##### 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 July 2, 2005
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
  CABG Medical, Inc.
  MINNESOTA
(State of incorporation)
    
    41-1958628
(I.R.S. Employer Identification No.)
 st
   þ o
  o þ
     1




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS.NOTES TO 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 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.SIGNATURESEXHIBIT INDEX TO FORM 10-Q2005 Annual Incentive PlanCertification 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)
 STATEMENTS OF OPERATIONS
(unaudited)
 Period fromDecember 3, 1999(Date ofInception) to
    
    
    Three Months
    
    
    Six MonthsJune 30,
    
    
    Ended June 30,
    
    
    Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005(In thousands, except share and per share data)Revenue
    
    $
    21
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Expenses:Research and development (note 2)
    
    
    11,541
    
    
    
    473
    
    
    
    1,063
    
    
    
    992
    
    
    
    6,387Marketing, general and administrative
    
    
    2,740
    
    
    
    236
    
    
    
    474
    
    
    
    401
    
    
    
    1,012Total
    
    
    14,281
    
    
    
    709
    
    
    
    1,537
    
    
    
    1,393
    
    
    
    7,399Interest income
    
    
    674
    
    
    
    7
    
    
    
    277
    
    
    
    12
    
    
    
    483Net loss
    
    $
    (13,586
    )
    
    $
    (702
    )
    
    $
    (1,260
    )
    
    $
    (1,381
    )
    
    $
    (6,916
    )Basic and diluted net loss per share
    
    
    
    
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    (0.14
    )
    
    $
    (0.39
    )Weighted average shares outstanding 
basic and diluted
    
    
    
    
    
    
    9,846,052
    
    
    
    19,082,764
    
    
    
    9,601,077
    
    
    
    17,942,362
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CABG MEDICAL, INC.
(A Development Stage Company)
 BALANCE SHEETS
(unaudited)
 December 31,
    
    
    June 30,2004
    
    
    2005(In thousands, except share amounts)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    27,746
    
    
    $
    19,892Short-term investments
    
    
    1,190
    
    
    
    11,501Accounts receivable, net
    
    
    21
    
    
    
    Prepaid expenses
    
    
    253
    
    
    
    133Other current assets
    
    
    17
    
    
    
    32Total current assets
    
    
    29,227
    
    
    
    31,558Long-term investments
    
    
    
    
    
    
    4,000Property and equipment, net
    
    
    199
    
    
    
    314$
    29,426
    
    
    $
    35,872LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities
    
    $Accounts payable
    
    $
    841
    
    
    $
    477Accrued liabilities
    
    
    19
    
    
    
    29Total current liabilities
    
    
    860
    
    
    
    506Commitments 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
17,982,155 shares issued and outstanding
    
    
    36,378
    
    
    
    49,877Deferred compensation
    
    
    (1,142
    )
    
    
    (925
    )Deficit accumulated during development stage
    
    
    (6,670
    )
    
    
    (13,586
    )Total stockholders equity
    
    
    28,566
    
    
    
    35,366Total liabilities and shareholders equity
    
    $
    29,426
    
    
    $
    35,872
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CABG MEDICAL, INC.
(A Development Stage Company)
 STATEMENTS OF CASH FLOW
(unaudited)
 Period fromDecember 3, 1999(date of inception)
    
    
    Six months ended June 30,to June 30, 2005
    
    
    2004
    
    
    2005(In thousands)Cash flows from operating activities:Net loss
    
    $
    (13,586
    )
    
    $
    (1,381
    )
    
    $
    (6,916
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    94
    
    
    
    10
    
    
    
    32Stock-based compensation
    
    
    103
    
    
    
    
    
    
    
    103Non-cash stock-based research and development expense
    
    
    4,791
    
    
    
    195
    
    
    
    4,335Change in operating assets and liabilities:Accounts receivable
    
    
    
    
    
    
    
    
    
    
    21Prepaid expenses and other current assets
    
    
    (233
    )
    
    
    13
    
    
    
    49Accounts payable and accrued liabilities
    
    
    506
    
    
    
    362
    
    
    
    (354
    )Net cash used in operating activities
    
    
    (8,325
    )
    
    
    (801
    )
    
    
    (2,730
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (408
    )
    
    
    (58
    )
    
    
    (148
    )Purchases of short-term investments
    
    
    (20,249
    )
    
    
    (496
    )
    
    
    (15,432
    )Proceeds from short-term investments
    
    
    4,817
    
    
    
    1,491
    
    
    
    1,178Net cash provided by (used in) investing activities
    
    
    (15,840
    )
    
    
    937
    
    
    
    (14,402
    )Cash flows from financing activities:Issuance of common stock, net of issuance costs
    
    
    43,943
    
    
    
    1,377
    
    
    
    9,180Proceeds from exercise of employee stock options
    
    
    114
    
    
    
    
    
    
    
    98Net cash provided by financing activities
    
    
    44,057
    
    
    
    1,377
    
    
    
    9,278Net change in cash and cash equivalents
    
    
    19,892
    
    
    
    1,513
    
    
    
    (7,854
    )Cash and cash equivalents beginning of period
    
    
    
    
    
    
    246
    
    
    
    27,746Cash and cash equivalents end of period
    
    $
    19,892
    
    
    $
    1,759
    
    
    $
    19,892Supplemental non-cash disclosures:Deferred compensation
    
    $
    220
    
    
    $
    88
    
    
    $
    114
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##### Table of Contents



CABG Medical, Inc.
(A Development Stage Company)
 NOTES TO 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
    
    
    Six months endedJune 30,
    
    
    June 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(In thousands, except per share amounts)Net loss, as reported
    
    $
    (702
    )
    
    $
    (1,260
    )
    
    $
    (1,381
    )
    
    $
    (6,916
    )Add: Stock-based employee compensation expense included in net loss
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    103Less: Employee stock compensation expense determined under the
fair value method for all awards
    
    
    (23
    )
    
    
    (92
    )
    
    
    (50
    )
    
    
    (191
    )Pro forma net loss
    
    $
    (725
    )
    
    $
    (1,300
    )
    
    $
    (1,431
    )
    
    $
    (7,004
    )Pro forma net loss per share  basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    (0.15
    )
    
    $
    (0.39
    )
 Net Loss Per Share
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(In thousands, except per share amounts)Net loss, as reported
    
    $
    (702
    )
    
    $
    (1,260
    )
    
    $
    (1,381
    )
    
    $
    (6,916
    )Weighted average common shares and equivalents outstandingCommon shares outstanding
    
    
    9,846,052
    
    
    
    17,816,941
    
    
    
    9,601,077
    
    
    
    17,236,821Warrants issued at a nominal exercise price (note 2)
    
    
    
    
    
    
    1,265,823
    
    
    
    
    
    
    
    705,541Weighted average shares outstanding  basic and diluted
    
    
    9,846,052
    
    
    
    19,082,764
    
    
    
    9,601,077
    
    
    
    17,942,362Pro forma net loss per share  basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    (0.14
    )
    
    $
    (0.39
    )
  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
        8




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Critical Accounting Policies
  9




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Results of Operations
 Three months ended June 30,
    
    
    Six months ended June 30,2004
    
    
    2005
    
    
    Increase
    
    
    2004
    
    
    2005
    
    
    Increase(In thousands)Statements of
Operations Data:Revenue
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Expenses:Research and development
    
    
    473
    
    
    
    1,063
    
    
    
    590
    
    
    
    992
    
    
    
    6,387
    
    
    
    5,395Marketing, general and
administrative
    
    
    236
    
    
    
    474
    
    
    
    238
    
    
    
    401
    
    
    
    1,012
    
    
    
    611Total costs and expenses.
    
    
    709
    
    
    
    1,537
    
    
    
    828
    
    
    
    1,393
    
    
    
    7,399
    
    
    
    6,006Interest income
    
    
    7
    
    
    
    277
    
    
    
    270
    
    
    
    12
    
    
    
    483
    
    
    
    471Net loss
    
    $
    (702
    )
    
    $
    (1,260
    )
    
    $
    (558
    )
    
    $
    (1,381
    )
    
    $
    (6,916
    )
    
    $
    (5,535
    )
 Revenue
  Research and development expenses
   Marketing, general and administrative expenses
   10




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Interest income
  Liquidity and Capital Resources
  Cash Flows from Operating Activities
 Cash Flows from Investing Activities
 Cash Flows from Financing Activities.
  New Accounting Pronouncements
  Forward-Looking Statements
  11




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
    
    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, our business will be materially harmed.
    
    We have had adverse results in our first two human implants. In response to these
results we have revised coating procedures and drug regimens which we believe will prevent
occlusion. If for any reason, these new procedures do not prevent occlusion in future
implants, the Companys business would be materially and adversely impaired.
    
    Failure to obtain market acceptance of the Holly Graft System could cause us to
discontinue operations.
    
    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.
    
    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.
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
    
    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.
    
    If we fail to maintain the adequacy of our internal controls, our ability to provide
accurate financial statements could be impaired and any failure to maintain our internal
controls and provide accurate financial statements would cause our stock price to decrease
substantially.
    
    We may encounter difficulties in managing our growth and expanding our operations
successfully.
    
    Because we are subject to intense government regulation, we may not be able to obtain or
maintain regulatory approval.
    
    We may not be able to protect our intellectual property rights adequately.
    
    We could be harmed by litigation involving patents and other intellectual property rights.
  
 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.
  (a)
    
    The Company held its Annual Meeting of Shareholders on May 3, 2005.(b)
    
    Proxies were solicited pursuant to Regulation 14A under the
Securities Act of 1934. The shareholders voted on three matters:
(i) to set the number of directors at nine (9), (ii) to elect
directors, and (iii) to ratify the appointment of KPMG LLP as our
Independent Registered Public Accounting Firm for the year ended
December 31, 2005. The shareholders approved all matters by the
following votes:
 Votes
    
    
    Votes
    
    
    BrokerVotes For
    
    
    Against
    
    
    Abstained
    
    
    Non-Votes(i) Set the number of directors at five (5)
    
    
    14,665,357
    
    
    
    21,000
    
    
    
    14,900
    
    
    
    
 VotesVotes For
    
    
    Withheld(ii) Elect directorsManuel A. Villafaña
    
    
    14,431,957
    
    
    
    269,300John L. Babitt
    
    
    14,660,357
    
    
    
    40,900A. Jay Graf
    
    
    14,426,957
    
    
    
    274,300Robert E. Munzenrider
    
    
    14,426,957
    
    
    
    274,300Arch C. Smith
    
    
    14,426,957
    
    
    
    274,300
 Votes
    
    
    Votes
    
    
    BrokerVotes For
    
    
    Against
    
    
    Abstained
    
    
    Non-Votes(iii) To ratify the
appointment of KPMG
LLP as Independent
Registered Public
Accounting Firm for
the year ended
December 31, 2005
    
    
    14,370,358
    
    
    
    308,999
    
    
    
    21,900
    
    
    
    
 
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. EXHIBITS.
  14




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SIGNATURES
  CABG Medical, Inc.August 12, 2005
    By:
    /s/ John L. BabittJohn L. BabittPresident, Chief Operating Officer and Chief Financial Officer
(principal financial officer and chief accounting officer) 15




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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 EXHIBIT INDEX TO FORM 10-Q
 For the Quarter Ended July 2, 2005
 CABG Medical, Inc
 Exhibit
    
    Description10.1
    
    
    CABG Medical, Inc. 2005 Annual Incentive Plan31.1
    
    
    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