QUINTON CARDIOLOGY SYSTEMS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2002


		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 000-49755

QUINTON CARDIOLOGY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)


California (State of Incorporation)		94-3300396 (IRS Employer Identification No.)

3303 Monte Villa Parkway
Bothell, Washington 98021
(Address of principal executive offices)

(425) 402-2000
(Registrant’s telephone number)

Indicated by check ü 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 þ No o

As of November 8, 2002, 11,989,688 shares of the issuer’s common stock were outstanding.

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	Item 1. Unaudited Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATION
EXHIBIT 99.1
EXHIBIT 99.2

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION			3

	Item 1.	Unaudited Financial Statements	3

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

	Item 4.	Controls and Procedures	19

PART II - OTHER INFORMATION			20

	Item 1.	Legal Proceedings	20

	Item 2.	Changes in Securities and Use of Proceeds	20

	Item 5.	Other Information	21

	Item 6.	Exhibits and Reports on Form 8-K	21

SIGNATURE			22

CERTIFICATION			23

PART I — FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

QUINTON CARDIOLOGY SYSTEMS, INC.
AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)


				December 31,			September 30,
				2001			2002

ASSETS
Current Assets:
	Cash and cash equivalents			$	218		$	23,431
	Accounts receivable, net of allowance for doubtful accounts				6,123			5,563
	Inventories				6,161			6,158
	Prepaid expenses and other current assets				626			633

			Total current assets		13,128			35,785
Machinery and equipment, net of accumulated depreciation					3,165			3,036
Patents, net of accumulated amortization					173			81
Investment in unconsolidated entity					1,000			1,000

			Total assets	$	17,466		$	39,902

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
	Line of credit			$	4,471		$	—
	Accounts payable				4,029			4,292
	Accrued liabilities				2,548			3,396
	Warranty liability				1,269			1,040
	Deferred revenue				3,556			4,145
	Putable warrants				705			253

			Total current liabilities		16,578			13,126
Sublease liability, net of current portion					831			208

			Total liabilities		17,409			13,334

Shareholders’ Equity:
	Preferred stock (50,000,000 shares authorized):
		Series A convertible preferred stock			12,230			—
		Series B convertible preferred stock			865			—
	Common stock (100,000,000 shares authorized), no par value, 677,275 and 11,968,435 shares issued and outstanding at December 31, 2001 and September 30, 2002, respectively				3,490			44,957
	Deferred stock-based compensation				(287	)		(198	)
	Accumulated deficit				(16,241	)		(18,191	)

			Total shareholders’ equity		57			26,568

			Total liabilities and shareholders’ equity	$	17,466		$	39,902

The accompanying notes are an integral part of these unaudited condensed consolidated balance sheets.

QUINTON CARDIOLOGY SYSTEMS, INC.
AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)


				Three Months Ended						Nine Months Ended
				September 30,						September 30,

				2001			2002			2001			2002

Revenues:
		Systems		$	8,623		$	9,380		$	25,576		$	26,609
		Service			2,207			2,275			6,815			6,694

			Total revenues		10,830			11,655			32,391			33,303

Cost of Revenues:
		Systems			5,234			5,959			16,135			16,701
		Service			1,115			1,109			3,749			3,485

			Total cost of revenues		6,349			7,068			19,884			20,186

			Gross profit		4,481			4,587			12,507			13,117

Operating Expenses:
		Research and development			1,206			1,205			4,212			3,892
		Sales and marketing			2,381			2,460			7,145			7,379
		General and administrative, excluding stock-based compensation expense			1,151			1,434			3,648			4,023
		Stock-based compensation			577			23			1,028			93

			Total operating expenses		5,315			5,122			16,033			15,387

			Operating loss		(834	)		(535	)		(3,526	)		(2,270	)

Other Income (Expense):
		Interest income			—			97			—			143
		Interest expense			(93	)		—			(276	)		(102	)
		Non-cash interest income (expense), Putable warrants			(186	)		161			(248	)		294
		Other income (expense), net			23			(2	)		47			1

			Total other income (expense)		(256	)		256			(477	)		336

Loss before income taxes					(1,090	)		(279	)		(4,003	)		(1,934	)
	Income tax benefit (provision)				—			(2	)		197			(16	)

		Net loss		$	(1,090	)	$	(281	)	$	(3,806	)	$	(1,950	)

Basic and diluted net loss per share				$	(1.72	)	$	(0.02	)	$	(6.14	)	$	(0.30	)

Weighted average shares used to compute basic and diluted net loss per share					632,471			11,951,569			619,553			6,512,247

The accompanying notes are an integral part of these unaudited condensed consolidated statements.

QUINTON CARDIOLOGY SYSTEMS, INC.
AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


					Three Months Ended						Nine Months Ended
					September 30,						September 30,

					2001			2002			2001			2002

Operating Activities:
	Net loss				$	(1,090	)	$	(281	)	$	(3,806	)	$	(1,950	)
	Adjustments to reconcile net loss to net cash from operating activities—
		Depreciation and amortization				283			308			861			891
		Loss on sale of equipment				7			5			49			14
		Amortization of deferred stock compensation				577			23			1,028			93
		Non-cash interest expense (income), putable warrants				186			(161	)		248			(294	)
		Non-cash other income				(30	)		—			(30	)		—
		Changes in operating assets and liabilities:
			Accounts receivable			543			608			1,396			560
			Inventories			17			(752	)		440			3
			Prepaid expenses and other assets			274			82			74			(7	)
			Income taxes receivable			—			—			1,209			—
			Accounts payable			215			91			521			228
			Accrued liabilities and sublease liability			(270	)		65			(45	)		225
			Warranty liability			(126	)		(57	)		(372	)		(229	)
			Deferred revenue			(45	)		306			(291	)		589

				Net cash flows from operating activities		541			237			1,282			123

Investing Activities:
	Purchases of machinery and equipment					(21	)		(286	)		(192	)		(684	)

				Net cash flows from investing activities		(21	)		(286	)		(192	)		(684	)

Financing Activities:
	Repayments of borrowings on the bank line of credit, net					(517	)		—			(1,119	)		(4,471	)
	Proceeds from (costs of) issuance of common stock, net of issuance costs of $772 for the three months ended September 30, 2002 and $3,981 for the nine months ended September 30, 2002					—			(630	)		—			28,361
	Redemption of putable warrants					—			(158	)		—			(158	)
	Proceeds from exercise of stock options					—			3			5			42
	Repurchase of shares in connection with termination					—			—			(94	)		—

				Net cash flows from financing activities		(517	)		(785	)		(1,208	)		23,774

Net change in cash and cash equivalents						3			(834	)		(118	)		23,213
Cash and cash equivalents, beginning of period						302			24,265			423			218

Cash and cash equivalents, end of period					$	305		$	23,431		$	305		$	23,431

Supplemental disclosure of cash flow information:
	Cash paid for interest				$	94		$	—

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