DIAMETRICS MEDICAL INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-21982

Diametrics Medical, Inc.

Incorporated pursuant to the Laws of Minnesota

Internal Revenue Service—Employer Identification No. 41-1663185

3050 Centre Pointe Drive, Suite 150, Roseville, Minnesota 55113

(651) 639-8035

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 ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes x No ¨

As of July 31, 2004, 35,121,835 shares of Common Stock were outstanding.

Diametrics Medical, Inc.


		Page
Part I—FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (unaudited)
	Consolidated Statements of Operations:
	Three Months Ended June 30, 2004 and 2003	3
	Six Months Ended June 30, 2004 and 2003	3
	Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003	4
	Consolidated Statements of Cash Flows:
	Six Months Ended June 30, 2004 and 2003	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	17
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	27
Item 4.	Controls and Procedures	28

Part II—OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	28
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Submission of Matters to a Vote of Security Holders	29
Item 5.	Other Information	29
Item 6.	Exhibits and Reports on Form 8-K	29
Signatures		31

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (unaudited)

DIAMETRICS MEDICAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Net revenue	$	644,279		$	672,261		$	1,295,295		$	1,409,473
Cost of revenue		681,980			626,815			1,292,900			1,246,301

Gross profit (loss)		(37,701	)		45,446			2,395			163,172

Operating expenses:
Research and development		533,875			529,695			905,543			1,119,414
Selling, general and administrative		1,316,517			1,522,797			2,640,611			3,059,565

Total operating expenses		1,850,392			2,052,492			3,546,154			4,178,979

Operating loss		(1,888,093	)		(2,007,046	)		(3,543,759	)		(4,015,807	)
Interest income		2,254			3,199			7,015			10,685
Interest expense		(553,040	)		(340,711	)		(934,231	)		(479,238	)
Gain on modification of convertible notes		—			1,500,000			—			1,500,000
Other income (expense), net		65,981			(12,444	)		(57,874	)		(10,946	)

Net loss before discontinued operations		(2,372,898	)		(857,002	)		(4,528,849	)		(2,995,306	)

Discontinued operations:
Loss from discontinued operations		—			(369,002	)		—			(1,121,319	)
Gain on sale of discontinued operations		—			—			557,052			—

Income (loss) from discontinued operations		—			(369,002	)		557,052			(1,121,319	)

Net loss		(2,372,898	)		(1,226,004	)		(3,971,797	)		(4,116,625	)
Beneficial conversion feature—preferred stock dividend		(1,067,650	)		(958,962	)		(1,733,644	)		(958,962	)
Deemed dividend on preferred stock		(1,050,690	)		—			(1,050,690	)		—

Net loss available to common shareholders	$	(4,491,238	)	$	(2,184,966	)	$	(6,756,131	)	$	(5,075,587	)

Basic and diluted net loss per common share:
Net loss from continuing operations	$	(0.15	)	$	(0.07	)	$	(0.25	)	$	(0.15	)
Discontinued operations:
Loss from discontinued operations		—			(0.01	)		—			(0.04	)
Gain on sale of discontinued operations		—			—			0.02			—

Net income (loss) from discontinued operations		—			(0.01	)		0.02			(0.04	)

Net loss	$	(0.15	)	$	(0.08	)	$	(0.23	)	$	(0.19	)

Weighted average number of common shares outstanding		30,298,741			26,852,847			29,398,683			26,844,197

See accompanying notes to consolidated financial statements.

DIAMETRICS MEDICAL, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	June 30, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	750,016		$	315,176
Restricted cash		—			720,169
Accounts receivable, net		395,142			464,402
Inventories		1,059,598			1,450,824
Prepaid expenses and other current assets		142,853			298,167

Total current assets		2,347,609			3,248,738

Property and equipment		6,981,666			7,249,524
Less accumulated depreciation and amortization		(5,248,850	)		(5,390,497	)

		1,732,816			1,859,027

Other assets		67,966			85,234

	$	4,148,391		$	5,192,999

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	1,327,471		$	1,097,069
Accrued expenses		957,614			794,148
Deferred credits and revenue		37,885			826,359
Capital lease obligations and other borrowings		90,835			169,861

Total current liabilities		2,413,805			2,887,437

Long-term liabilities:
Convertible senior secured fixed rate notes (net of discount of $1,191,831 and $1,667,858 at June 30, 2004 and December 31, 2003, respectively)		6,108,169			5,632,142
Long-term liabilities, excluding current portion		28,501			48,736
Accrued retirement plan benefit		2,495,260			2,495,260

Total liabilities		11,045,735			11,063,575

Shareholders’ deficit:
Preferred stock, $.01 par value: 5,000,000 authorized, 27,500 and 7,500 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively		275			75
Common stock, $.01 par value: 100,000,000 authorized, 33,938,443 and 27,456,209 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively		339,384			274,562
Additional paid-in capital		156,160,934			150,612,474
Accumulated deficit		(159,612,724	)		(152,856,593	)
Deferred compensation		(13,387	)		(93,699	)
Accumulated other comprehensive loss		(3,771,826	)		(3,807,395	)

Total shareholders’ deficit		(6,897,344	)		(5,870,576	)

	$	4,148,391		$	5,192,999

See accompanying notes to consolidated financial statements.

DIAMETRICS MEDICAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six Months Ended June 30,
	2004			2003
Cash flows from operating activities:
Net loss	$	(3,971,797	)	$	(4,116,625	)
Adjustments to reconcile net loss to net cash used in continuing operating activities:
Loss from discontinued operations		—			1,121,319
Gain on sale of discontinued operations		(557,052	)		—
Depreciation and amortization		402,479			341,502
Gain on modification of convertible senior secured fixed rate notes		—			(1,500,000	)
Accretion of convertible senior secured fixed rate notes		476,027			193,213
Expense related to warrant repricings		161,191			—
Stock-based compensation		80,312			206,178
Loss on disposal of property and equipment		3,723			—
Recognition of deferred gain on sale of business		(718,924	)		—
Changes in operating assets and liabilities (net of effect of operations sold):
Accounts receivable		69,260			(87,347	)
Inventories		391,226			345,347
Prepaid expenses and other current assets		155,314			236,794
Accounts payable

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