##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended October 1, 2005
 OR
 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 0-51050
 CABG Medical, Inc.
  MINNESOTA
    
    41-1958628(State of incorporation)
    
    (I.R.S. Employer Identification No.)
 st
   Yes þ
    
    No o
  Yes o
    
    No þ
  Yes o
    
    No þ




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 3. DEFAULTS UPON SENIOR SECURITIESITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERSITEM 5. OTHER INFORMATIONITEM 6. EXHIBITSSIGNATURESCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS.
 CABG MEDICAL, INC.
(A Development Stage Company)
 CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
 Period fromDecember 3, 1999(Date ofInception) toSeptember 30,
    
    
    Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005(In thousands, except share and per share data)Revenue
    
    $
    55
    
    
    $
    
    
    
    $
    34
    
    
    $
    
    
    
    $
    34Expenses:Research and development (note 2)
    
    
    12,664
    
    
    
    648
    
    
    
    1,124
    
    
    
    1,640
    
    
    
    7,510Marketing, general and administrative
    
    
    3,228
    
    
    
    195
    
    
    
    488
    
    
    
    596
    
    
    
    1,500Total
    
    
    15,837
    
    
    
    843
    
    
    
    1,578
    
    
    
    2,236
    
    
    
    8,976Interest income
    
    
    970
    
    
    
    13
    
    
    
    296
    
    
    
    25
    
    
    
    779Net loss
    
    $
    (14,867
    )
    
    $
    (830
    )
    
    $
    (1,282
    )
    
    $
    (2,211
    )
    
    $
    (8,197
    )Basic and diluted net loss per share
    
    
    
    
    
    $
    (0.08
    )
    
    $
    (0.07
    )
    
    $
    (0.23
    )
    
    $
    (0.45
    )Weighted average shares outstanding
 basic and diluted
    
    
    
    
    
    
    10,228,639
    
    
    
    19,361,242
    
    
    
    9,810,264
    
    
    
    18,413,596
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CABG MEDICAL, INC.
(A Development Stage Company)
 CONDENSED BALANCE SHEETS
(unaudited)
 December 31,
    
    
    September 30,2004
    
    
    2005(In thousands, except shareamounts)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    27,746
    
    
    $
    13,128Short-term investments
    
    
    1,190
    
    
    
    17,152Accounts receivable, net
    
    
    21
    
    
    
    39Prepaid expenses
    
    
    253
    
    
    
    64Other current assets
    
    
    17
    
    
    
    28Total current assets
    
    
    29,227
    
    
    
    30,411Long-term investments
    
    
    
    
    
    
    3,965Property and equipment, net
    
    
    199
    
    
    
    335$
    29,426
    
    
    $
    34,711LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    841
    
    
    $
    443Accrued liabilities
    
    
    19
    
    
    
    102Total current liabilities
    
    
    860
    
    
    
    545Commitments and Contingencies (note 2)Stockholders EquityUndesignated stock (no par value) 6,000,000 shares authorized, none issued
and outstanding
    
    
    
    
    
    
    Common stock (no par value) 54,000,000 shares authorized, 15,822,975 and
18,361,155 shares issued and outstanding
    
    
    36,378
    
    
    
    49,715Deferred compensation
    
    
    (1,142
    )
    
    
    (682
    )Deficit accumulated during development stage
    
    
    (6,670
    )
    
    
    (14,867
    )Total stockholders equity
    
    
    28,566
    
    
    
    34,166Total liabilities and shareholders equity
    
    $
    29,426
    
    
    $
    34,711
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CABG MEDICAL, INC.
(A Development Stage Company)
 STATEMENTS OF CASH FLOW
(unaudited)
 Period fromDecember 3, 1999(date of inception)
    
    
    Nine months ended September 30,to September 30,2005
    
    
    2004
    
    
    2005(In thousands)Cash flows from operating activities:Net loss
    
    $
    (14,867
    )
    
    $
    (2,211
    )
    
    $
    (8,197
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    117
    
    
    
    15
    
    
    
    54Stock-based compensation
    
    
    313
    
    
    
    
    
    
    
    155Non-cash stock-based research and development expense
    
    
    4,664
    
    
    
    195
    
    
    
    4,349Change in operating assets and liabilities:Accounts receivable
    
    
    (39
    )
    
    
    
    
    
    
    (18
    )Prepaid expenses and other current assets
    
    
    (176
    )
    
    
    (7
    )
    
    
    106Accounts payable and accrued liabilities
    
    
    545
    
    
    
    579
    
    
    
    (315
    )Net cash used in operating activities
    
    
    (9,443
    )
    
    
    (1,429
    )
    
    
    (3,866
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (452
    )
    
    
    (95
    )
    
    
    (190
    )Purchases of investments
    
    
    (25,850
    )
    
    
    (1,476
    )
    
    
    (21,033
    )Proceeds from investments
    
    
    4,817
    
    
    
    1,491
    
    
    
    1,178Net cash provided by (used in) investing activities
    
    
    (21,485
    )
    
    
    (80
    )
    
    
    (20,045
    )Cash flows from financing activities:Issuance of common stock, net of issuance costs
    
    
    43,926
    
    
    
    2,689
    
    
    
    9,180Proceeds from exercise of employee stock options
    
    
    130
    
    
    
    
    
    
    
    113Net cash provided by financing activities
    
    
    44,056
    
    
    
    2,689
    
    
    
    9,293Net change in cash and cash equivalents
    
    
    13,128
    
    
    
    1,180
    
    
    
    (14,618
    )Cash and cash equivalents beginning of period
    
    
    
    
    
    
    246
    
    
    
    27,746Cash and cash equivalents end of period
    
    $
    13,128
    
    
    $
    1,426
    
    
    $
    13,128Supplemental non-cash disclosures:Deferred compensation
    
    $
    995
    
    
    $
    352
    
    
    $
    (305
    )
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CABG Medical, Inc.
(A Development Stage Company)
 NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
 1.
    
    Basis of Presentation and Significant Accounting Policies
   Accounting Periods
  Development Stage Activities
   Investments
  5




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Stock-Based compensation
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(In thousands, except per share amounts)Net loss, as reported
    
    $
    (830
    )
    
    $
    (1,282
    )
    
    $
    (2,211
    )
    
    $
    (8,197
    )Add: Stock-based employee compensation expense included in net loss
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    155Less: Employee stock compensation expense determined under the
fair value method for all awards
    
    
    (17
    )
    
    
    (81
    )
    
    
    (67
    )
    
    
    (272
    )Pro forma net loss
    
    $
    (847
    )
    
    $
    (1,311
    )
    
    $
    (2,278
    )
    
    $
    (8,314
    )Pro forma net loss per share  basic and diluted
    
    $
    (0.08
    )
    
    $
    (0.07
    )
    
    $
    (0.23
    )
    
    $
    (0.45
    )
 Net Loss Per Share
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(In thousands, except per share amounts)Net loss, as reported
    
    $
    (830
    )
    
    $
    (1,282
    )
    
    $
    (2,211
    )
    
    $
    (8,197
    )Weighted average common shares and equivalents outstandingCommon shares outstanding
    
    
    10,228,639
    
    
    
    18,095,419
    
    
    
    9,810,264
    
    
    
    17,521,976Warrants issued at a nominal exercise price (note 2)
    
    
    
    
    
    
    1,265,823
    
    
    
    
    
    
    
    891,620Weighted
average shares outstanding  basic and diluted
    
    
    10,228,639
    
    
    
    19,361,242
    
    
    
    9,810,264
    
    
    
    18,413,596Pro forma net loss per share  basic and diluted
    
    $
    (0.08
    )
    
    $
    (0.07
    )
    
    $
    (0.23
    )
    
    $
    (0.45
    )
  6




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New Accounting Pronouncement
  2.
    
    License and Investment Agreement
   7




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
    TM
    8




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Critical Accounting Policies
  Results of Operations
 Three months ended September 30,
    
    
    Nine months ended September 30,2004
    
    
    2005
    
    
    Increase
    
    
    2004
    
    
    2005
    
    
    Increase(In thousands)Statements of
Operations Data:Revenue
    
    $
    
    
    
    $
    34
    
    
    $
    34
    
    
    $
    
    
    
    $
    34
    
    
    $
    34Expenses:Research and development
    
    
    648
    
    
    
    1,124
    
    
    
    476
    
    
    
    1,640
    
    
    
    7,510
    
    
    
    5,870Marketing, general and
administrative
    
    
    195
    
    
    
    488
    
    
    
    293
    
    
    
    596
    
    
    
    1,500
    
    
    
    904Total costs and expenses
    
    
    843
    
    
    
    1,578
    
    
    
    735
    
    
    
    2,236
    
    
    
    8,976
    
    
    
    6,740Interest income
    
    
    13
    
    
    
    296
    
    
    
    283
    
    
    
    25
    
    
    
    779
    
    
    
    754Net loss
    
    $
    (830
    )
    
    $
    (1,282
    )
    
    $
    (452
    )
    
    $
    (2,211
    )
    
    $
    (8,197
    )
    
    $
    (5,986
    )
 Revenue
  Research and development expenses
   9




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Marketing, general and administrative expenses
   Interest income
  Liquidity and Capital Resources
  Cash Flows from Operating Activities.
 Cash Flows from Investing Activities
 Cash Flows from Financing Activities.
  10




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New Accounting Pronouncements
  Forward-Looking Statements
   
    
    We are a development stage company with a limited operating history and have incurred
losses since inception. If we do not generate significant revenues, we will not be able to
achieve profitability.
    
    Our future is entirely dependent upon the success of our Holly Graft System which is
still under development. If we are unable to commercialize the Holly Graft System, or we
experience significant delays in doing so, we may be forced to discontinue operations.
    
    We have had adverse results in our first two human implants. In response to these
results, we have made modifications to the Holly Graft System and implant procedure. If
for any reason, these modifications do not prevent occlusion in future implants, the
Companys business would be materially and adversely impaired.
    
    If the incorporation of an anti-platelet regimen of warfarin in the second phase of our
clinical trial does not prevent occlusion in future implants, we may be forced to
discontinue operations.
    
    If we fail to improve clinical results in the second phase of our clinical trial it may
be significantly more difficult to get approval for additional clinical trials. Even if
additional trials are approved, there is no assurance that future improvements made in the
Holly Graft System will be successful.
    
    Without significantly improved clinical results, it is unlikely that we will have the
ability to get approval from the FDA to begin clinical trials in the United States which
could result in causing us to discontinue operations.
    
    Failure to obtain market acceptance of the Holly Graft System could cause us to
discontinue operations.
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
    
    If we are unable to solve the occlusion problem in our graft implants, it will be very
difficult, if not impossible, to raise the funds which will be ultimately required to fund
the Companys operations.
    
    The incorporation of warfarin into our clinical trial may make it significantly more
difficult to recruit patients into our trial causing delays in regulatory approval of our
device.
    
    Any requirement for an anti-platelet regimen of chronic warfarin could have a
significant impact on our ability to gain physician adoption, generate significant revenue
and achieve profitability.
    
    If we fail to develop an effective direct sales force and network of cardiovascular
surgery representatives to introduce and sell the Holly Graft System to surgeons, our
financial results may suffer and the price of our shares may decline.
    
    We will be subject to intense competition and risk of obsolescence.
    
    Our Holly Graft System may not be commercially viable if we fail to obtain an adequate
level of reimbursement by Medicare and other third party payors. The markets for our Holly
Graft System may also be limited by the indications for which its use may be reimbursed.
    
    We may face product liability claims which could place a substantial burden on us.
    
    We depend on a limited number of suppliers and may be unable to manufacture the Holly
Graft System if shipments from these suppliers are delayed or interrupted.
    
    If we are unable to develop relationships with collaborative partners, we may have
difficulty creating a sufficient market for our Holly Graft System.
    
    We may not be able to attract or retain employees with the skills needed to support our
anticipated growth.
    
    Should we lose the services of certain key personnel, we may not be able to successfully
commercialize the Holly Graft System.
    
    We have limited manufacturing experience and will depend on third parties to manufacture
components of our products.
    
    New product development in the medical device industry is both costly and labor
intensive with very low success rates for successful commercialization.
    
    The number of patients undergoing bypass procedures may continue to decline, resulting
in a reduction of our market potential.
    
    There is a risk that the Holly Graft System may be subject to a market withdrawal or
product recall.
    
    Our financial results for future periods may be adversely affected by changes required
by financial and accounting regulatory agencies.
    
    Our financial results for future periods will be affected by the attainment of
milestones.
    
    Because we are subject to intense government regulation, we may not be able to obtain or
maintain regulatory approval.
    
    We could be harmed by litigation involving patents and other intellectual property
rights.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  13




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PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
  
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. EXHIBITS.
  14




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SIGNATURES
  CABG Medical, Inc.November 15, 2005By:
    
    /s/ John L. BabittJohn L. BabittPresident, Chief Operating Officer and Chief Financial Officer(principal financial officer and chief accounting officer)
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 EXHIBIT INDEX TO FORM 10-Q
 For the Quarter Ended October 1, 2005
 CABG Medical, Inc
 Exhibit
    
    Description31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
 16