UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
ý | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31, 2005 |
| | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-33295
MedicalCV, Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Minnesota | | 41-1717208 |
(State or Other Jurisdiction
of Incorporation or Organization) | | (I.R.S. Employer
Identification No.) |
9725 South Robert Trail
Inver Grove Heights, Minnesota 55077
(651) 452-3000
(Address of Principal Executive Offices and Issuer’s
Telephone Number, including Area 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 the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
As of September 13, 2005, the issuer had outstanding 11,353,333 shares of common stock and 17,785 shares of convertible preferred stock.
Transitional Small Business Disclosure Format (check one) o Yes ý No
EXPLANATORY NOTE
We are filing this Quarterly Report on Form 10-QSB/A for the quarterly period ended July 31, 2005, to conform note 6 to the financial statements to disclose the amounts of our restructuring charges that have been included in discontinued operations consistent with the presentation contained in our Annual Report on Form 10-KSB/A for the fiscal year ended April 30, 2005, and to report a material weakness in our internal control over financial reporting.
The revision to note 6 had no effect on our financial statements. This Form 10-QSB/A amends only Part I, Items 1 and 3. The remaining items are unaffected by this revision, have not been updated and are not reproduced in this Form 10-QSB/A. In addition, this Form 10-QSB/A contains currently-dated certifications from our Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officer and Chief Financial Officer are attached to this Form 10-QSB/A as Exhibits 31.1, 31.2, 32.1 and 32.2.
TABLE OF CONTENTS
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PART I
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
MEDICALCV, INC.
Balance Sheets
| | July 31, | | April 30, | |
| | 2005 | | 2005 | |
| | (unaudited) | | | |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 8,883,804 | | $ | 10,637,796 | |
Prepaid expenses and other assets | | 191,384 | | 199,978 | |
Current assets of discontinued operations | | 432,182 | | 875,648 | |
Total current assets | | 9,507,370 | | 11,713,422 | |
| | | | | |
Property, plant and equipment, net | | 1,010,317 | | 827,791 | |
Deferred financing costs, net | | 56,407 | | 58,226 | |
Other long-term assets | | 30,798 | | 30,798 | |
Non-current assets of discontinued operations | | 367,799 | | 367,799 | |
Total assets | | $ | 10,972,691 | | $ | 12,998,036 | |
| | | | | |
LIABILITIES AND SHAREHOLDERS’ DEFICIT | | | | | |
Current liabilities: | | | | | |
Accounts payable | | $ | 108,550 | | $ | 399,588 | |
Current portion of related party lease obligations | | 314,005 | | 311,155 | |
Accrued expenses | | 267,908 | | 179,095 | |
Current liabilities of discontinued operations | | 16,300 | | 202,595 | |
Total current liabilities | | 706,763 | | 1,092,433 | |
Fair value of puttable warrants | | 21,538,671 | | 27,992,609 | |
Related party lease obligations, less current portion | | 2,786,564 | | 2,824,977 | |
Total liabilities | | $ | 25,031,998 | | $ | 31,910,019 | |
| | | | | |
Commitments and contingencies | | | | | |
| | | | | |
5% series A redeemable convertible preferred stock; $.01 par value; 19,000 shares authorized; 17,785 and 18,035 shares issued and outstanding as of July 31, 2005 and April 30, 2005, respectively | | — | | — | |
| | | | | |
Shareholders’ deficit: | | | | | |
Common stock; $.01 par value; 95,000,000 shares authorized; 11,353,333 and 10,849,583 shares issued and outstanding as of July 31, 2005 and April 30, 2005, respectively | | 108,533 | | 108,496 | |
Additional paid-in capital | | 23,387,565 | | 23,386,478 | |
Accumulated deficit | | (37,555,405 | ) | (42,406,957 | ) |
Total shareholders’ deficit | | (14,059,307 | ) | (18,911,983 | ) |
Total liabilities and shareholders’ deficit | | $ | 10,972,691 | | $ | 12,998,036 | |
The accompanying notes are an integral part of these financial statements.
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MEDICALCV, INC.
Statements of Operations
(unaudited)
| | Three months ended July 31, | |
| | 2005 | | 2004 | |
Operating expenses, continuing operations: | | | | | |
Sales and marketing | | $ | 105,217 | | $ | — | |
General and administrative | | 763,329 | | 868,785 | |
Research and Development | | 403,225 | | — | |
Engineering and regulatory | | — | | 312,210 | |
Total operating expenses | | 1,271,771 | | 1,180,995 | |
Loss from operations | | (1,271,771 | ) | (1,180,995 | ) |
Other income (expense): | | | | | |
Decrease in warrant liability | | 6,453,938 | | — | |
Interest income | | 68,962 | | 2,840 | |
Interest expense | | (79,036 | ) | (180,420 | ) |
Other income (expense) | | 1,060 | | 312 | |
Total other income (expense) | | 6,444,924 | | (177,268 | ) |
| | | | | |
Income (loss) from continuing operations | | 5,173,153 | | (1,358,263 | ) |
Income (loss) from discontinued operations | | (102,969 | ) | 103,607 | |
Net Income (loss) | | $ | 5,070,184 | | $ | (1,254,656 | ) |
| | | | | |
Basic and dilutive loss to common shareholders | | | | | |
Net income (loss) | | $ | 5,070,184 | | $ | (1,254,656 | ) |
Convertible preferred stock dividends | | (218,633 | ) | — | |
Net income (loss) to common shareholders | | $ | 4,851,551 | | $ | (1,254,656 | ) |
| | | | | |
Earning (loss) per share - Continuing operations | | | | | |
Basic | | $ | 0.47 | | $ | (0.14 | ) |
Diluted | | (0.06 | ) | (0.14 | ) |
| | | | | |
Earning (loss) per share - Discontinured operations | | | | | |
Basic | | (0.01 | ) | 0.01 | |
Diluted | | (0.01 | ) | 0.01 | |
| | | | | |
Earnings (loss) per share | | | | | |
Basic | | 0.44 | | (0.13 | ) |
Diluted | | (0.07 | ) | (0.13 | ) |
| | | | | |
Weighted average shares used | | | | | |
Basic | | 11,024,420 | | 9,489,670 | |
Diluted | | 21,393,743 | | 9,489,670 | |
The accompanying notes are an integral part of these financial statements.
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MEDICALCV, INC.
Statements of Cash Flows
(unaudited)
| | Three months ended July 31, | |
| | 2005 | | 2004 | |
Cash flows from operating activities: | | | | | |
Net income (loss) | | $ | 5,070,184 | | $ | (1,254,656 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | |
Depreciation | | 56,248 | | 80,247 | |
Increase (decrease) in warrant liability | | (6,453,938 | ) | — | |
Provision for inventory obsolescence | | — | | 10,250 | |
Stock-based compensation | | — | | 452 | |
Interest and other income (expense) related to issued warrants and amortization of loan origination costs | | — | | 14,294 | |
Changes in assets and liabilities: | | | | | |
Accounts receivable | | — | | 111,245 | |
Inventories | | — | | (3,115 | ) |
Prepaid expenses and other assets | | 453,788 | | 52,535 | |
Accounts payable | | (291,039 | ) | (191,802 | ) |
Accrued expenses | | (97,482 | ) | 363,692 | |
Net cash used in operating activities | | (1,262,239 | ) | (816,858 | ) |
| | | | | |
Cash flows from investing activities: | | | | | |
Purchase of property, plant and equipment | | (238,682 | ) | (7,129 | ) |
Proceeds from the sale of property, plant and equipment | | — | | (152,500 | ) |
Net cash used in investing activities | | (238,682 | ) | (159,629 | ) |
| | | | | |
Cash flows from financing activities: | | | | | |
Payments of term debt | | — | | (500,000 | ) |
Deferred financing costs | | — | | 10,920 | |
Proceeds from the issuance of common stock and warrants, net of offering costs | | — | | 2,002,907 | |
Preferred dividend paid | | (218,633 | ) | — | |
Proceeds from option exercise | | 1,125 | | — | |
Principal payments under related party lease obligations | | (35,563 | ) | (37,928 | ) |
Net cash provided by (used in) financing activities | | (253,071 | ) | 1,475,899 | |
| | | | | |
Net increase (decrease) in cash and cash equivalents | | (1,753,992 | ) | 499,412 | |
Cash and cash equivalents at beginning of year | | 10,637,796 | | 659,856 | |
Cash and cash equivalents at end of period | | $ | 8,883,804 | | $ | 1,159,268 | |
| | | | | |
Supplemental disclosure of cash flow information: | | | | | |
| | | | | |
Cash paid for interest | | $ | 79,035 | | $ | 112,829 | |
The accompanying notes are an integral part of these financial statements.
5
MEDICALCV, INC.
Notes to Financial Statements
(1) Basis of Financial Statement Presentation
The accompanying unaudited financial statements included herein have been prepared by MedicalCV, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These interim financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-KSB, as amended, for the fiscal year ended April 30, 2005.
The balance sheet as of July 31, 2005, the statements of operations for the three months ended July 31, 2005 and 2004, and the statements of cash flows for the three months ended July 31, 2005 and 2004 include, in the opinion of management, all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the financial results for the respective interim periods and are not necessarily indicative of results of operations to be expected for the entire fiscal year ending April 30, 2006.
(2) Going Concern
The Company’s financial statements for the quarter ended July 31, 2005, have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The Company has sustained losses and negative cash flows from operations in recent years and expects these conditions to continue for the foreseeable future. At July 31, 2005, the Company had an accumulated deficit of $37,555,405. Although the Company raised funds through the sale of convertible preferred stock in the last quarter of fiscal year 2005, the level of cash required for operations during fiscal year 2006 is difficult to predict, and management anticipates that development of its new products will require additional capital by October 2006. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management intends to seek additional debt or equity financing as it continues development of new products. However, the Company may not be able to obtain such financing on acceptable terms or at all. If the Company is unable to obtain such additional financing, it will be required to significantly revise its business plans and drastically reduce operating expenditures such that it may not be able to develop or enhance its products, gain market share in the United States of America or respond to competitive pressures or unanticipated requirements, which could seriously harm its business, financial position and results of operations.
The Company is subject to risks and uncertainties common to medical technology-based companies, including rapid technological change, new product development and acceptance, actions of competitors and regulators, dependence on key personnel and market penetration.
(3) Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations and complies with the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS Statement No. 123.”
In December 2004, the Financial Accounting Standards Board (FASB) issued a revised FAS No. 123, “Share-Based Payment (revised 2004)” (FAS No. 123R), which supersedes APB No. 25 and amends FAS No. 123 to require companies to expense the value of stock-based compensation plans. Additionally, FAS 123R, once adopted, disallows the use of the prospective transition method permitted by FAS No. 148. FAS 123R is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005 (i.e., the beginning of the Company’s fiscal year 2006).
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For purposes of the pro forma disclosures below, the estimated fair value of the options is amortized to expense over the options’ vesting period. Had compensation cost for the Company’s stock options been recognized based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company’s net income (loss) would have been adjusted to the pro forma amounts indicated below:
| | Three months ended July 31, | |
| | 2005 | | 2004 | |
Net income (loss) to common shareholders | | $ | 4,851,551 | | $ | (1,254,656 | ) |
Less: Pro forma stock based employee compensation cost | | (382,181 | ) | (43,501 | ) |
| | | | | |
Net income (loss) — pro forma | | $ | 4,469,370 | | $ | (1,298,157 | ) |
| | | | | |
Basic earnings (loss) per share | | | | | |
As reported | | $ | .44 | | $ | (.13 | ) |
Pro forma | | .41 | | (.13 | ) |
| | | | | |
Diluted earnings (loss) per share | | | | | |
As reported | | (.07 | ) | (.14 | ) |
Pro forma | | (.09 | ) | (.14 | ) |
(4) Earnings (loss) per Share
Earnings (loss) per share is computed under the provisions of SFAS No. 128, “Earnings Per Share.” Basic earnings (loss) per common share is computed using net income (loss) and the weighted-average number of shares of common stock outstanding. Diluted earnings (loss) per share reflects the potential dilution of securities that could share in the earnings of an entity. Diluted net loss per common share does not differ from basic net loss per common share in the three-month period ended July 31, 2004 since the potentially dilutive shares are anti-dilutive to net loss per share. Potentially dilutive shares excluded from the calculation of diluted net loss per share related to outstanding stock options and warrants totaling 5,151,188 in 2005 and outstanding stock options and warrants totaling 1,761,714 in 2004.
| | Three months ended July 31, | |
| | 2005 | | 2004 | |
Net income (loss) to common shareholders for basic (loss) earnings per share | | $ | 4,851,551 | | $ | (1,254,656 | ) |
| | | | | |
Effect of dilutive securities: | | | | | |
| | | | | |
Decrease in warrant liability | | (6,453,938 | ) | — | |
| | | | | |
Net income (loss) to common shareholders for diluted (loss) earnings per share | | $ | (1,602,387 | ) | $ | (1,254,656 | ) |
| | Three months ended July 31, | |
| | 2005 | | 2004 | |
Weighted average shares for basic (loss) earnings per share | | 11,024,420 | | 9,489,670 | |
Effect of dilutive securities: | | | | | |
Shares issuable under warrant agreements | | 10,369,323 | | — | |
Weighted average shares for diluted (loss) earnings per share | | 21,393,743 | | 9,489,670 | |
The Company restated dilutive earnings (loss) per share from continuing operations for the three months ended July 31, 2005, to correct a computational error. The effect of the restatement was to decrease dilutive earnings per share from continuing operations by $0.30. This change had no impact on net income available to common shareholders for the three months ended July 31, 2005, or total shareholder deficit at July 31, 2005.
(5) Discontinued Operations
On November 18, 2004, the Company’s board of directors voted to authorize management to cease production of heart valves but to continue marketing the valves while exploring the merits of possible strategic alternatives for the heart valve business, including, but not limited to, a joint venture with another party or the sale of the business. Following exploration of a number of alternatives, management concluded in April 2005 that an orderly winding up of the valve business was the Company’s best alternative. On April 6, 2005, the Company’s board authorized management to discontinue sales of heart valves effective April 30, 2005, and to seek a buyer for the related production equipment.
As a result of the Company’s discontinuance of the heart valve business, the Company made a determination during the fourth quarter of fiscal year 2005 that the remaining assets of the heart valve operations should be considered “held for sale” pursuant to SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.” (SFAS No. 144) Pursuant to SFAS No. 144, the Company ceased depreciation of property and equipment held for sale and evaluated whether any of the long-lived assets of the discontinued heart valve business were impaired. Based upon the estimated selling prices of these assets, management concluded that the carrying value of these assets was not
7
impaired. As of July 31, 2005 and April 30, 2005, the carrying value of the remaining net assets of the heart valve business is reported as assets of discontinued operations on the Company’s balance sheet. In connection with this decision to discontinue the sale of heart valves, the Company reduced the carrying value of certain excess inventories, resulting in a provision recorded during fiscal year 2005 of $2,573,656. This provision was included in the 2005 loss from discontinued operations.
Valve business revenue and loss before income taxes included in discontinued operations are as follows:
| | For Three Months Ended July 31, | |
| | 2005 | | 2004 | |
Revenues | | $ | 338,333 | | $ | 795,503 | |
| | | | | |
Income (loss) before income taxes | | $ | (102,969 | ) | $ | 103,607 | |
The carrying amounts and major classes of the assets and liabilities, which are presented as assets and liabilities of discontinued operations on the accompanying balance sheet as of July 31, 2005 and April 30, 2005, are as follows:
| | July 31, 2005 | | April 30, 2005 | |
ASSETS | | | | | |
Accounts receivable, net of allowance of $13,974 and $196,521 at July 31, 2005 and April 30, 2005, respectively | | $ | 364,913 | | $ | 557,291 | |
Inventories | | — | | 228,665 | |
Prepaid expenses | | 67,269 | | 89,692 | |
Total current assets of discontinued operations | | $ | 432,182 | | $ | 875,648 | |
| | | | | |
Property, plant and equipment, net | | $ | 188,145 | | $ | 188,145 | |
Other long-term assets | | 179,654 | | 179,654 | |
Total non-current assets of discontinued operations | | $ | 367,799 | | $ | 367,799 | |
| | | | | |
LIABILITIES | | | | | |
Accounts payable | | $ | 6,000 | | $ | 192,295 | |
Accrued expenses | | 10,300 | | 10,300 | |
Total current liabilities of discontinued operations | | $ | 16,300 | | $ | 202,595 | |
| | | | | |
Net assets of discontinued operations | | $ | 783,681 | | $ | 1,040,852 | |
(6) Restructuring and Severance Charges
In the quarter ended July 31, 2004 (the first quarter of fiscal year 2005), the Company restructured its executive management team, resulting in the termination of two employees, which resulted in a charge of approximately $182,000 to general and administrative expenses. This charge represented the amount of future severance payments due to these former employees. During the quarter ended October 31, 2004, the Company terminated an additional five employees in an effort to reduce operating costs. This restructuring resulted in additional severance costs of approximately $46,000, of which $20,000 is included in general and administrative expenses and $26,000 (restated) is included in discontinued operations. In the quarter ended January 31, 2005, the Company terminated an additional eleven employees resulting in approximately $48,000 of severance costs, of which $16,000 is included in general and administrative expenses and $32,000 (restated) is included in discontinued operations. During the quarter ended April 30, 2005, the Company terminated two additional employees resulting in approximately $32,000 of severance costs charged to general and administrative expenses. During the quarter ended July 31, 2005 (the first quarter of fiscal year 2006) the Company entered into a separation agreement with an employee, resulting in a charge to general and administrative expense for severance pay of $40,382. The Company expects to pay all amounts due to these former employees by September 30, 2005. As of July 31, 2005, $27,802 remained accrued but not paid.
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| | Total | |
Restructuring charges fiscal year 2005 | | $ | 308,000 | |
Cash usage fiscal year 2005 | | (283,166 | ) |
Balance as of April 30, 2005 | | $ | 24,834 | |
Severance charges first quarter of fiscal year 2006 | | 40,382 | |
Cash usage first quarter of fiscal year 2006 | | (37,414 | ) |
Balance as of July 31, 2005 | | $ | 27,802 | |
(7) Equity Sale
During the fourth quarter of fiscal year 2004 and the first quarter of fiscal year 2005, the Company completed the private sale of 2,730,763 units for $1.47 per unit. Each unit consisted of one share of common stock and one five-year warrant to purchase a common share for $1.60 per share. Proceeds from the offering, net of offering costs of $452,892, were $3,561,330. In addition to cash commissions included in the offering costs, the Company issued to the private placement agent and finder five-year warrants to purchase an aggregate of 218,461 units at $1.8375 per unit. As a result of anti-dilution adjustments through July 31, 2005, these warrants are exercisable for 599,137 units at $0.67 per unit.
Preferred Stock
On April 1, 2005, under the terms of a Securities Purchase Agreement with accredited investors, the Company issued 18,035 shares of 5% Series A Convertible Preferred Stock to such investors, warrants for the purchase of 27,052,500 shares of common stock to such investors exercisable at $0.50 per share, and warrants for the purchase in the aggregate of 1,635,960 shares of common stock to the placement agent and finder exercisable at $0.50 per share. These warrants have a term of five years. The preferred stock, which is non-voting, has a stated value of $1,000 and accrues cumulative dividends at a rate of 5 percent of this stated value annually. Dividends are payable quarterly but may, at the option of the Company, be added to the stated value rather than paid in cash, if certain conditions are met. Each share of preferred stock is convertible into the number of shares of common stock equal to the $1,000 stated value divided by $0.50, subject to anti-dilution adjustments. As a result, the 18,035 preferred shares sold may be converted into 36,070,000 shares of common stock, subject to anti-dilution adjustments. As of July 31, 2005, there were 17,785 preferred shares outstanding.
In certain circumstances, the Company may have the option to require the preferred stockholders to convert their shares into common stock. In the event of a fundamental transaction, as defined, the preferred shareholders have the right to require the Company to redeem the preferred shares at their stated value, including any accrued but unpaid dividends. In the event of certain defaults, the preferred shareholders have the right to require the Company to redeem the preferred shares at 110 percent their stated value, including any accrued but unpaid dividends. As a result of these redemption provisions, the carrying value of these preferred shares is considered to be redeemable and is reported as a “mezzanine” instrument on the Company’s balance sheet beginning on April 30, 2005. The aggregate liquidation value of these redeemable preferred shares at July 31, 2005 was $17,959,116. However, the carrying value of this redeemable preferred stock is zero, net of a discount associated with the warrants issued to the shareholders, the placement agent and the finder, as described below.
The Company is required to register the common shares underlying the preferred stock conversion option and the purchaser warrants. If the Company does not meet certain registration deadlines, the preferred stockholders will be entitled to liquidated damages, as defined. In the event of a fundamental transaction, as defined, the warrants issued to the preferred shareholders, the placement agent and the finder, all provide the warrant holders with the right to put the warrants to the Company for cash in an amount equal to the fair value of the warrants, as determined using the Black Scholes option pricing model. As a result of this put right, the warrants are reported at their fair value as a liability on the Company’s balance sheet beginning on April 30, 2005, and future changes in the fair value of the warrant will result in charges or benefits to the Company’s results of operations. The fair value of these warrants upon closing of the preferred stock sale was $22,271,047. Because the fair value of these warrants at April 30, 2005, exceeded the proceeds received in the preferred stock and warrant issuances, the excess of the fair value of the warrants over the proceeds received (including the converted debt) was recognized as an interest charge of
9
$4,266,047 upon closing. During the period between closing and April 30, 2005, the fair value of these warrants increased to $27,992,609. The Company reported this $5,721,562 increase in fair value as other expense in the fourth quarter of fiscal year 2005. During the quarter ended July 31, 2005, the fair value of these warrants decreased to $21,538,671. The Company reported this $6,453,938 decrease in fair value as a decrease in warrant liability in other income (expense) in the first quarter of fiscal year 2006.
The Company obtained gross cash proceeds of $13,603,000 at the closing (net of $30,000 in legal fees which were withheld by the lead investor). The Company also converted $4,402,000 of indebtedness into the above-referenced securities. The Company incurred cash offering costs of $817,980, including agent commissions, a finder’s fee and out-of-pocket expense reimbursements to certain third parties. The Company also paid legal and administrative expenses of $18,086 incurred by PKM Properties, LLC (“PKM”) in this transaction. PKM is an entity controlled by Paul K. Miller. Mr. Miller serves on our Board of Directors and is our largest shareholder.
(8) Segment Information
The Company views its operations and manages its business as one segment, the manufacturing and marketing of cardiothoracic surgery devices. Factors used to identify the Company’s single operating segment include the organizational structure of the Company and the financial information available for evaluation by chief operating decision maker.
The following table summarizes net sales by geographic area:
| | Three Months Ended July 31, | |
| | 2005 | | 2004 | |
| | (unaudited) | |
Europe | | $ | 279,435 | | $ | 353,316 | |
Middle East | | — | | 257,332 | |
Far East | | — | | 7,703 | |
United States | | 58,898 | | 168,548 | |
Other | | — | | 8,604 | |
TOTALS | | $ | 338,333 | | $ | 795,503 | |
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ITEM 3 CONTROLS AND PROCEDURES
Restatement of Previously Issued Financial Statements
As described in Note 16 to the financial statements set forth in our Annual Report on Form 10-KSB/A for the year ended April 30, 2005, we identified errors in the presentation of our previously issued statements of operations. As a result of these errors, we have restated our financial statements for the the quarter ended October 31, 2004 and the year ended April 30, 2005.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our company’s disclosure controls and procedures as of the end of the period covered in this Quarterly Report on Form 10-QSB/A. Based on this evaluation and because of the material weakness described below, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of the end of the period covered in this Quarterly Report on Form 10-QSB/A. To address the material weakness described below, we have expanded our disclosure controls and procedures to include additional analysis and other procedures over the preparation of the financial statements included in this report. Accordingly, our management has concluded that the financial statements included in this report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.
Material Weakness in Internal Control Over Financial Reporting
A material weakness is a control deficiency or a combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Our management has concluded that, as of July 31, 2005, we did not maintain effective controls over the preparation, review, presentation and disclosure of our statement of operations. Specifically, our controls did not prevent or detect the incorrect presentation of certain expenses as part of continuing operations rather than as part of discontinued operations, in accordance with generally accepted accounting principles. This control deficiency resulted in the restatement of our financial statements for the quarter ended October 31, 2004 and the year ended April 30, 2005. Additionally, this control deficiency could result in a misstatement of the presentation and disclosure of our statement of operations that would result in a material misstatement in our annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency constitutes a material weakness in our internal control over financial reporting as of July 31, 2005.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our quarter ended July 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Plan for Remediation of Material Weakness
We have developed a plan to address this material weakness that includes adding additional professional accounting personnel. On an interim basis, we engaged a senior financial consultant in February 2006 to provide an immediate expansion in our technical finance and accounting resources. This individual will be retained until additional accounting personnel have been employed. We will continue to assess the adequacy and appropriateness of our financial staff and adjust accordingly as changes in our business warrant. Management believes that our plan to address this material weakness, when fully implemented, will remediate this material weakness. Although we are not certain when the material weakness will be remediated, we will need a period of time over which to demonstrate that these controls are functioning appropriately to conclude that we have adequately remediated the material weakness.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 20, 2006.
| MedicalCV, Inc. |
| | |
| By | /s/ Marc P. Flores | |
| | Marc P. Flores |
| | President and Chief Executive Officer |
| | |
| By | /s/ John H. Jungbauer | |
| | John H. Jungbauer |
| | Vice President, Finance and
Chief Financial Officer |
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INDEX TO EXHIBITS
Exhibit
Number | | Description |
10.1 | | Amended Non-Qualified Stock Option Agreement issued to John H. Jungbauer, dated November 18, 2004. * |
| | |
10.2 | | Lease Termination Agreement entered into by and between PKM Properties, LLC and the Company, dated June 29, 2005. * |
| | |
10.3 | | Employment Agreement by and between Marc P. Flores and the Company, dated August 9, 2005 (incorporated by reference to our Current Report on Form 8-K/A, filed August 9, 2005 (File No. 000-33295)). |
| | |
10.4 | | Employment Agreement by and between John H. Jungbauer and the Company, dated August 9, 2005 (incorporated by reference to our Current Report on Form 8-K/A, filed August 9, 2005 (File No. 000-33295)). |
| | |
10.5 | | Form of Non-Qualified Stock Option Agreement Issued to Executive Officers and Other Key Employees (incorporated by reference to our Current Report on Form 8-K/A, filed August 9, 2005 (File No. 000-33295)). |
| | |
31.1 | | Chief Executive Officer Certification pursuant to Exchange Act Rule 13a-14(a). |
| | |
31.2 | | Chief Financial Officer Certification pursuant to Exchange Act Rule 13a-14(a). |
| | |
32.1 | | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350. |
| | |
32.2 | | Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. |
* Previously filed.
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