Nordicus Partners 10Q 2008 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-28034

CardioTech International, Inc.

(Exact name of registrant as specified in its charter)

Massachusetts		04-3186647
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

229 Andover Street, Wilmington, Massachusetts		01887
(Address of principal executive offices)		(Zip Code)

(978) 657-0075

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Act, (Check one):

o Large Accelerated Filer

o Accelerated Filer

x Non-Accelerated Filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 10, 2007, 20,031,650 shares of the registrant’s Common Stock were outstanding.

CARDIOTECH INTERNATIONAL, INC.

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets at June 30, 2007 and March 31, 2007	3

	Condensed Consolidated Statements of Operations for the three months ended June 30, 2007 and 2006	4

	Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2007 and 2006	5

	Notes to Condensed Consolidated Financial Statements	6-14

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15-23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

Item 4.	Controls and Procedures	23

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24

Item 3.	Defaults Upon Senior Securities	24

Item 4.	Submission of Matters to a Vote of Security Holders	24

Item 5.	Other Information	24

Item 6.	Exhibits	24

	Signatures	25

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CardioTech International, Inc.
Condensed Consolidated Balance Sheets
(Unaudited - - in thousands, except share and per share amounts)

	June 30, 2007			March 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	2,602		$	4,066
Accounts receivable-trade, net of allowance of $61 and $93 as of June 30, 2007 and March 31, 2007, respectively	730			592
Accounts receivable-other	514			553
Inventories	565			453
Prepaid expenses and other current assets	63			115
Current assets held for sale	7,582			6,962
Total current assets	12,056			12,741
Property, plant and equipment, net	3,265			3,242
Goodwill	487			487
Other assets	3			3
Non-current assets held for sale	—			1,428
Total assets	$	15,811		$	17,901

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	388		$	432
Accrued expenses	333			452
Deferred revenue	352			198
Current liabilities held for sale	1,685			1,856
Total current liabilities	2,758			2,938
Non-current liabilities held for sale	—			116

Stockholders’ equity:
Preferred stock; $.01 par value; 5,000,000 shares authorized; 500,000 shares issued and none outstanding as of December 31, 2006 and March 31, 2006	—			—
Common stock; $.01 par value; 50,000,000 shares authorized; 20,031,650 shares issued and outstanding as of both June 30, 2007 and March 31, 2007, respectively	200			200
Additional paid-in capital	36,983			36,949
Accumulated deficit	(24,130		)	(22,302		)
Total stockholders’ equity	13,053			14,847
Total liabilities and stockholders’ equity	$	15,811		$	17,901

The accompanying notes are an integral part of these financial statements.

CardioTech International, Inc.

Condensed Consolidated Statements of Operations

(Unaudited - in thousands, except per share amounts)

	For The Three Months Ended June 30,
	2007			2006
Revenues:
Product sales	$	1,189		$	900
Royalties and development fees	498			289
	1,687			1,189
Cost of sales	1,012			1,333
Gross margin	675			(144		)

Operating expenses:
Research, development and regulatory	230			136
Selling, general and administrative	793			849
	1,023			985
Loss from operations	(348		)	(1,129		)

Interest and other income and expense:
Interest income	8			8
Other income (expense)	(1		)	—
Interest and other income, net	7			8
Equity in net loss of CorNova, Inc.	—			(203		)
Net loss from continuing operations	(341		)	(1,324		)
(Loss) income from discontinued operations	(309		)	114
Loss on sale of Gish	(1,178		)	—
Net (loss) income from discontinued operations	(1,487		)	114
Net loss	$	(1,828	)	$	(1,210	)
Net loss per common share, basic and diluted:
Net loss per share, continuing operations	$	(0.02	)	$	(0.07	)
Net (loss) income per common share, discontinued operations	(0.07		)	0.01
Net loss per common share	$	(0.09	)	$	(0.06	)
Shares used in computing net loss per common share, basic and diluted	20,032			19,813

The accompanying notes are an integral part of these financial statements.

CardioTech International, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited - in thousands)

	For The Three Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net loss	$	(1,828	)	$	(1,210	)
Less: Net (income) loss from discontinued operations	1,487			(114		)
Net loss from continuing operations	(341		)	(1,324		)
Adjustments to reconcile net loss from continuing operations to net cash flows:
Depreciation and amortization	106			52
Equity in net loss of CorNova, Inc.	—			203
Provision for doubtful accounts	(32		)	—
Provision for inventory obsolescence	—			(20		)
Share-based compensation	35			5
Changes in assets and liabilities:
Accounts receivable-trade, net	(106		)	(173		)
Accounts receivable-other	39			(14		)
Inventories	(112		)	43
Prepaid expenses and other current assets	52			56
Accounts payable	(44		)	(164		)
Accrued expenses	(119		)	(244		)
Deferred revenue	154			438
Net cash flows used in operating activities of continuing operations	(368		)	(1,142		)
Net cash flows provided by (used in) operating activities of discontinued operations	(950		)	(64		)
Net cash flows used in operating activities	(1,318		)	(1,206		)
Cash flows from investing activities:
Purchase of property, plant and equipment	(130		)	(53		)
Increase in other assets	—			7
Net cash flows used in investing activities of continuing operations	(130		)	(46		)
Net cash flows used in investing activities of discontinued operations	(16		)	(14		)
Net cash flows used in investing activities	(146		)	(60		)
Cash flows from financing activities:
Net proceeds from issuance of common stock	—			62
Purchase of treasury stock	—			(1		)
Net cash flows provided by financing activities of continuing operations	—			61
Net change in cash and cash equivalents	(1,464		)	(1,205		)
Cash and cash equivalents at beginning of period	4,066			6,841
Cash and cash equivalents at end of period	$	2,602		$	5,636

The accompanying notes are an integral part of these financial statements.

CARDIOTECH INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

CardioTech International, Inc. (including its wholly-owned subsidiaries, collectively “CardioTech” or the “Company”) is a medical device company that designs, develops, manufactures and sells innovative products and materials for the treatment of cardiovascular, orthopedic, oncological, urological and other diseases. The Company’s business model calls for leveraging its technological and manufacturing expertise in order to expand its royalty, development and license fee income, develop next generation polymers and manufacture new and complex medical devices. The Company is focused on developing and marketing polymers that can be used in products that are designed to reduce risk, trauma, cost and surgical procedure time. The Company’s subsidiaries and divisions from continuing operations are Catheter and Disposables Technology, Inc. (“CDT” or “engineering services and contract manufacturing”) and CT Biomaterials (“advanced polymers” or “materials science technology”), collectively referred to hereinafter as the “Continuing Subsidiaries.” The Company operates in one segment, medical device manufacturing and sales.

On July 3, 2007, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Medos Medizintechnik AG, a German corporation (“Medos”). The Purchase Agreement provided for the sale of Gish to Medos for a purchase price of approximately $7.5 million in cash, of which $1 million will remain in escrow until July 5, 2008 as a reserve for the Company’s indemnification obligations to Medos, if any. The Purchase Agreement also contained representations, warranties and indemnities that are customary in a transaction involving the sale of all or substantially all of a company or its assets. The indemnifications include items such as compliance with legal and regulatory requirements, product liability, lawsuits, environmental matters, product recalls, intellectual property, and representations regarding tax audits and net operating losses. In addition, the realization of the escrow fund is contingent upon the realizability of the Gish accounts receivable and inventory that were sold to Medos for one year from the sale date. Therefore, the Company has not included the $1 million of proceeds being held in escrow in the calculation of the loss on sale of Gish. The sale of Gish, pursuant to the Purchase Agreement, was completed on July 6, 2007. Simultaneous with the completion of the sale of Gish, the Company and Gish entered into a non-exclusive, royalty-free license (the “License Agreement”) which provides for the Company’s use of certain patented technology of Gish in Company products and services, provided such products and services do not compete with the cardiac bypass product development and manufacturing businesses of Gish or Medos. The Company is in the process of determining the value, if any, of the License Agreement. The Company believes the ultimate value will be de minimus, however, any value that is ascribed to the License Agreement will be recorded as an intangible asset.

After transaction expenses and post-closing adjustments, and assuming the disbursement to the Company of all funds held in escrow after July 5, 2008, the Company expects to realize approximately $6.8 million in proceeds from the sale of Gish. Under the terms of the Purchase Agreement, the Company retained Gish’s cash assets of approximately $2.0 million as of June 29, 2007, net of certain adjustments.

CardioTech has partnered with CorNova, Inc. (“CorNova”) to develop a drug-eluting stent. As of June 30, 2007, the Company owned 29% of the issued and outstanding shares of common stock of CorNova. Assuming the conversion to common stock of all of the shares of preferred stock of CorNova owned by the Company, as of June 30, 2007 the Company’s ownership interest in the equity of CorNova would have been 16%. (See Note 14).

The Company’s corporate and materials science technology headquarters are located in Wilmington, Massachusetts, with CDT’s manufacturing operations in Minnesota.

2. Interim Financial Statements and Basis of Presentation

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, the accompanying condensed consolidated financials statements include all adjustments (consisting only of normal recurring adjustments), which the Company considers necessary for a fair presentation of the financial position at such date and of the operating results and cash flows for the periods presented. The results of operations and cash flows for the three months ended June 30, 2007 may not necessarily be indicative of results that may be expected for any succeeding quarter or for the entire fiscal year. The information contained in this Form 10-Q should be read in conjunction with the Company’s audited financial statements, included in our Form 10-K/A as of and for the year ended March 31, 2007 filed with the Securities and Exchange Commission (the “SEC”).

The balance sheet at March 31, 2007 has been derived from our audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The accompanying condensed consolidated financial statements include the accounts of the Company and the Continuing Subsidiaries. All intercompany balances have been eliminated in consolidation. As a result of the sale of Gish pursuant to the Purchase Agreement, our financial statements have reflected the assets and liabilities of Gish in our balance sheet as assets and liabilities, respectively, held for sale as of June 30, 2007 and the statement of operations of Gish as discontinued operations for the three months ended June 30, 2007 and 2006, respectively. Additionally, the related information contained in the notes to the condensed consolidated financial statements includes those of the Company’s continuing operations unless specifically identified as disclosures related to discontinued operations.

The Company’s investment in CorNova is accounted for using the equity method of accounting in accordance with APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”

Our significant accounting policies are described in Note A to the financial statements included in Item 7 of our Form 10-K/A as of March 31, 2007. Our discussion and analysis of our financial condition and results of operations are based upon the financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments, which are evaluated on an ongoing basis, that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and judgments. In particular, significant estimates and judgments include those related to revenue recognition, allowance for doubtful accounts, useful lives of property and equipment, inventory reserves, valuation for goodwill and acquired intangible assets, and warranty reserves.

3. Revenue Recognition

The Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements.” The Company recognizes revenue from product sales upon shipment, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collection is deemed probable. If uncertainties regarding customer acceptance exist, the Company recognizes revenue when those uncertainties are resolved and title has been transferred to the customer. Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue. The Company also receives license and royalty fees for the use of its proprietary advanced polymers. CardioTech recognizes these fees as revenue in accordance with the terms of the contracts. Contracted product design and development projects are recognized on a time and materials basis as services are performed.

Generally, the customer specifies the delivery method and is responsible for delivery costs. However, in certain situations, the customer specifies the delivery method and requests the Company pay the delivery costs and then invoice the delivery costs to the customer or include an estimate of the delivery costs in the price of the product.

4. Stock Based Compensation

Effective April 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, using the modified prospective transition method. Under this transition method, compensation cost recognized in the statement of operations for the three months ended June 30, 2007 and 2006 includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of April 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123; and (b) compensation cost for all stock-based payments granted, modified or settled subsequent to April 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. In accordance with the modified prospective transition method, results for prior periods have not been restated.

For the three months ended June 30, 2007 and 2006, the Company recorded stock-based compensation expense for options that vested of approximately $35,000 and $5,000, respectively, which would not have been recorded prior to the adoption of SFAS No. 123R.

As of June 30, 2007, the Company has approximately $309,000 of unrecognized compensation cost related to stock options that is expected to be recognized as expense over a weighted average period of 1.95 years.

The valuation of employee stock options is an inherently subjective process, since market values are generally not available for long-term, non-transferable employee stock options. Accordingly, an option pricing model is utilized to derive an estimated fair value. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In calculating the estimated fair value of our stock options we use the Black-Scholes pricing model, which requires the consideration of the following six variables for purposes of estimating fair value:

· the stock option exercise price,

· the expected term of the option,

· the grant price of our common stock, which is issuable upon exercise of the option,

· the expected volatility of our common stock,

· the expected dividends on our common stock (we do not anticipate paying dividends in the foreseeable future), and

· the risk free interest rate for the expected option term.

Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

The fair value of each option granted during the three months ended June 30, 2007 and 2006 is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Three Months Ended June 30,
	2007		2006
Dividend yield	None		None
Expected volatility	75.80		103.00
Risk-free interest rate	4.67	%	4.83	%
Expected life	6.5 years		6.5 years

The weighted average fair value of stock options granted during the three months ended June 30, 2007 and 2006 was $1.44 and $2.44 per share, respectively.

CardioTech’s 1996 Employee, Director and Consultants Stock Option Plan (the “1996 Plan”) was approved by CardioTech’s Board of Directors and Stockholders in March 1996. A total of 7,000,000 shares have been reserved for issuance under the Plan. Under the terms of the Plan the exercise price of Incentive Stock Options issued under the Plan must be equal to the fair market value of the common stock at the date of grant. In the event that Non-Qualified Options are granted under the Plan, the exercise price may be less than the fair market value of the common stock at the time of the grant (but not less than par value). In October 2003, the Company’s shareholders approved the CardioTech International, Inc. 2003 Stock Option Plan (the “2003 Plan”), which authorizes the issuance of 3,000,000 shares of common stock with terms similar to the 1996 Plan. In January 2006, the Company filed Form S-8 with the Securities and Exchange Commission registering an additional 489,920 shares of common stock in the 1996 Plan and 2003 Plan. Total shares of common stock registered for the 1996 Plan and 2003 Plan are 10,489,920. Substantially all of the stock options granted pursuant to the 1996 Plan provide for the acceleration of the vesting of the shares of Common Stock subject to such options in connection with certain changes in control of the Company. A similar provision is not included in the 2003 Plan. Normally, options granted expire ten years from the grant date.

Information regarding option activity for the three months ended June 30, 2007 under the 1996 Plan and 2003 Plan is summarized below:

	Options Outstanding		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Options outstanding as of April 1, 2007	5,426,018		$	2.16	6.15	$	1,207,568
Granted	11,250		1.44
Exercised	—		—
Cancelled	(25,000	)	2.83
Forfeited	—		—
Options outstanding as of June 30, 2007	5,412,268		2.15		5.89	$	665,018
Options exercisable as of June 30, 2007	5,182,124		2.17		5.74	$	665,018
Options vested and expected to vest as of June 30, 2007	5,412,268		2.15		5.89	$	665,018

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing price of the common stock on June 29, 2007 of $1.29 and the exercise price of each in-the-money option) that would have been received by the option holders had all option holders exercised their options on June 30, 2007. Total intrinsic value of stock options exercised under the Plan for the three months ended June 30, 2007 was $0. As of June 30, 2007, there are unvested options to purchase approximately 230,144 shares of the Company’s common stock.

5. Comprehensive Income or Loss

SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for the reporting and displaying of comprehensive income or loss and its components in the consolidated financial statements. Comprehensive income (loss) is the Company’s total of net income (loss) and all other non-owner changes in equity including such items as unrealized holding gains (losses) on securities classified as available-for-sale, foreign currency translation adjustments and minimum pension liability adjustments. During the three months ended June 30, 2007 and 2006, the Company’s only item of other comprehensive income or loss was its equity in unrecognized holding losses on securities classified as available for sale recorded by CorNova.

	Three Months Ended June 30,
(In thousands)	2007			2006
Net loss	$	(1,828	)	$	(1,210	)
Other comprehensive income (loss)	—			(35		)
Comprehensive loss	$	(1,828	)	$	(1,245	)

6. Related Party Transactions

On January 1, 2007, the Company entered into a consulting agreement with Michael L. Barretti, a member of its Board of Directors, for an annualized fee of $50,000. During the three months ended June 30, 2007, the Company recognized $12,500 of expense related to services incurred under this agreement, which was recorded as selling, general and administrative expense. There were no expenses related to this consulting agreement during the three months ended June 30, 2006.

7. Inventories

Inventories consist of the following:

(in thousands)	June 30, 2007		March 31, 2007
Raw materials	$	264	$	155
Work in progress	195		210
Finished goods	106		88
Total inventories	$	565	$	453

8. Property, Plant and Equipment

Property, plant and equipment consists of the following:

(in thousands)	June 30, 2007			March 31, 2007
Land	$	500		$	500
Building	2,153			2,153
Machinery, equipment and tooling	1,412			1,286
Furniture, fixtures and office equipment	497			494
Leasehold improvements	57			57
	4,619			4,490
Less: accumulated depreciation and amortization	(1,354		)	(1,248		)
	$	3,265		$	3,242

For the three months ended June 30, 2007 and 2006, depreciation expense was $106,000 and $52,000, respectively.

9. Deferred Revenue

Beginning in fiscal 2005 and continuing into fiscal 2006, the Company started shipping branded catheter products in its private label business on a purchase order basis to a major customer (the “Intermediary”), who would then perform additional manufacturing processes and ship these products to the end user (the “End User”). These products were developed previously by the End User who then transferred manufacturing to the Intermediary. The Intermediary then engaged the Company to manufacture the products. In March 2006, the End User sought to directly source products from the Company. On May 18, 2006, the Company was notified by the End User that the End User had decided to cease using the Company for future production. During this time, the End User also began an alliance with a competitive supplier of branded catheters. The End User’s decision in May 2006 was due to concerns about supply constraints related to production specifications. Due to the uncertainty of acceptance of products by the End User, at June 30, 2006, the Company recorded deferred revenues of $397,000 related to shipments of branded catheter products to the End User. This deferral of $397,000 was recognized as revenues in the statement of operations during the three months ended December 31, 2006, as there was no further uncertainty around customer acceptance. There were no additional shipments of branded catheters to the End User subsequent to the three month period ended June 30, 2006.

Deferred revenue as of June 30, 2007 consists primarily of annual royalty and development fees received by the Company, as well as from customer deposits. Revenue is recognized ratably over the respective contractual periods or as product is shipped.

10. Earnings Per Share

The Company follows SFAS No. 128, “Earnings Per Share,” where basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the period plus additional weighted average common equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercise of outstanding stock options and warrants, the proceeds of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock method. At June 30, 2007 and 2006, potentially dilutive shares of 6,292,999 and 7,034,945, respectively, were excluded from the earnings per share calculation because their effect would be antidilutive. Shares deemed to be antidilutive include stock options, warrants and additional investment rights.

11. Enterprise and Related Geographic Information

The Company has managed its business on the basis of one reportable operating segment, Medical Device Manufacturing and Sales, in accordance with the qualitative and quantitative criteria established by SFAS 131, “Disclosures About Segments of an Enterprise and Related Information.”

The Company has no long-lived assets outside the United States.

Revenues for the presented periods are as follows:

	Three Months Ended June 30,
(in thousands)	2007		2006
Medical devices	$	1,062	$	715
Engineering services	127		185
Royalties and development fees	498		289
	$	1,687	$	1,189

12. Stockholders’ Equity

During the three months ended June 30, 2006, the Company issued 36,250 shares of common stock, respectively, as a result of the exercise of options by employees, generating cash proceeds of $62,000. During the three months ended June 30, 2006, the Company repurchased 500 shares of its common stock at a cost of $1,200.

13. Income Taxes

The Company uses the liability method of accounting for income taxes as set forth in SFAS No. 109, “Accounting for Income Taxes.” Under this method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are recognized and measured based on the likelihood of realization of the related tax benefit in the future.

For the three months ended June 30, 2007 and 2006, the Company provided for no income taxes, other than state income taxes, as the Company has significant net loss carryforwards.

14. Investment in CorNova

An Exchange and Venture Agreement (the “Agreement”) was entered into on March 5, 2004 by and among CardioTech, Implant, and CorNova, Inc. (“CorNova”). CorNova is a privately-held, development stage company, incorporated as a Delaware corporation on October 12, 2003. CorNova’s focus is the development of a next-generation drug-eluting stent. On March 5, 2004, CardioTech and Implant each agreed to transfer to CorNova 12,931 shares and 10,344 shares of their common stock (collectively, the “Contributory Shares”), respectively, in exchange for 1,500,000 shares, each, of CorNova’s common stock. The number of Contributory Shares issued reflects the fair market value of CardioTech’s and Implant’s common stock as of November 18, 2003, for an aggregate value of $75,000 each. This also resulted in CardioTech and Implant each receiving a thirty percent (30%) ownership interest in CorNova.

Upon the event of CorNova securing additional financing in the minimum amount of $1,000,000 and up to a maximum amount of $3,000,000 (the “Series A Financing”), CardioTech and Implant were each required to issue additional shares of their common stock (the “Investment Shares”), where the number of Investment Shares to be issued was equal to twenty-five percent (25%) of the gross proceeds of the Series A Financing divided by the respective five (5) day average of the closing prices of the common stock of CardioTech and Implant as published in the Wall Street Journal on the dates immediately preceding the closing of the Series A Financing. CorNova, Inc. completed its Series A Financing transaction on February 4, 2005. At that time, the Company became obligated to contribute shares of its common stock equal to $750,000. The number of shares was determined to be 308,642. The Company has no additional obligation to contribute assets or additional common stock nor to assume any liabilities or to fund any losses that CorNova may incur. In addition to the issuance of its common stock at the completion of a Series A Financing, CardioTech granted to CorNova an exclusive license for the technology consisting of ChronoFlex DES polymer, or any poly (carbonate) urethane containing derivative thereof, for use on drug-eluting stents.

As of June 30, 2007, CardioTech has a 29% ownership interest in the issued and outstanding shares of common stock of CorNova and, accordingly, CardioTech has used the equity method of accounting in accordance with APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”, and recorded 30% of the net loss of CorNova in its consolidated financial statements for the three months ended June 30, 2006. Assuming the conversion to common stock of all of the shares of preferred stock of CorNova owned by the Company, as of June 30, 2007 the Company’s ownership interest in the equity of CorNova would have been 16%.

During the three months ended June 30, 2006, the Company recorded equity in the net loss of CorNova of $203,000, and equity in comprehensive income of CorNova of $35,000 (related to unrealized holding gains on securities classified as available-for-sale). The Company has invested $825,000 in CorNova, Inc. and has recorded cumulative net losses through September 30, 2006 of $825,000. Therefore, the maximum portion of CorNova’s future losses allocable to the Company were met. Accordingly, the Company recorded no equity in the net loss of CorNova during the three month period ended June 30, 2007. The Company has no additional obligation to contribute assets or additional common stock nor to assume any liabilities or to fund any losses that CorNova may incur. As of June 30, 2007, CorNova owned no shares of CardioTech.

Both the Contributory Shares and the Investment Shares (collectively, the “Securities”) are restricted securities within the meaning of Rule 144 of the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities Act”), and none of the Securities may be sold except pursuant to an effective registration statement under the Securities Act or under the securities laws of any state, or in a transaction exempt from registration under the Securities Act.

The Series A Financing transaction resulted in the issuance by CorNova of 3,050,000 shares of preferred stock. The preferred stock has a liquidation preference equal to $1.00 per share, the original preferred stock purchase price and the same voting rights as CorNova’s common stock. The CorNova preferred stock can be converted on a share for share basis into CorNova common stock at the discretion of the preferred stockholders. The preferred stock is subject to several mandatory conversion requirements based on future events and subject to redemption at a premium, which varies based on the redemption date. CorNova currently also has outstanding warrants for the purchase of 150,000 shares of its common stock at $1.00 per share, issued in conjunction with its original seed loans and warrants for the purchase 635,000 shares of its common stock at $1.10 per share, issued to an individual as a “finders” fee. Additionally, CorNova’s shareholders have approved the 2004 Qualified Incentive Stock Option Plan (“2004 Plan”) which authorized the Board of Directors of CorNova to grant options to purchase up to 1,000,000 shares of CorNova’s common stock to employees and consultants.

15. Discontinued Operations

On July 3, 2007, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Medos Medizintechnik AG, a German corporation (“Medos”), for the sale of all of the common stock of Gish Biomedical, Inc. (“Gish”), the Company’s then wholly-owned subsidiary engaged in the development and manufacture of single use cardiopulmonary bypass products having a disposable component. The Purchase Agreement provided for the sale of Gish to Medos for a purchase price of approximately $7.5 million in cash, of which $1 million will remain in escrow until July 5, 2008 as a reserve for the Company’s indemnification obligations to Medos, if any. The Purchase Agreement also contained representations, warranties and indemnities that are customary in a transaction involving the sale of all or substantially all of a company or its assets. The

indemnifications include items such as compliance with legal and regulatory requirements, product liability, lawsuits, environmental matters, product recalls, intellectual property, and representations regarding tax audits and net operating losses. In addition, the realization of the escrow fund is contingent upon the realizability of the Gish accounts receivable and inventory that were sold to Medos for one year from the sale date. Therefore, the Company has not included the $1 million of proceeds being held in escrow in the calculation of the loss on sale of Gish.

The sale of Gish, pursuant to the Purchase Agreement, was completed on July 6, 2007. Simultaneous with the completion of the sale of Gish, the Company and Gish entered into a non-exclusive, royalty-free license (the “License Agreement”) which provides for the Company’s use of certain patented technology of Gish in Company products and services, provided such products and services do not compete with the cardiac bypass product development and manufacturing businesses of Gish or Medos. The Company is in the process of determining the value, if any, of the License Agreement. The Company believes the ultimate value will be de minimus, however, any value that is ascribed to the License Agreement will be recorded as an intangible asset.

In accordance with Statement of Financial Accounting Standards No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the June 30, 2007 financial statements have been prepared and historical statements of operations have been reclassified to present the results of Gish as discontinued operations. The Company’s Board of Directors approved a plan to sell Gish in June 2007. The Company executed the Purchase Agreement on July 3, 2007 and closed on July 6, 2007. The Company has (i) eliminated Gish’s financial results from its ongoing operations, (ii) determined that Gish, which operated as a separate subsidiary, was a separate component of its aggregated business as, historically, management reviewed separately the Gish financial results and cash flows apart from its ongoing continuing operations, and (iii) determined that it will have no further continuing involvement in the operations of Gish or cash flows from Gish after the sale.

The assets and liabilities of Gish are as follows:

	June 30, 2007		March 31, 2007
(in thousands)
Assets of Discontinued Operations:
Current assets of discontinued operations:
Cash and cash equivalents	$	201	$	—
Accounts receivable-trade	2,161		2,120
Inventories	4,295		4,752
Prepaid expenses and other current assets	43		90
Property, plant and equipment, net	762		—
Deposits	120		—
Total current assets of discontinued operations	$	7,582	$	6,962
Non-current assets of discontinued operations:
Property, plant and equipment, net	$	—	$	840
Deposits	—		120
Intangible assets	—		468
Total non-current assets of discontinued operations	$	—	$	1,428
Liabilities of Discontinued Operations
Current liabilities of discontinued operations:
Accounts payable	$	739	$	1,446
Accrued expenses	844		410
Other liabilities	111		—
Total current liabilities of discontinued operations	$	1,694	$	1,856
Non-current liabilities	$	—	$	116

Condensed results of operations of Gish for the three months ended June 30, 2007 and 2006 are as follows:

	Three Months Ended June 30,
(in thousands)	2007			2006
Revenues	$	3,849		$	3,781
Gross margin	815			1,032
(Loss) income from discontinued operations	(309		)	114
Loss on sale of Gish	(1,178		)	—
Net (loss) income from discontinued operations	(1,487		)	114

16. Authorization of Company Buy-Back of Common Stock

In June 2001, the Board of Directors authorized the purchase of up to 250,000 shares of the Company’s common stock, of which 174,687 shares, in the aggregate, have been purchased through June 30, 2007. In June 2004, the Board of Directors authorized the purchase of up to 500,000 additional shares of the Company’s common stock. The Company announced that purchases may be made from time-to-time in the open market, privately negotiated transactions, block transactions or otherwise, at times and prices deemed appropriate by management. There were no repurchases of the Company’s common stock during the three months ended June 30, 2007.

17. New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainties in income taxes recognized in an enterprise’s financial statements. The Interpretation requires that we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. If a tax position meets the more likely than not recognition criteria, FIN 48 requires the tax position be measured at the largest amount of benefit greater than fifty percent (50%) likely of being realized upon ultimate settlement. This accounting standard is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on April 1, 2007. The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements.” SAB 108 expresses SEC staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether those misstatements are material to a company’s financial statements. The provisions of SAB 108 are effective for fiscal years ending on or after November 15, 2006. Our adoption of the provisions of SAB 108 did not have any material impact on our results of operations, financial position or cash flows.

18. Subsequent Event

On July 6, 2007, the Company received $6.45 million in cash from Medos, excluding $1 million that will remain in escrow until July 5, 2008 as a reserve for the Company’s indemnification obligations to Medos, if any. Under the terms of the Purchase Agreement, the Company as of June 30, 2007 owes Medos $149,000 as a result of the change in the stockholder’s equity of Gish from March 31, 2007 to June 30, 2007. This adjustment is included in the calculation of the loss on sale of Gish through June 30, 2007.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This Report on Form 10-Q contains certain statements that are “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”). These forward looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended or using other similar expressions.

In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Report on Form 10-Q. For example, the Company may encounter competitive, technological, financial and business challenges making it more difficult than expected to continue to develop and market its products; the market may not accept the Company’s existing and future products; the Company may not be able to retain its customers; the Company may be unable to retain existing key management personnel; and there may be other material adverse changes in the Company’s operations or business. Certain important factors affecting the forward-looking statements made herein also include, but are not limited to (i) continued downward pricing pressures in the Company’s targeted markets, (ii) the continued acquisition of the Company’s customers by certain of its competitors, and (iii) continued periods of net losses, which could require the Company to find additional sources of financing to fund operations, implement its financial and business strategies, meet anticipated capital expenditures and fund research and development costs. In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its marketing, capital expenditure or other budgets, which may in turn affect the Company’s financial position and results of operations. For all of these reasons, the reader is cautioned not to place undue reliance on forward-looking statements contained herein, which speak only as of the date hereof. The Company assumes no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise except as required by law. For further information you are encouraged to review CardioTech’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K/A for the fiscal year ended March 31, 2007.

Overview

History

We were founded in 1993 as a subsidiary of PolyMedica Corporation (“PMI”). In June 1996, PMI distributed all of the shares of CardioTech’s common stock, par value $0.01 per share, which PMI owned, to PMI stockholders of record. Our materials science technology is principally based upon the ChronoFlex proprietary polymers which represent our core technology.

In July 1999, we acquired the assets of Tyndale-Plains Hunter, Ltd., a manufacturer of specialty hydrophilic polyurethanes.

In July 1999, Dermaphylyx International, Inc. (“Dermaphylyx”), was formed by certain affiliates of CardioTech to develop advanced wound healing products. Dermaphylyx was merged with and into CardioTech effective March 2004 and is now a wholly-owned subsidiary of CardioTech. In June 2006, the Company’s Board of Directors decided to cease the operations of Dermaphylyx. The net assets were immaterial to the Company.

In April 2001, we acquired Catheter and Disposables Technology, Inc. (“CDT”). CDT is an original equipment manufacturer and supplier of private-label advanced disposable medical devices from concept to finished packaged and sterilized products. Our engineering services and contract manufacturing primarily operate through our CDT subsidiary. Certain devices designed, developed and manufactured for customers by CDT include sensing, balloon and drug delivery catheters; disposable endoscopes; and in-vitro diagnostic and surgical disposables.

In April 2003, we acquired Gish Biomedical, Inc. (“Gish”), a manufacturer of single use cardiopulmonary bypass products having a disposable component. Gish was sold on July 6, 2007 as described in Note 15 of the accompanying condensed consolidated financial statements.

In March 2004, we joined with Implant Sciences Corporation (“Implant”) to participate in the funding of CorNova. CorNova was formed to develop a novel coronary drug eluting stent using the combined capabilities and technology of CorNova, Implant Sciences and CardioTech. We own common stock of CorNova, representing a 16% equity interest, based on the total outstanding preferred and common stock of CorNova. Although CorNova is expected to incur future operating losses, we have no obligation to fund CorNova.

We operate as one segment, medical device manufacturing and sales.

Technology and Intellectual Property

Our unique materials science strengths are embodied in our family of proprietary polymers. We manufacture and sell our custom polymers under the trade names ChronoFilm, ChronoFlex, ChronoThane, ChronoPrene, HydroThane, and PolyBlend. The ChronoFlex family of polymers has the potential to be marketed beyond our existing customer base. Our goal is to fulfill the market’s need for advanced materials science capabilities, thereby enabling customers to improve devices that utilize polymers. Our chemists continue to develop the ChronoFlex family of medical-grade polymers. Conventional polymers are susceptible to degradation resulting in catastrophic failure of long-term implantable devices such as pacemaker leads. ChronoFlex and ChronoThane polymers are designed to overcome such degradation and reduce the incidents of infections associated with invasive devices.

Key characteristics of our polymers are i) optional use as lubricious coatings for smooth insertion of a device into the body, ii) antimicrobial properties that are part of the polymer itself, and iii) mechanical properties, such as hardness and elasticity, sufficient to meet engineering requirements. We believe our technology has wide application in increasing biocompatibility, drug delivery, infection control and expanding the utility of complex devices in the hospital and clinical environment.

We also manufacture and sell our proprietary HydroThane polymers to medical device manufacturers that are evaluating HydroThane for use in their products. HydroThane is a thermoplastic, water-absorbing, polyurethane elastomer possessing properties which we believe make it well suited for the complex requirements of a variety of catheters. In addition to its physical properties, we believe HydroThane exhibits an inherent degree of bacterial resistance, clot resistance and biocompatibility. When hydrated, HydroThane has elastic properties similar to living tissue.

We also manufacture specialty hydrophilic polyurethanes that are primarily sold to customers as part of an exclusive arrangement. Specifically, these customers are supplied tailored, patented hydrophilic polyurethanes in exchange for multi-year, royalty-bearing exclusive supply contracts.

The development and manufacture of our products are subject to good laboratory practices (“GLP”) and quality system regulations (“QSR”) requirements prescribed by the Food and Drug Administration (“FDA”) and other standards prescribed by the appropriate regulatory agency in the country of use. There can be no assurance that we will be able to obtain or manufacture products in a timely fashion at acceptable quality and prices, that we or any suppliers can comply with GLP or the QSR, as applicable, or that we or such suppliers will be able to manufacture an adequate supply of products. Our Minnesota facility is ISO 13485 certified.

ChronoFilm is a registered trademark of PMI. ChronoFlex is our registered trademark. ChronoThane, ChronoPrene, HydroThane, and PolyBlend are our tradenames. CardioPass is our trademark.

We own or license 4 patents relating to our vascular graft manufacturing and polymer technology and products. While we believe our patents secure our exclusivity with respect to certain of our technologies, there can be no assurance that any patents issued would afford us adequate protection against competitors which sell similar inventions or devices, nor can there be any assurance that our patents will not be infringed upon or designed around by others. However, we intend to vigorously enforce all patents issued to us.

In June 2007, we filed for a U.S. patent on our proprietary antimicrobial formulation for ChronoFlex. Current technology in the marketplace uses antibiotic drugs. The antimicrobial component of our polymers has been designed to be non-leaching as a result of the polymerization process. In addition, PMI has granted us an exclusive, perpetual, worldwide, royalty-free license for the use of one polyurethane patent and related technology in the field consisting of the development, manufacture and sale of implantable medical devices and biodurable polymer material to third parties for the use in medical applications (the “Implantable Device and Materials Field”). PMI also owns, jointly with Thermedics, Inc., an unrelated company that manufactures medical grade polyurethane, the

ChronoFlex polyurethane patents relating to the ChronoFlex technology (the “Joint Technology”). PMI has granted us a non-exclusive, perpetual, worldwide, royalty-free sublicense of these patents for use in the Implantable Devices and Materials Field.

Development

We have developed a synthetic coronary artery bypass graft (“SynCAB”), trademarked CardioPassTM, using specialized ChronoFlex polyurethane materials designed to provide improved performance in the treatment of arterial disorders. The Company is not applying any new resources to further development of CardioPass. The grafts have three layers, similar to natural arteries, and are designed to replicate the physical characteristics of human blood vessels. We have developed a 4mm and 5mm SynCAB graft. We believe the SynCAB graft may be used initially to provide an alternative to patients with insufficient or inadequate native vessels for use in bypass surgery as a result of repeat procedures, trauma, disease or other factors. We believe, however, that the SynCAB graft may ultimately be used as a substitute for native saphenous veins, thus avoiding the trauma and expense associated with the surgical harvesting of the vein.

We initiated plans in fiscal 2006 to obtain European marketing approvals. In May 2006, we received written acknowledgement from our Notified Body in Europe that our clinical trial plan had been accepted. The planned 10 patient clinical trial protocol allows surgeons to intraoperatively decide to use the SynCAB instead of suboptimal autologous vessels. We hired a European-based contract research organization (“CRO”) to assist in management of the entire clinical process. The CRO helped us review possible sites in the European Union for the selection of investigators to follow the approved protocols. A site has been selected, a Principal Investigator has signed a letter of agreement to conduct the trial and provide the necessary data for the clinical research report and we have received approval from the Ethics Committee. Our Principal Investigator has participated in a wide range of cardiovascular clinical trials. Achievement of this important milestone fits within our planned timeline and is an important benchmark in the commencement and completion of the clinical trial. We have undergone a rigorous review by the Ministry of Health and completed paperwork for an import license, and prepared for patient selection.

The patient enrollment process is not an easy one for a long-term surgical implant that is designed to improve outcomes for very sick patients. Prior to each surgery, our investigators must receive patient consent for participation in the trials. The surgeon then decides at the time of the operation whether or not to utilize the graft. Patients will be followed for 90 days and assessed for graft patency and quality of life measures. Following the completed clinical trial, we intend to submit the analyzed data to the Notified Body in support of our application for CE Mark. In January 2007, we announced the initiation of these clinical trials with the first patient surgically implanted in March 2007.

Manufacturing Operations

The Company generated approximately 71% of its revenues from manufacturing operations during the three months ended June 30, 2007.

Critical Accounting Policies

Our significant accounting policies are summarized in Note A to our consolidated financial statements included in Item 7 of our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2007. However, certain of our accounting policies require the application of significant judgment by our management, and such judgments are reflected in the amounts reported in our consolidated financial statements. In applying these policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of market trends, information provided by our strategic partners and information available from other outside sources, as appropriate. Actual results may differ significantly from the estimates contained in our consolidated financial statements. There has been no change to our critical accounting policies through the fiscal quarter ended June 30, 2007. Our critical accounting policies are as follows:

· Revenue Recognition. The Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements.” The Company recognizes revenue from product sales upon shipment, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collection is deemed probable. If uncertainties regarding customer acceptance exist, the Company recognizes revenue when those uncertainties are resolved and title has been transferred to the customer. Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue. The Company also receives license and royalty fees for the use of its proprietary advanced

polymers . CardioTech recognizes these fees as revenue in accordance with the terms of the contracts. Contracted product design and development projects are recognized on a time and materials basis as services are performed.

· Accounts Receivable Valuation. We perform various analyses to evaluate accounts receivable balances and record an allowance for bad debts based on the estimated collectibility of the accounts such that the amounts reflect estimated net realizable value. If actual uncollectible amounts significantly exceed the estimated allowance, the Company’s operating results would be significantly and adversely affected.

· Inventory Valuation. We value our inventory at the lower of our actual cost or the current estimated market value. We regularly review inventory quantities on hand and inventory commitments with suppliers and record a provision for excess and obsolete inventory based primarily on our historical usage for the prior twelve month period. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated change in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.

· Intangibles. Our long-lived assets include goodwill. In assessing the recoverability of our goodwill, we must make assumptions in determining the fair value of the asset by estimating future cash flows and considering other factors, including our significant changes in the manner or use of the assets, or negative industry reports or economic conditions. If those estimates or their related assumptions change in the future, we may be required to record impairment charges for those assets. Under the provisions of Statement of Financial Accounting Standards, or SFAS No. 142, “Goodwill and Other Intangible Assets,” we are required to test our intangible assets for impairment on a periodic basis thereafter. The Company will be required to continue to perform a goodwill impairment test on an annual basis, or more frequently if indicators of impairment exist, and the next test is scheduled during the quarter ending March 31, 2008.

· Stock-Based Compensation. Effective April 1, 2006, we adopted Statement of Financial Accounting Standard No. 123R (SFAS 123R), “Share-Based Payment,” which requires the expense recognition of the estimated fair value of all stock-based payments issued to employees. Prior to the adoption of SFAS 123R, the estimated fair value associated with such awards was not recorded as an expense, but rather was disclosed in a footnote to our financial statements.

The valuation of employee stock options is an inherently subjective process, since market values are generally not available for long-term, non-transferable employee stock options. Accordingly, an option pricing model is utilized to derive an estimated fair value. In calculating the estimated fair value of our stock options we use the Black-Scholes pricing model, which requires the consideration of the following six variables for purposes of estimating fair value:

· the stock option exercise price,

· the expected term of the option,

· the grant price of our common stock, which is issuable upon exercise of the option,

· the expected volatility of our common stock,

· the expected dividends on our common stock (we do not anticipate paying dividends in the foreseeable future), and

· the risk free interest rate for the expected option term.

Stock Option Exercise Price and Grant Date Price of our Common Stock. The closing market price of our common stock on the date of grant.

Expected Term. For option grants subsequent to the adoption of SFAS 123R, the expected life of stock options granted is based on the simplified method prescribed under SAB 107, “ Share-Based Payment. “ Accordingly, the expected term is presumed to be the midpoint between the vesting date and the end of the contractual term.

Expected Volatility. The expected volatility is a measure of the amount by which our stock price is expected to fluctuate during the expected term of options granted. We determine the expected volatility solely based upon the historical volatility of our common stock over a period commensurate with the option’s expected term. We do not believe that the future volatility of our common stock over an option’s expected term is likely to differ significantly from the past.

Expected Dividends. We have never declared or paid any cash dividends on any of our capital stock and do not expect to do so in the foreseeable future. Accordingly, we use an expected dividend yield of zero to calculate the grant-date fair value of a stock option.

Risk-Free Interest Rate. The risk-free interest rate is the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the option’s expected term on the grant date.

Of the variables above, the selection of an expected term and expected stock price volatility are the most subjective. The majority of the stock option expense recorded in the three months ended June 30, 2007 relates to the vesting of stock options granted subsequent to April 1, 2006, as the majority of our outstanding options were fully vested due to the acceleration of vesting of certain stock option effective July 8, 2004.

Upon adoption of SFAS 123R, we were also required to estimate the level of award forfeitures expected to occur and record compensation expense only for those awards that are ultimately expected to vest. This requirement applies to all awards that are not yet vested, including awards granted prior to April 1, 2006. Due to the limited number of unvested options outstanding, the majority of which are held by executives and members of the Company’s Board of Directors, the Company has estimated a zero forfeiture rate. The Company will revisit this assumption periodically and as changes in the composition of our option pool dictate.

Changes in the inputs and assumptions, as described above, can materially affect the measure of estimated fair value of our stock-based compensation. The Company anticipates the amount of stock-based compensation to increase in the future as additional options are granted. As of June 30, 2007, there was approximately $309,000 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over a weighted average period of 1.95 years.

Results of Operations

Three Months Ended June 30, 2007 vs. June 30, 2006

Revenues

The following table presents revenues and the percent of total change in revenues for the three months ended June 30,

	2007				2006
(in thousands)	Revenues		% of Revenues		Revenues		% of Revenues
Revenues:
Product sales	$	1,189	70.5	%	$	900	75.7	%
Royalties and development fees	498		29.5	%	289		24.3	%
	$	1,687	100.0	%	$	1,189	100.0	%

The following table presents product sales by group expressed as a percentage of total product sales for the three months ended June 30,

	2007				2006
(in thousands)	Product sales		% of Product sales		Product sales		% of Product sales
Medical devices	$	1,062	89.3	%	$	715	79.4	%
Engineering services	127		10.7	%	185		20.6	%
	$	1,189	100.0	%	$	900	100.0	%

Medical device revenues for the three months ended June 30, 2007 were $1,062,000 as compared to $715,000 for the comparable prior year period, an increase of $347,000, or 48.5%. Medical devices are primarily composed of private-label products and advanced polymers developed by our materials science technology. The increase in medical device revenues for the three months ended June 30, 2007 was primarily from $90,000 in private-label products and $250,000 from shipments of advanced polymers. We are experiencing a growth in both the number of

new customers and frequency of shipments of our custom polymer materials, which we expect to continue. The increase is due in part to the launch of the Company’s new website in April 2007 and growth of the Company’s technical staff. The Company has plans to expand sales staff into new geographical regions of the United States and initiate a business development program during fiscal year 2008.

During the three months ended June 30, 2006, we deferred approximately $397,000 in private-label shipments to a major customer (the “End User”), as further discussed below. Beginning in fiscal 2005 and continuing into fiscal 2006, we started shipping branded catheter products (the “Branded Products”) on a purchase order basis to a single customer in the fiscal year ended March 31, 2006 (the “Intermediary”). The Intermediary would then perform additional manufacturing processes and ship these Branded Products to the End User. These Branded Products were previously developed by the End User who then transferred manufacturing to the Intermediary. The Intermediary then engaged us to manufacture the Branded Products. In March 2006, the End User directly sourced the Branded Products from us. In May 2006, the End User decided to cease using us for future production due to concerns about supply constraints related to production specifications. We had initially deferred the revenue related to shipments to the End User due to the uncertainty regarding customer acceptance of the shipped product. As the contracted period to notify us of any defective product passed during the second quarter of fiscal 2007 without further notification from the End User of any defective product, we determined that all revenue recognition criteria had been met and $397,000 of revenue related to shipments to the End User was recorded during the fiscal year ended March 31, 2007. The costs associated with this revenue were expensed during the quarters ended March 31, 2006 and June 30, 2006 because the net realizable value of the inventory was uncertain due to the likely return and rework of the product.

Engineering services revenues for the three months ended June 30, 2007 were $127,000 as compared to $185,000 for the comparable prior year period, a decrease of $58,000 or 31.4%. Engineering services are provided primarily to OEM suppliers and development companies with the expectation of manufacturing private-label medical devices following the completion of these services. The decrease in engineering services is a result of a decrease in contracted projects during the three months ended June 30, 2007.

Royalties and development fees for the three months ended June 30, 2007 were $498,000 as compared to $289,000 for the comparable prior year period, an increase of $209,000 or 72.3%. We have agreements to license our proprietary advanced polymer technology to medical device manufacturers. Royalties are earned when these manufacturers sell medical devices which use our materials science technology; accordingly, the increase in royalties during the three months ended June 30, 2007 is a result of increased shipments of existing and new products by these manufacturers. Additionally, in October 2006, we began to generate development fees from the supply of our proprietary ChronoFlex polymer material, specifically formulated for the development of orthopedic implant devices, from a leading developer and manufacturer of orthopedic devices.

Gross Margin

The following table presents product sales gross margins and gross margin percentages as a percent of the respective product sales for the three months ended June 30,

	2007				2006
(in thousands)	Gross Margin		% Gross Margin		Gross Margin			% Gross Margin
Product sales	$	177	14.9	%	$	(433	)	-48.1	%

Gross margin on product sales (excluding royalties and development fees) was $177,000, or 14.9% as a percentage of product revenue for the three months ended June 30, 2007, as compared to ($433,000), or (48.1%) for the comparable prior year period.

The increase in gross margin as a percentage of product sales for the three months ended June 30, 2007, as compared to the comparable prior year period, is primarily due to the discontinuation during the three months ended June 30, 2006 of the manufacture of private-label products for the End User and the deferral of revenues on shipments in the amount of $397,000, as described above. In addition, the increase in gross margins as a percentage of product revenue for the three months ended June 30, 2007 reflects more efficient manufacturing operations at our private-label business.

Research, Development and Regulatory Expenses

The following table presents research and development expenses as a percentage of revenues for the three months ended June 30,

(in thousands)	2007		% of Revenues		2006		% of Revenues
Research, development and regulatory expenses	$	230	13.6	%	$	136	11.4	%

Research, development and regulatory expenses for the three months ended June 30, 2007 were $230,000 as compared to $136,000 for the comparable prior year period, an increase of $94,000 or 69.1%. CardioTech’s research and development efforts are focused on developing new applications of ChronoFlex, synthetic vascular graft technologies, including the CardioPass graft. Research and development expenditures consisted primarily of the salaries of full time employees and related expenses, and are expensed as incurred. The Company had additional staff for research and development in the three months ended June 30, 2007. These individuals work on a variety of projects, including production support, and we believe we are operating at the minimum staffing level to support our operating needs. In addition, we incurred costs of approximately $21,000 during the three months ended June 30, 2007 for conducting a clinical trial in Europe for CardioPass. As contacts with potential customers grow for advanced polymers and our materials science technology, the Company expects to add to its scientific and technical staff during fiscal year 2008.

Selling, General and Administrative Expenses

The following table presents selling, general and administrative expenses as a percentage of revenues for the three months ended June 30,

(in thousands)	2007		% of Revenues		2006		% of Revenues
Selling, general and administrative	$	793	47.0	%	$	849	71.4	%

Selling, general and administrative expenses for the three months ended June 30, 2007 were $793,000 as compared to $849,000 for the comparable prior year period, an decrease of $56,000 or 6.6%. This decrease is primarily attributable to reductions in financial systems implementation, legal and professional expenses during the three months ended June 30, 2007, when compared to the year-earlier period.

Interest and Other Income and Expense

Interest and other income and expense, net for the three months ended June 30, 2007 was $7,000, There was $8,000 of interest and other income and expense, net for the three months ended June 30, 2006.

Equity in Net Loss of CorNova, Inc.

During the three months ended June 30, 2006, the Company recorded equity in the net loss of CorNova of $203,000, and equity in comprehensive income of CorNova of $35,000 (related to unrealized holding gains on securities classified as available-for-sale). The Company has invested $825,000 in CorNova, Inc. and has recorded cumulative net losses through September 30, 2006 of $825,000 from CorNova. Therefore, the maximum portion of CorNova’s future losses allocable to the Company were met. Accordingly, the Company recorded no equity in the net loss of CorNova during the three month period ended June 30, 2007. The Company has no additional obligation to contribute assets or additional common stock nor to assume any liabilities or to fund any losses that CorNova may incur. As of June 30, 2007, CorNova owned no shares of CardioTech.

Net (Loss) Income from Discontinued Operations

Net loss from discontinued operations for the three months ended June 30, 2007 was $1,487,000, which included $1,178,000 of loss on sale of Gish. The loss on sale of Gish includes transaction costs of approximately $412,000. The loss from discontinued operations was $309,000 for the three months ended June 30, 2007 as compared to income from discontinued operations of $114,000 for the comparable prior year period. At June 30, 2007, the Company determined that the proceeds from the sale of Gish, less the related transaction costs, were less than the book value of the net assets sold and therefore gave rise to the loss on the sale of $1,178,000 that was recorded in the quarter ended June 30, 2007.

Liquidity and Capital Resources

On July 3, 2007, the Company entered into the Purchase Agreement with Medos, for the sale of all of the common stock of Gish, the Company’s then wholly-owned subsidiary engaged in the development and manufacture of single use cardiopulmonary bypass products having a disposable component. The Purchase Agreement provided for the sale of Gish to Medos for a purchase price of approximately $7.5 million in cash, of which $1 million will remain in escrow until July 5, 2008 as a reserve for the Company’s indemnification obligations to Medos, if any. The Purchase Agreement also contained representations, warranties and indemnities that are customary in a transaction involving the sale of all or substantially all of a company or its assets. The indemnifications include items such as compliance with legal and regulatory requirements, product liability, lawsuits, environmental matters, product recalls, intellectual property, and representations regarding tax audits and net operating losses. In addition, the realization of the escrow fund is contingent upon the realizability of the Gish accounts receivable and inventory that were sold to Medos for one year from the sale date. Therefore, the Company has not included the $1 million of proceeds being held in escrow in the calculation of the loss on sale of Gish.

After transaction expenses and certain post-closing adjustments, and assuming the disbursement to the Company of all funds held in escrow after July 5, 2008, the Company expects to realize approximately $6.8 million in proceeds from the sale of Gish. Under the terms of the Purchase Agreement, the Company retained all cash on Gish’s balance sheet as of June 29, 2007, net of certain adjustments.

As of June 30, 2007, the Company had cash and cash equivalents of $2.6 million, which excludes $5.8 million in net proceeds received by the Company after June 30, 2007 from the sale of Gish. The amount received excludes $1 million that will remain in escrow until July 5, 2008 as a reserve for the Company’s indemnification obligations to Medos, if any, as described above. The $2.6 million balance of cash and cash equivalents as of June 30, 2007 is a decrease of $1.5 million when compared with a balance of $4.1 million as of March 31, 2007.

Under the terms of the Purchase Agreement, the Company owes Medos $149,000 as a result of the change in stockholder’s equity from March 31, 2007 to June 30, 2007. This adjustment is included the calculation of the loss on sale of Gish.

During the three months ended June 30, 2007, the Company had net cash outflows of $1.3 million from operating activities of continuing operations as compared to net cash outflows of $1.2 million for the comparable prior year period. The approximate $110,000 increase in net cash outflows used in operating activities during the three months ended June 30, 2007, as compared to the comparable prior year period was primarily a result of: (i) increased net loss; (ii) increases in inventories and deferred revenue; and (iii) decreases in accounts payable and accrued expenses.

During the three months ended June 30, 2007, the Company had net cash outflows of $130,000 from investing activities of continuing operations as compared to net cash outflows of $53,000 for the comparable prior year period. The increase in net cash outflows from investing activities is a primarily a result of an additional $77,000 in property, plant and equipment purchases during the three months ended June 30, 2007.

During the three months ended June 30, 2007, there were no exercises of stock options pursuant to the 1996 Plan or the 2003 Plan.

At June 30, 2007, the Company had no debt. CardioTech believes its June 30, 2007 cash position, together with $5.8 million in net cash proceeds from Medos after June 30, 2007 from the sale of Gish, will be sufficient to fund its working capital and research and development activities for at least the next twelve months.

The Company’s future growth may depend upon its ability to raise capital to support research and development activities and to market and sell its vascular graft technology, specifically the coronary artery bypass graft. CardioTech may require substantial funds for further research and development, future pre-clinical and clinical trials, regulatory approvals, establishment of commercial-scale manufacturing capabilities, and the marketing of its products. CardioTech’s capital requirements depend on numerous factors, including but not limited to, the progress of its research and development programs; the progress of pre-clinical and clinical testing; the time and costs

involved in obtaining regulatory approvals; the cost of filing, prosecuting, defending and enforcing any intellectual property rights; competing technological and market developments; changes in CardioTech’s development of commercialization activities and arrangements; and the purchase of additional facilities and capital equipment.

As of June 30, 2007, the Company had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

Contractual obligations consist of the following as of June 30, 2007:

	Payment Due by Period
(in thousands)	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years
Operating lease obligations	$	219	$	188	$	31	$	—	$	—
Purchase obligations	$	472	472		—		—		—
	$	691	$	660	$	31	$	—	$	—

Operating lease obligations are for aggregate future minimum rental payments required under operating leases for the California and Minnesota manufacturing facilities. Purchase obligations primarily represent purchase orders issued for inventory used in production.

With respect to the Exchange and Venture Agreement with CorNova, the Company has no additional obligation to contribute assets or additional common stock nor to assume any liabilities or to fund any losses that CorNova may incur.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We own certain money market funds that are sensitive to market risks as part of our investment portfolio. The investment portfolio is used to preserve our capital until it is required to fund operations, investing or financing activities. None of the market-risk sensitive instruments held in our investment portfolio are held for trading purposes. We do not own derivative financial instruments in our investment portfolio. We do not believe that the exposure to market risks in our investment portfolio is material.

Item 4. Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Company’s disclosure controls and procedures as of June 30, 2007. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have determined that such controls and procedures are effective to ensure that information relating to the Company, including its consolidated subsidiaries, required to be disclosed in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. There have been no changes in the Company’s internal controls over financial reporting that were identified during the evaluation that occurred during the fiscal quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not a party to any legal proceedings, other than ordinary routine litigation incidental to its business, which the Company believes will not have a material affect on its financial position or results of operations.

Item 1A. Risk Factors

There have not been any material changes from the risk factors previously disclosed under Item 7A of the Company’s Annual Report on Form 10-K/A for the year ended March 31, 2007.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.
31.1		Certification of Principal Executive Officer pursuant to Section 3.02 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Section 3.02 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CardioTech International, Inc.

	By:	/s/ Michael F. Adams
		Michael F. Adams
		President & Chief Executive Officer


	By:	/s/ Eric G. Walters
		Eric G. Walters
		Vice President & Chief Financial Officer

Dated: August 13, 2007

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Nordicus Partners (NORD) 10-Q2008 Q1 Quarterly report

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