credit.

 

As part of ourcredit agreement with Associated Bank Minnesota, we were required to maintain aminimum tangible net worth of not less than $3,000,000, measured as of the lastday of each fiscal quarter.  At April30, 2001, we failed to comply with the minimumtangible 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 were in compliance with our debt covenants as ofOctober 31, 2002.  However, absent an infusion of equitycapital during the quarter ending January 31, 2003, our tangible net worth willfall below the required $1,000,000 minimum.

 

As of October 31, 2002, wehad cash and cash equivalents of $210,032 and had borrowed the maximum$2,500,000 under our line of credit with Associated Bank.  In November 2002, the maturity date of ourrevolving line of credit was extended to February 2003.  In November 2002, we also obtained accessfor up to $500,000 of temporary financing from a principal shareholder intendedas a bridge loan for the next 90 days or until we are able to obtain permanentfinancing, whichever comes first.  Inaddition, we received a $60,000 unsecured advance from an executive officer inDecember 2002.  (See Notes toConsolidated Financial Statements Footnote (8) Subsequent Events.)

 

We are currently pursuing therefinancing of our revolving line of credit and are seeking other financing tofund our operations and working capital requirements.  However, we cannot provide any assurance that such additionalfinancing will be available on terms acceptable to the Company or at all.  We will need to obtain additional capitalprior to the maturity date of our revolving line of credit to continueoperations.  Further discussion of ourneed for immediate financing is included below.

 

Subject to the uncertainties surrounding ourneed for financing as described above, we expect to continue developing our business and to buildmarket 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.  The actual amounts and timing of our capital expenditures willvary significantlydepending upon the speed at which we are able to expand our distributioncapability in domestic and international markets and the availability offinancing.

 

We expect thatour operating losses and negative operating cash flow will continue in fiscalyears 2003 and 2004 as we expand our manufacturing capabilities, continueincreasing our corporate staff to support the U.S. roll-out of our Omnicarbon3000 heart valve, and add marketing programs domestically and internationallyto build awareness of and create demand for our Omnicarbon heart valves.  As described above, we will need to obtainadditional capital prior to the maturity date of ourrevolving line of credit to continue operations. We anticipate that we will need to raisebetween $2,000,000and $3,000,000 ofadditional equity or debt financing to fund operations and working capitalrequirements in thenext 1 to 6 months.  This is in addition to refinancing ourcurrent $2,500,000 of bank debt which matures in February 2003. We alsoanticipate the need to raise a minimum of $1,500,000 in new financing within 6to 9 months.  We may also seek todispose of certain assets and enter into a sale / leaseback arrangementinvolving our corporate headquarters and manufacturing facility as a means toimprove liquidity. We expect toface substantial difficulty in raising funds in the current market environmentand we have no commitments at this time to provide the required financing.  If we obtain $2,000,000 to$3,000,000 of additional financing and refinance our bank debt, we believe we willhavesufficient capacity to operate and fund the growth of our businessfor the remainder of fiscal year 2003.  Our capital requirements may vary dependingupon the timing and the success of the implementation of our business plan,regulatory, technological and competitive developments, or if:

 

 

12

----

 

•       operating losses exceed ourprojections,

 

•       our manufacturing and development costs or projectionsprove to be inaccurate,

 

•       we determine to license or develop additional technologies,

 

•       we experience substantial difficulty ingaining U.S. market acceptance ordelays in obtaining FDA clearance of our proprietary carbon coating process forheart valves sold inthe U.S. market, or

 

•       we make acquisitions.

 

We cannot assureyou that we will be able to raise sufficient capital on terms that we consideracceptable, or at all.  If we are unableto obtain adequate financingon acceptable terms, we may be unable to continue operations.

 

**Commitments and Contingent Liabilities**

 

*Sulzer Carbomedics.* In July 1998, we enteredinto a three-year supply agreement with Sulzer Carbomedics, the source ofcertain raw material components used in the manufacture of our Omnicarbon 3000heart valves.  The supply agreement wasextended for an additional two years in March 2001.  The agreement provides that we purchase a minimum number of rawmaterial units each calendar year through 2003.  Under the terms of the agreement, we are required to compensateSulzer Carbomedics for any purchase shortfalls up to a maximum of $200,000 peryear.  We have not met the minimumpurchase requirements for the past three calendar years.  In addition, we do not believe we will meetthe minimum purchase requirement for calendar year 2002.  As a result, we expensed $148,991 in fiscalyear 2002, and $108,174 in fiscal year 2001 related to these purchase shortfalls.  We expensed $13,075 in thesecond quarter of fiscal year 2003 and $50,000 in the second quarter last year.For the first six months of fiscal year 2003 we expensed $30,125 and weexpensed $100,000 in the comparable period last year. These charges were reflected in cost of goods sold.  Future purchase shortfalls could adverselyaffect our ongoing relationship with Sulzer Carbomedics.

 

*UROPACE*. In July 1995, we established a wholly owned subsidiary, UROPACE, Inc., tocommercialize technology for treating female urinary incontinence.  On November 1, 2000, we completed thespin-off of UROPACE to our existing shareholders.  The separation was effected by transferring from our company toUROPACE all assets, tangible and intangible, relating to the development offemale urinary incontinence technology. Our shareholders of record on September 15, 2000 received one share ofcommon stock of UROPACE for each 6.882 shares of our common stock they held onthat date.  The assets transferred toUROPACE had no book value at November 1, 2000, and the operations of UROPACEbefore the spin-off had no revenues and minimal expenses during fiscal year 2000and fiscal year 2001.  As a part of thisspin-off, we agreed to loan UROPACE up to $356,250 at a variable interestrate.  Principal and interest on thenote will be payable in installments equal to 5 percent of UROPACE’s future annual net sales until the noteand interest is paid in full.  At October31, 2002, we had loaned UROPACE $235,000.  Due to the development stage of UROPACE andthe uncertainty associated with the collection of these borrowings, we haverecorded an allowance for the entire balance of the loan, with thecorresponding expense included in other (expense) income in the ConsolidatedStatement of Operations.

 

*Bank Line ofCredit*.  Since fiscal year2000, we have financed our operations in part through a bank line of creditsecured by our real estate, tangible and intangible property and a guarantee bya principal shareholder.  This line ofcredit,which wasscheduled to mature on November23, 2002, has beenextended to February 23, 2003.  Amounts borrowed under this line of credit currently bear interest at a fixedrate of 6.5 percent per year.  As of October 31, 2002, we had borrowed the maximumamount available of $2,500,000 under this line of credit.

 

As part of our revolvingcredit agreement with Associated Bank Minnesota, we were formerly required tomaintain a minimum tangible net worth of not less than $3,000,000, measured asof the last day of each fiscal quarter. At April 30, 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.  With the net proceeds from our November 2001 IPO, we met our minimum tangible net worthrequirement through October 31, 2002. However, absent an infusion of equity capital during the quarter endedJanuary 31, 2003, our tangible net worth will fall below the required$1,000,000 minimum.

 

As of October 31, 2002, we were in compliance with allcovenants or other requirements set forth in our credit agreement.  We do not have any rating downgrade triggersthat would accelerate the maturity dates of our debt.  A downgrade in our credit rating could adversely affect our abilityto renew existing, or obtain access to new, credit facilities in the future andcould increase the cost of such facilities.

 

 

13

----

 

*Dakota Electric Association. *At October 31, 2002, we were indebted to Dakota ElectricAssociation in the principal amount of $156,348. Payments are due in monthly installmentsthrough May 2009, with interest at 5.75 percent, collateralized by our lightingequipment and rooftop air-conditioning units.

 

*Dakota County. *At October 31, 2002, we owed Dakota County for special land assessments with principaland interest due at 8 percent in semi-annual installments through May 2010.

 

*Operating and Capital Leases*.  We lease certainmanufacturing equipment under various operating and capital leases.  The operating leases expire at various datesthrough fiscal year 2003.  The capitallease terms extendintofiscal year 2004 with implicit interest rates ranging from 6.9 to 16.2percent.  The capital leases arecollaterized by the underlying equipment with a total original cost of $322,733.

 

*Clinical Studies. *We entered intoan agreement with several large non-U.S. hospitals to conduct clinical studiesregarding certain aspects of our Omnicarbon heart valve’s clinical performance.  The agreement runs through fiscal year2006.  In general, recipients ofclinical study payments are required to purchase our products in order to complete their studies.

 

*Consulting*. In November 2001, we entered into aseparation agreement and release with Adel A. Mikhail, Ph.D., who was ourfounder and served as our President and Chief Executive Officer from March 1992until June 15, 2001, when he retired. Dr. Mikhail continues 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.

 

*Bridge Financing.*  We obtained access to temporary bridge financing for up to$500,000 from Paul K. Miller, a principal shareholder who also serves on theBoard of Directors.  In November 2002,we borrowed $275,000 under this agreement. The principle and interest on these notes are due and payable in 90 daysof the note date or the date that we refinanced our line of credit, whichevercomes first.  On December 11, 2002, wealso received a $60,000 unsecured advance from an executive officer to fundworking capital requirements.  This loanwill be repaid out of refinancing proceeds.

 

 
| **Summary of Contractual Obligations** |   | **Payments Due By Period** |      |
|----------------------------------------|--------|----------------------------|-----------|
|                                   |   | **TOTAL**                  |      | **Less than One****Year** |   | **Two to Three****Years** |   | **Four or More****Years** |   |
| Sulzer Carbomedics                     |   | $                          | 139,642   |   | $ | 139,642 |   | $ |   | $ |   |
| UROPACE Loan                           |   | 121,250                    |      | 121,250 |   |   |   |   |   |
| Bank Line of Credit                    |   | 2,500,000                  |      | 2,500,000 |   |   |   |   |   |
| Dakota Electric Association (1)        |   | 188,178                    |      | 28,584 |   | 57,168 |   | 102,426 |   |
| Dakota County (1)                      |   | 261,120                    |      | 39,360 |   | 72,960 |   | 148,800 |   |
| Operating Leases                       |   | 6,581                      |      | 6,581 |   |   |   |   |   |
| Capital Leases (1)                     |   | 73,683                     |      | 56,454 |   | 17,229 |   |   |   |
| Clinical Studies                       |   | 422,380                    |      | 143,762 |   | 198,247 |   | 80,371 |   |
| Consulting                             |   | 57,000                     |      | 57,000 |   |   |   |   |   |
| Bridge Financing                       |   | 335,000                    |      | 335,000 |   |   |   |   |   |
| TOTAL CONTRACTUAL OBLIGATIONS          |   | $                          | 4,104,834 |   | $ | 3,427,633 |   | $ | 345,604 |   | $ | 331,597 |   |
|                                        |        |                            |           |  |  |  |  |  |  |  |  |  |  |

 

----

(1)           Future payments include interest due.

 

**Recent Accounting Pronouncements**

 

In May 2002, theFASB issued SFAS No. 145, “Rescissionof SFAS Nos. 4, 44, and 64, Amendments to SFAS No. 13, and TechnicalCorrections as of April 2002.”  The new statementamends existing authoritative pronouncements to make various technicalcorrections, clarify meanings, or describe their applicability under changedconditions.  SFAS No. 145 was adopted byus effective May 1, 2001.  The adoptionof SFAS No. 145 required the classification of the loss on early extinguishmentof convertible subordinated bridge notes as a component of net loss fromrecurring operations for fiscal year 2002 versus being classified as anextraordinary item.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit orDisposal Activities”. The new statement addresses the accounting for costsassociated with exit or disposal activities. The provisions of the statementwill be effective for disposal activities initiated after December 31, 2002.The adoption of SFAS No. 146 is not expected to have a material impact on ourfinancial position or results of operations.

 

 

14

----

 

**Qualitative and Quantitative Disclosuresabout Market Risk**

 

We develop ourproducts in the U.S. and market our products globally.  Because we continue to derive our revenueprimarily from sources outside of the U.S., our financial results could beaffected by many factors, such as changes in currency exchange rates or weakeconomic conditions in foreign markets. Substantially all of our sales are denominated in U.S. dollars.  A strengthening of the U.S. dollar couldmake our products less competitive in foreign markets.  We do not currently participate in anycurrency hedging activities to mitigate this risk.  We intend to assess the need to use financial instruments tohedge our exchange rate exposure on an ongoing basis.  Our interest income and expenses are sensitive to changes in thegeneral level of U.S. interest rates, particularly since our investments are inshort-term instruments and our long-term debt and revolving line of creditrequire interest payments calculated at variable rates.  Based on the current nature and levels ofour investments and debt, however, we believe that we currently have nomaterial market risk exposure.

 

Our generalinvesting policy is to limit market and credit risk and the risk of principalloss.  All liquid investments withoriginal maturities of three months or less are considered to be cashequivalents.

 

15

----

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

 

We maintain a system of disclosure controlsand procedures that is designed to provide reasonable assurance thatinformation, which is required to be disclosed, is accumulated and communicatedto management timely.  Within the 90-dayperiod prior to the filing date of this periodic report, we carried out anevaluation under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures areeffective in timely alerting them to material information relating to ourcompany required to be disclosed in our periodic filings with the SEC.

 

There were no significant changes in ourinternal controls or in other factors that could significantly affect ourinternal controls subsequent to the date of their most recent evaluation.

 

 

16

----

 

 

**PART II****OTHER INFORMATION**

 

ITEM1   Legal Proceedings

 

As of December 13, 2002, wewere not a party to any material litigation.

 

ITEM2   Changes in Securities and Use ofProceeds

 

(a)   Not applicable.

 

(b)   Not applicable.

 

(c)   On August 7, 2002, we issued to Segmed, Inc.,a Minnesota corporation, a seven-year warrant to purchase 100,000 shares of ourcommon stock at $2.95 per share.  Weissued this warrant in partial consideration of Segmed’s assignment of certainintellectual property to our company.

 

The foregoing issuance wasmade in reliance upon the exemption provided in Section 4(2) of the SecuritiesAct.  Such securities are restricted asto sale or transfer, unless registered under the Securities Act, and thecertificate representing such securities contains a restrictive legendpreventing sale, transfer or other disposition, unless registered under theSecurities Act.  In addition, therecipient of such securities received material information concerning ourcompany, including, but not limited to, our reports on Form 10-KSB and Form10-QSB, as filed with the Securities and Exchange Commission.  No underwriting commissions or discountswere paid with respect to the issuance of such securities.

 

(d)   Our Registration Statement on Form SB-2 (File No. 333-68884) wasdeclared effective by the SEC on November 20, 2001.

 

Afterdeducting the total expenses of $1,353,515 of our initial public offering, ournet proceeds were approximately $5,396,485. We estimate that we used$5,311,453of theinitial public offering net proceeds through October 31, 2002.  Such uses of proceeds represent: (1)$4,409,453 to fund sales and marketing initiatives, including general andadministrative expenses tosupport infrastructure and engineering andregulatory expenses to supportoperations,(2)$125,000 to fundworking capital requirements, (3) $237,000 to purchase capital equipment, (4) $500,000 to repay bridge notes, and (5) $40,000in advances to UROPACE.

 

ITEM 3   Defaults uponSenior Securities

 

Not applicable.

 

ITEM4   Submission of Matters to a Voteof Security Holders

 

Not applicable.

 

ITEM5   Other Information

 

Not applicable.

 

ITEM6   Exhibits and Reports on Form 8-K

 

                (a)           Exhibits

 

                                None.

 

                (b)           Reports on Form 8-K

 

Theregistrant filed no Current Reports on Form 8-K during the quarter endedOctober 31, 2002.

 

 

17

----

 

**SIGNATURES**

 

In accordance with the requirements of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|                          | MedicalCV, Inc. |
|-------------------------------|-----------------|
|                          |            |   |
|                          |            |   |
|                          |            |   |
| Date:  December 16, 2002 | By              | /s/ Blair P. Mowery |
|                          |            | Blair P. Mowery |
|                          |            | President and Chief  Executive Officer |
|                          |            |   |
| Date:  December 16, 2002 | By              | /s/ Jules L. Fisher |
|                          |            | Jules L. Fisher |
|                          |            | Chief Financial Officer |

 

 

 

18

----

 

**CERTIFICATIONS**

 

*CHIEFEXECUTIVE OFFICER CERTIFICATION PURSUANT TO RULE 13a-14*

 

                I, Blair P. Mowery,President and Chief Executive Officer of MedicalCV, Inc., certify that:

 

1.             I have reviewed this quarterlyreport on Form 10-QSB of MedicalCV, Inc.;

 

2.             Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.             Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and have:

 

a)             designed such disclosure controlsand procedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)            evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)             presented in this quarterly reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

 

a)             all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)            any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.             The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Dated: | December 16, 2002 |   |   | By     | /s/ Blair P. Mowery                    |
|--------|-------------------|--------|--------|--------|----------------------------------------|
|   |              |   |   |   | Blair P. Mowery                        |
|   |              |   |   |   | President and Chief  Executive Officer |

 

 

19

----

 

*CHIEFFINANCIAL OFFICER CERTIFICATION PURSUANT TO RULE 13a-14*

 

                I, Jules L. Fisher,Chief Financial Officer of MedicalCV, Inc., certify that:

 

1.             I have reviewed this quarterlyreport on Form 10-QSB of MedicalCV, Inc.;

 

2.             Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact or omitto state a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.             Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and have:

 

a)             designed such disclosure controlsand procedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)            evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)             presented in this quarterly reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent functions):

 

a)             all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)            any fraud, whether or not material,that involves management or other employees who have a significant role in the registrant’sinternal controls; and

 

6.             The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Dated: | December 16, 2002 | By     |   | /s/ Jules L. Fisher     |
|--------|-------------------|--------|--------|-------------------------|
|   |              |   |   | Jules L. Fisher         |
|   |              |   |   | Chief Financial Officer |

 

 

20

----

 

 

*CHIEFEXECUTIVE OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350*

 

In connection with the Quarterly Report of MedicalCV,Inc. (the “Company”) on Form 10-QSB for the quarterly period ended October 31,2002, as filed with the Securities and Exchange Commission on the date hereof(the “Report”), I, Blair P. Mowery, President and Chief Executive Officer ofthe Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.             the Report fully complies with therequirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;and

 

2.             the information contained in theReport fairly presents, in all material respects, the financial condition andresults of operations of the Company.

 

 
| Dated: | December 16, 2002 |   | By     |   | /s/ Blair P. Mowery                    |
|--------|-------------------|--------|--------|--------|----------------------------------------|
|   |              |   |   |   | Blair P. Mowery                        |
|   |              |   |   |   | President and Chief  Executive Officer |

 

 

 

 

 

*CHIEFFINANCIAL OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350*

 

In connection with the Quarterly Report of MedicalCV,Inc. (the “Company”) on Form 10-QSB for the quarterly period ended October 31,2002, as filed with the Securities and Exchange Commission on the date hereof(the “Report”), I, Jules L. Fisher, Chief Financial Officer of the Company,certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002, that:

 

1.             the Report fully complies with therequirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;and

 

2.             the information contained in theReport fairly presents, in all material respects, the financial condition andresults of operations of the Company.

 

 
| Dated: | December 16, 2002 |   | By     |   | /s/ Jules L. Fisher     |
|--------|-------------------|--------|--------|--------|-------------------------|
|   |              |   |   |   | Jules L. Fisher         |
|   |              |   |   |   | Chief Financial Officer |

 

 

 

21

----