##### 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 June 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 000-51512
 
 Cardiac Science Corporation
  Delaware
    
    94-3300396(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)3303 Monte Villa Parkway, Bothell, WA
    
    98021(Address of Principal Executive Offices)
    
    (Zip Code)
 (425) 402-2000  (Registrants Telephone Number, Including Area Code)
 þ o
 o o
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o o þ




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)
    
    
    3Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    31PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    32Item 1A.
    
    Risk Factors
    
    
    32Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3.
    
    Defaults Upon Senior Securities
    
    
    33Item 4.
    
    Removed and Reserved
    
    
    33Item 5.
    
    Other Information
    
    
    34Item 6.
    
    Exhibits
    
    
    34SIGNATURE
    
    
    35EX-10.4EX-31.1EX-31.2EX-32.1EX-32.2
  Page 2 of 35




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements
 CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,(in thousands, except share amounts)
    
    2010
    
    
    2009ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    10,885
    
    
    $
    26,866Accounts receivable, net of allowance for doubtful accounts of $900 and
$1,017, respectively
    
    
    23,784
    
    
    
    24,228Inventories
    
    
    24,476
    
    
    
    23,581Prepaid expenses and other current assets
    
    
    3,240
    
    
    
    3,702Total current assets
    
    
    62,385
    
    
    
    78,377Other assets
    
    
    666
    
    
    
    872Machinery and equipment, net of accumulated depreciation and amortization
of $18,749 and $17,490, respectively
    
    
    8,418
    
    
    
    8,406Deferred income taxes
    
    
    31
    
    
    
    31Intangible assets, net of accumulated amortization of $19,836 and $17,876,
respectively
    
    
    25,999
    
    
    
    27,988Investments in unconsolidated entities
    
    
    400
    
    
    
    386Total assets
    
    $
    97,899
    
    
    $
    116,060LIABILITIES AND EQUITYCurrent Liabilities:Accounts payable
    
    $
    12,499
    
    
    $
    11,030Accrued liabilities
    
    
    12,619
    
    
    
    12,216Warranty liability
    
    
    3,981
    
    
    
    4,028Deferred revenue
    
    
    7,799
    
    
    
    7,919Corrective action liabilities
    
    
    21,452
    
    
    
    15,249Total current liabilities
    
    
    58,350
    
    
    
    50,442Deferred income taxes
    
    
    5,389
    
    
    
    5,389Total liabilities
    
    
    63,739
    
    
    
    55,831Equity:Cardiac Science Corporation shareholders equity:Preferred stock (10,000,000 shares authorized), $0.001 par value, no shares
issued or outstanding as of June 30, 2010 and December 31, 2009,
respectively
    
    
    
    
    
    
    Common stock (65,000,000 shares authorized), $0.001 par value,
23,808,124 and 23,566,320 shares issued and outstanding at
June 30, 2010 and December 31, 2009, respectively
    
    
    232,455
    
    
    
    231,159Accumulated other comprehensive income
    
    
    53
    
    
    
    304Accumulated deficit
    
    
    (199,624
    )
    
    
    (172,527
    )Total Cardiac Science Corporation shareholders equity
    
    
    32,884
    
    
    
    58,936Noncontrolling interests
    
    
    1,276
    
    
    
    1,293Total equity
    
    
    34,160
    
    
    
    60,229Total liabilities and equity
    
    $
    97,899
    
    
    $
    116,060
  Page 3 of 35




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CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In thousands, except share and per share data)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues:Products
    
    $
    31,672
    
    
    $
    31,653
    
    
    $
    60,439
    
    
    $
    66,918Service
    
    
    4,431
    
    
    
    4,461
    
    
    
    8,771
    
    
    
    8,860Total revenues
    
    
    36,103
    
    
    
    36,114
    
    
    
    69,210
    
    
    
    75,778Cost of Revenues:Products
    
    
    16,047
    
    
    
    15,433
    
    
    
    31,075
    
    
    
    32,067Corrective action costs
    
    
    11,000
    
    
    
    
    
    
    
    11,000
    
    
    
    Service
    
    
    3,187
    
    
    
    3,130
    
    
    
    6,350
    
    
    
    6,281Total cost of revenues
    
    
    30,234
    
    
    
    18,563
    
    
    
    48,425
    
    
    
    38,348Gross profit
    
    
    5,869
    
    
    
    17,551
    
    
    
    20,785
    
    
    
    37,430Operating Expenses:Research and development
    
    
    4,629
    
    
    
    3,617
    
    
    
    8,834
    
    
    
    7,088Sales and marketing
    
    
    12,412
    
    
    
    11,271
    
    
    
    25,214
    
    
    
    22,469General and administrative
    
    
    7,201
    
    
    
    6,349
    
    
    
    13,594
    
    
    
    11,965Total operating expenses
    
    
    24,242
    
    
    
    21,237
    
    
    
    47,642
    
    
    
    41,522Operating loss
    
    
    (18,373
    )
    
    
    (3,686
    )
    
    
    (26,857
    )
    
    
    (4,092
    )Other Income (Loss):Interest income
    
    
    8
    
    
    
    19
    
    
    
    18
    
    
    
    32Other income (loss), net
    
    
    (37
    )
    
    
    545
    
    
    
    94
    
    
    
    397Total other income (loss)
    
    
    (29
    )
    
    
    564
    
    
    
    112
    
    
    
    429Loss before income tax benefit (expense)
    
    
    (18,402
    )
    
    
    (3,122
    )
    
    
    (26,745
    )
    
    
    (3,663
    )Income tax benefit (expense)
    
    
    (58
    )
    
    
    1,194
    
    
    
    (191
    )
    
    
    1,360Net loss
    
    
    (18,460
    )
    
    
    (1,928
    )
    
    
    (26,936
    )
    
    
    (2,303
    )Less: Net income attributable to noncontrolling interests
    
    
    (50
    )
    
    
    (178
    )
    
    
    (161
    )
    
    
    (341
    )Net loss attributable to Cardiac Science Corporation
    
    $
    (18,510
    )
    
    $
    (2,106
    )
    
    $
    (27,097
    )
    
    $
    (2,644
    )Net loss per share attributable to CardiacScience Corporation:Basic
    
    $
    (0.78
    )
    
    $
    (0.09
    )
    
    $
    (1.15
    )
    
    $
    (0.11
    )Diluted
    
    $
    (0.78
    )
    
    $
    (0.09
    )
    
    $
    (1.15
    )
    
    $
    (0.11
    )Weighted average shares outstanding:Basic
    
    
    23,723,268
    
    
    
    23,198,352
    
    
    
    23,658,886
    
    
    
    23,127,742Diluted
    
    
    23,723,268
    
    
    
    23,198,352
    
    
    
    23,658,886
    
    
    
    23,127,742
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CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Operating Activities:Net loss
    
    $
    (18,460
    )
    
    $
    (1,928
    )
    
    $
    (26,936
    )
    
    $
    (2,303
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Stock-based compensation
    
    
    635
    
    
    
    554
    
    
    
    1,220
    
    
    
    1,213Depreciation and amortization
    
    
    1,620
    
    
    
    1,542
    
    
    
    3,208
    
    
    
    3,067Deferred income taxes
    
    
    
    
    
    
    (1,398
    )
    
    
    
    
    
    
    (1,765
    )Changes in operating assets and liabilities, net of
businesses acquired:Accounts receivable, net
    
    
    (2,662
    )
    
    
    730
    
    
    
    (18
    )
    
    
    8,717Inventories
    
    
    1,021
    
    
    
    (89
    )
    
    
    (997
    )
    
    
    (1,330
    )Prepaid expenses and other assets
    
    
    86
    
    
    
    (392
    )
    
    
    660
    
    
    
    36Accounts payable
    
    
    1,593
    
    
    
    (118
    )
    
    
    1,726
    
    
    
    (2,457
    )Accrued liabilities
    
    
    (390
    )
    
    
    1,045
    
    
    
    579
    
    
    
    (291
    )Warranty liability
    
    
    (72
    )
    
    
    111
    
    
    
    (15
    )
    
    
    9Corrective action liabilities
    
    
    7,947
    
    
    
    
    
    
    
    6,203
    
    
    
    Deferred revenue
    
    
    (649
    )
    
    
    426
    
    
    
    (120
    )
    
    
    (670
    )Net cash provided by (used in) operating activities
    
    
    (9,331
    )
    
    
    483
    
    
    
    (14,490
    )
    
    
    4,226Investing Activities:Purchases of machinery and equipment
    
    
    (669
    )
    
    
    (769
    )
    
    
    (1,345
    )
    
    
    (1,654
    )Proceeds from repayment of note
    
    
    
    
    
    
    10
    
    
    
    2
    
    
    
    83Cash paid for acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54
    )Net cash used in investing activities
    
    
    (669
    )
    
    
    (759
    )
    
    
    (1,343
    )
    
    
    (1,625
    )Financing Activities:Proceeds from exercise of stock options and issuance of
shares under employee stock purchase plan
    
    
    57
    
    
    
    502
    
    
    
    152
    
    
    
    736Minimum tax withholding on restricted stock awards
    
    
    (64
    )
    
    
    
    
    
    
    (94
    )
    
    
    (97
    )Net cash provided by (used in) financing activities
    
    
    (7
    )
    
    
    502
    
    
    
    58
    
    
    
    639Effect of exchange rate changes on cash and cash equivalents
    
    
    (113
    )
    
    
    79
    
    
    
    (206
    )
    
    
    (27
    )Net change in cash and cash equivalents
    
    
    (10,120
    )
    
    
    305
    
    
    
    (15,981
    )
    
    
    3,213Cash and cash equivalents, beginning of period
    
    
    21,005
    
    
    
    37,563
    
    
    
    26,866
    
    
    
    34,655Cash and cash equivalents, end of period
    
    $
    10,885
    
    
    $
    37,868
    
    
    $
    10,885
    
    
    $
    37,868Supplemental disclosures of noncash investing and financing activities:Increase (decrease) in accrued machinery and equipment purchases
    
    $
    (69
    )
    
    $
    153
    
    
    $
    (85
    )
    
    $
    (243
    )
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CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Summary of Significant Accounting Policies
 Organization and Description of Business
 ® ® ®
  Basis of Presentation
    Liquidity
    Page 6 of 35




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Use of Estimates
  Net Loss Per Share
  Page 7 of 35




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands, except share data)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:Net loss attributable to Cardiac Science
Corporation
    
    $
    (18,510
    )
    
    $
    (2,106
    )
    
    $
    (27,097
    )
    
    $
    (2,644
    )Denominator:Weighted average shares for basic calculation
    
    
    23,723,268
    
    
    
    23,198,352
    
    
    
    23,658,886
    
    
    
    23,127,742Weighted average shares for diluted calculation
    
    
    23,723,268
    
    
    
    23,198,352
    
    
    
    23,658,886
    
    
    
    23,127,742
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Antidilutive shares issuable upon exercise of stock options
    
    
    2,907,638
    
    
    
    3,094,822
    
    
    
    2,907,638
    
    
    
    3,094,822Antidilutive shares issuable upon exercise of warrants
    
    
    
    
    
    
    212,776
    
    
    
    
    
    
    
    212,776Antidilutive shares related to non-vested stock awards and
ESPP
    
    
    1,546,725
    
    
    
    935,039
    
    
    
    1,546,725
    
    
    
    935,039Total
    
    
    4,454,363
    
    
    
    4,242,637
    
    
    
    4,454,363
    
    
    
    4,242,637
 Customer and Vendor Concentrations
   Subsequent Events
  Recent Accounting Pronouncements
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2. Corrective Action Liabilities
 November 2009 Corrective Actions
     Page 9 of 35




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February 2010 Corrective Action
  Recorded Charges
   Charged toBeginning
    
    product cost
    
    
    
    
    
    
    
    
    
    End of(in thousands)
    
    of period
    
    of revenues
    
    Adjustments
    
    Expenditures
    
    periodSix months ended June 30, 2010
    
    $
    15,249
    
    
    $
    11,000
    
    
    $
    
    
    
    $
    (4,797
    )
    
    $
    21,452
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3. Equity and Comprehensive Income (Loss)
    Attributable toCardiac Science
    
    
    Noncontrolling
    
    
    Total(in thousands)
    
    Corporation
    
    
    Interests
    
    
    EquityEquity at March 31, 2010
    
    $
    51,025
    
    
    $
    1,336
    
    
    $
    52,361Comprehensive loss:Net income (loss)
    
    
    (18,510
    )
    
    
    50
    
    
    
    (18,460
    )Unrealized gains on available for sale securities
    
    
    (92
    )
    
    
    
    
    
    
    (92
    )Foreign currency translation adjustments
    
    
    (165
    )
    
    
    (110
    )
    
    
    (275
    )Comprehensive loss
    
    
    (18,767
    )
    
    
    (60
    )
    
    
    (18,827
    )Stock-based transactions and compensation expense under
employee benefit plans
    
    
    626
    
    
    
    
    
    
    
    626Equity at June 30, 2010
    
    $
    32,884
    
    
    $
    1,276
    
    
    $
    34,160Equity at March 31, 2009
    
    $
    131,880
    
    
    $
    658
    
    
    $
    132,538Comprehensive income (loss):Net income (loss)
    
    
    (2,106
    )
    
    
    178
    
    
    
    (1,928
    )Unrealized losses on available for sale securities,
net of related tax of ($183)
    
    
    402
    
    
    
    
    
    
    
    402Foreign currency translation adjustments
    
    
    54
    
    
    
    33
    
    
    
    87Comprehensive income (loss)
    
    
    (1,650
    )
    
    
    211
    
    
    
    (1,439
    )Stock-based transactions and compensation expense under
employee benefit plans
    
    
    1,044
    
    
    
    
    
    
    
    1,044Equity at June 30, 2009
    
    $
    131,274
    
    
    $
    869
    
    
    $
    132,143
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Attributable toCardiac Science
    
    
    Noncontrolling
    
    
    Total(in thousands)
    
    Corporation
    
    
    Interests
    
    
    EquityEquity at December 31, 2009
    
    $
    58,936
    
    
    $
    1,293
    
    
    $
    60,229Comprehensive loss:Net income (loss)
    
    
    (27,097
    )
    
    
    161
    
    
    
    (26,936
    )Unrealized gains on available for sale securities
    
    
    15
    
    
    
    
    
    
    
    15Foreign currency translation adjustments
    
    
    (266
    )
    
    
    (178
    )
    
    
    (444
    )Comprehensive loss
    
    
    (27,348
    )
    
    
    (17
    )
    
    
    (27,365
    )Stock-based transactions and compensation expense under
employee benefit plans
    
    
    1,296
    
    
    
    
    
    
    
    1,296Equity at June 30, 2010
    
    $
    32,884
    
    
    $
    1,276
    
    
    $
    34,160Equity at December 31, 2008
    
    $
    131,703
    
    
    $
    545
    
    
    $
    132,248Comprehensive income (loss):Net income (loss)
    
    
    (2,644
    )
    
    
    341
    
    
    
    (2,303
    )Unrealized
losses on available for sale securities, net of related tax of ($169)
    
    
    374
    
    
    
    
    
    
    
    374Foreign currency translation adjustments
    
    
    (27
    )
    
    
    (17
    )
    
    
    (44
    )Comprehensive income (loss)
    
    
    (2,297
    )
    
    
    324
    
    
    
    (1,973
    )Stock-based transactions and compensation expense under
employee benefit plans
    
    
    1,868
    
    
    
    
    
    
    
    1,868Equity at June 30, 2009
    
    $
    131,274
    
    
    $
    869
    
    
    $
    132,143
 4. Segment Reporting
     Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Defibrillation products
    
    $
    19,051
    
    
    $
    16,853
    
    
    $
    34,913
    
    
    $
    39,791Cardiac monitoring products
    
    
    12,621
    
    
    
    14,800
    
    
    
    25,526
    
    
    
    27,127Service
    
    
    4,431
    
    
    
    4,461
    
    
    
    8,771
    
    
    
    8,860Total
    
    $
    36,103
    
    
    $
    36,114
    
    
    $
    69,210
    
    
    $
    75,778
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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Domestic
    
    $
    25,915
    
    
    $
    26,227
    
    
    $
    50,404
    
    
    $
    52,090Foreign
    
    
    10,188
    
    
    
    9,887
    
    
    
    18,806
    
    
    
    23,688Total
    
    $
    36,103
    
    
    $
    36,114
    
    
    $
    69,210
    
    
    $
    75,778
  5. Inventories
  June 30,
    
    
    December 31,(in thousands)
    
    2010
    
    
    2009Raw materials
    
    $
    16,770
    
    
    $
    18,752Finished goods
    
    
    7,706
    
    
    
    4,829Total inventories
    
    $
    24,476
    
    
    $
    23,581
  6. Intangible Assets
  AccumulatedUseful life
    
    
    Cost
    
    
    Amortization
    
    
    NetIntangible assets not subject to amortization:Burdick trade name
    
    
    
    
    
    $
    3,400
    
    
    $
    
    
    
    $
    3,400Cardiac Science trade name
    
    
    
    
    
    
    11,380
    
    
    
    
    
    
    
    11,380Cardiac Science Deutschland trade name
    
    
    
    
    
    
    163
    
    
    
    
    
    
    
    163Total intangible assets not subject to
amortization
    
    
    
    
    
    
    14,943
    
    
    
    
    
    
    
    14,943Intangible assets subject to amortization:Cardiac Science customer relationships
    
    5 years
    
    
    8,650
    
    
    
    (8,362
    )
    
    
    288Cardiac Science developed technology
    
    8 years
    
    
    11,330
    
    
    
    (6,845
    )
    
    
    4,485Burdick distributor relationships
    
    10 years
    
    
    1,400
    
    
    
    (1,050
    )
    
    
    350Burdick developed technology
    
    7 years
    
    
    860
    
    
    
    (860
    )
    
    
    Patents and patent applications
    
    5-10 years
    
    
    960
    
    
    
    (938
    )
    
    
    22Patent rights
    
    6-13 years
    
    
    7,692
    
    
    
    (1,781
    )
    
    
    5,911Total intangible assets subject to amortization
    
    
    
    
    
    
    30,892
    
    
    
    (19,836
    )
    
    
    11,056Total
    
    
    
    
    
    $
    45,835
    
    
    $
    (19,836
    )
    
    $
    25,999
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2010 (excluding Q1, Q2 2010)
    
    $
    1,3832011
    
    
    2,1902012
    
    
    2,1872013
    
    
    1,5672014
    
    
    623Thereafter
    
    
    3,106
 7. Credit Facility
   8. Warranty Liability
  Six Months Ended(in thousands)
    
    June 30, 2010Warranty liability, beginning of the period
    
    $
    4,028Charged to product cost of revenues, net
    
    
    887Warranty expenditures
    
    
    (934
    )Warranty liability, end of the period
    
    $
    3,981
 9. Stock-Based Compensation Plans
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Three months ended
    
    Six months endedJune 30,
    
    June 30,2010
    
    2009
    
    2010
    
    2009Stock options plans:Volatility
    
    
    55.5
    %
    
    
    54.0
    %
    
    
    55.5
    %
    
    
    53.7
    %Expected term (years)
    
    
    6.00
    
    
    
    6.70
    
    
    
    6.00
    
    
    
    6.61Risk-free interest rate
    
    
    3.3
    %
    
    
    2.7
    %
    
    
    3.3
    %
    
    
    2.6
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of options granted
    
    $
    1.03
    
    
    $
    2.30
    
    
    $
    1.03
    
    
    $
    2.16Employee stock purchase plan:Volatility
    
    
    47.0
    %
    
    
    40.0
    %
    
    
    47.0
    %
    
    
    40.0
    %Expected term (years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Risk-free interest rate
    
    
    2.7
    %
    
    
    2.1
    %
    
    
    2.7
    %
    
    
    2.1
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of employee stock purchase rights
    
    $
    0.79
    
    
    $
    1.73
    
    
    $
    0.79
    
    
    $
    1.73Non-vested stock:Fair value of non-vested stock awards granted
    
    $
    1.51
    
    
    $
    4.10
    
    
    $
    2.32
    
    
    $
    4.07
   SharesNon-vested balance, December 31, 2009
    
    
    1,045,460Granted
    
    
    675,000Vested
    
    
    (41,738
    )Forfeited
    
    
    (89,194
    )Non-vested balance, March 31, 2010
    
    
    1,589,528Granted
    
    
    28,500Vested
    
    
    (147,288
    )Forfeited
    
    
    (19,637
    )Non-vested balance, June 30, 2010
    
    
    1,451,103
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10. Commitments and Contingencies
       11. Income Taxes
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12. Derivatives
    13. Fair Value Measurement
    14. Restructuring Costs
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This Quarterly Report on Form 10-Q contains forward-looking statements relating to Cardiac
Science Corporation. Except for historical information, the following discussion contains
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. All statements other than statements of historical fact, including our expectations relating
to future results of operations, liquidity or financial position, completion of corrective action
plans; costs associated with corrective actions, cost reductions, resolution of pending regulatory
issues, and other matters, made in this Quarterly Report on Form 10-Q are forward looking. The
words believe, expect, intend, anticipate, will, may, variations of such words, and
similar expressions identify forward-looking statements, but their absence does not mean that the
statement is not forward-looking. These forward-looking statements reflect managements current
expectations and involve risks and uncertainties. Our actual results could differ materially from
results that may be anticipated by such forward-looking statements due to various uncertainties.
 The principal factors that could cause or contribute to such differences include, but are not
limited to, the factors discussed in the section entitled Risk Factors in Part 1  Item 1A of
our Annual Report on Form 10-K for the year ended December 31, 2009, those discussed in Part II 
Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and those
discussed elsewhere in this report. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. We undertake no
obligation to revise any forward-looking statements to reflect events or circumstances that may
subsequently arise. Readers are urged to review and consider carefully the various disclosures made
in this report and in our other filings made with the Securities and Exchange Commission (SEC)
that disclose and describe the risks and factors that may affect our business, prospects and
results of operations.
  Business Overview
 ® ® ®
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Critical Accounting Estimates and Policies
   Deferred Tax Assets and Income Taxes
  Stock-Based Compensation.
 Indefinite Lived Intangible Assets.
   Valuation of Long-Lived Assets.
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Accounts Receivable.
 Inventories.
 Warranty.
 Corrective Action Costs.
    Page 21 of 35




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Software Revenue Recognition.
  Revenue Recognition.
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Recent Accounting Pronouncements
    Results of Operations
 Summary of Results for the Three and Six Months Ended June 30, 2010
 
    
    We generated revenue of $36.1 million for the three month period ended June 30, 2010,
which was essentially flat compared to the same period of the prior year, but up $3.0
million from the first quarter of 2010.
    
    We generated revenue of $69.2 million for the six month period ended June 30, 2010,
representing a decrease of approximately 9% over the six month period ended June 30,
2009, including declines in defibrillation and cardiac monitoring revenues of 12% and
6%, respectively, as compared to the same period in 2009.
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
    
    We recorded a charge of $11.0 million during the three month period ended June 30,
2010 related to an estimate of additional costs associated with our updated plan to
repair or replace approximately 24,000 AEDs used by first responders and medical
facilities in the United States and an estimate of the cost to repair or replace certain
devices located outside of the United States that the Company believes that it is
probable that it would be required to perform in the future.
    
    We incurred a net loss of $18.5 million and $27.1 million for the three and six month
periods ended June 30, 2010, respectively, compared a net loss of $2.1 million and $2.6
million for the three and six month periods ended June 30, 2009.
    
    We used cash from operations of $9.3 million and $14.5 million for the three and six
month periods ended June 30, 2010, respectively, compared to cash generated from
operations of $0.5 million and $4.2 million for the three and six month periods ended
June 30, 2009, respectively.
    
    We successfully negotiated an amendment to our line of credit agreement with Silicon
Valley Bank which was finalized in July, 2010, increasing the amount available for
borrowing to $15.0 million. This agreement expires in July 2011.
    
    We made significant progress in addressing our previously announced voluntary
corrective actions associated with our AED products, including the release of our
universal software update associated with the field corrective action announced in
November 2009, as well as the replacement of substantially all of the devices included
in our medical device recall announced in February 2010.
    
    We continued to make progress toward multiple cardiac monitoring product releases
which are expected in upcoming quarters.
 Looking Forward
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Revenues
  Page 25 of 35




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Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    % Change
    
    
    Ended
    
    
    Six Months Ended
    
    
    % Change
    
    
    Six Months Ended(dollars in thousands)
    
    June 30, 2010
    
    
    2009 to 2010
    
    
    June 30, 2009
    
    
    June 30, 2010
    
    
    2009 to 2010
    
    
    June 30, 2009Defibrillation products
    
    $
    19,051
    
    
    
    13.0
    %
    
    $
    16,853
    
    
    $
    34,913
    
    
    
    (12.3
    %)
    
    $
    39,791% of revenue
    
    
    52.8
    %
    
    
    
    
    
    
    46.7
    %
    
    
    50.4
    %
    
    
    
    
    
    
    52.5
    %Cardiac monitoring products
    
    
    12,621
    
    
    
    (14.7
    %)
    
    
    14,800
    
    
    
    25,526
    
    
    
    (5.9
    %)
    
    
    27,127% of revenue
    
    
    35.0
    %
    
    
    
    
    
    
    41.0
    %
    
    
    36.9
    %
    
    
    
    
    
    
    35.8
    %Service
    
    
    4,431
    
    
    
    (0.7
    %)
    
    
    4,461
    
    
    
    8,771
    
    
    
    (1.0
    %)
    
    
    8,860% of revenue
    
    
    12.3
    %
    
    
    
    
    
    
    12.4
    %
    
    
    12.7
    %
    
    
    
    
    
    
    11.7
    %Total revenues
    
    $
    36,103
    
    
    
    (0.0
    %)
    
    $
    36,114
    
    
    $
    69,210
    
    
    
    (8.7
    %)
    
    $
    75,778
     Gross Profit
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Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    % Change
    
    
    Ended
    
    
    Six Months Ended
    
    
    % Change
    
    
    Six Months Ended(dollars in thousands)
    
    June 30, 2010
    
    
    2009 to 2010
    
    
    June 30, 2009
    
    
    June 30, 2010
    
    
    2009 to 2010
    
    
    June 30, 2009Products
    
    $
    15,625
    
    
    
    (3.7
    %)
    
    $
    16,220
    
    
    $
    29,364
    
    
    
    (15.7
    %)
    
    $
    34,851% of products
revenue
    
    
    49.3
    %
    
    
    
    
    
    
    51.2
    %
    
    
    48.6
    %
    
    
    
    
    
    
    52.1
    %Corrective action costs
    
    
    (11,000
    )
    
    
    n/m
    
    
    
    
    
    
    
    (11,000
    )
    
    
    n/m
    
    
    
    Service
    
    
    1,244
    
    
    
    (6.5
    %)
    
    
    1,331
    
    
    
    2,421
    
    
    
    (6.1
    %)
    
    
    2,579% of service revenue
    
    
    28.1
    %
    
    
    
    
    
    
    29.8
    %
    
    
    27.6
    %
    
    
    
    
    
    
    29.1
    %Total gross profit
    
    $
    5,869
    
    
    
    (66.6
    %)
    
    $
    17,551
    
    
    $
    20,785
    
    
    
    (44.5
    %)
    
    $
    37,430% of total revenue
    
    
    16.3
    %
    
    
    
    
    
    
    48.6
    %
    
    
    30.0
    %
    
    
    
    
    
    
    49.4
    %
    Operating Expenses
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Three Months
    
    
    % Change 2010
    
    
    Three Months
    
    
    Six Months
    
    
    % Change 2010
    
    
    Six MonthsEnded
    
    
    to 2009
    
    
    Ended
    
    
    Ended
    
    
    to 2009
    
    
    Ended(dollars in thousands)
    
    June 30, 2010
    
    

(Increase)/Decrease
    
    
    June 30, 2009
    
    
    June 30, 2010
    
    
    (Increase)/Decrease
    
    
    June 30, 2009Research and development
    
    $
    4,629
    
    
    
    (28.0
    %)
    
    $
    3,617
    
    
    $
    8,834
    
    
    
    (24.6
    %)
    
    $
    7,088% of total revenue
    
    
    12.8
    %
    
    
    
    
    
    
    10.0
    %
    
    
    12.8
    %
    
    
    
    
    
    
    9.4
    %Sales and marketing
    
    
    12,412
    
    
    
    (10.1
    %)
    
    
    11,271
    
    
    
    25,214
    
    
    
    (12.2
    %)
    
    
    22,469% of total revenue
    
    
    34.4
    %
    
    
    
    
    
    
    31.2
    %
    
    
    36.4
    %
    
    
    
    
    
    
    29.7
    %General and administrative
    
    
    7,201
    
    
    
    (13.4
    %)
    
    
    6,349
    
    
    
    13,594
    
    
    
    (13.6
    %)
    
    
    11,965% of total revenue
    
    
    19.9
    %
    
    
    
    
    
    
    17.6
    %
    
    
    19.6
    %
    
    
    
    
    
    
    15.8
    %Total operating expenses
    
    $
    24,242
    
    
    
    (14.1
    %)
    
    $
    21,237
    
    
    $
    47,642
    
    
    
    (14.7
    %)
    
    $
    41,522% of total revenue
    
    
    67.1
    %
    
    
    
    
    
    
    58.8
    %
    
    
    68.8
    %
    
    
    
    
    
    
    54.8
    %
    Other Income and Expense
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Income Taxes
     Liquidity and Capital Resources
 Three Months
    
    
    
    
    
    
    Three Months
    
    
    Six Months
    
    
    
    
    
    
    Six MonthsEnded
    
    
    % Change
    
    
    Ended
    
    
    Ended
    
    
    % Change
    
    
    Ended(dollars in thousands)
    
    June 30, 2010
    
    
    2009 to 2010
    
    
    June 30, 2009
    
    
    June 30, 2010
    
    
    2009 to 2010
    
    
    June 30, 2009Cash provided by (used in) operating activities
    
    $
    (9,331
    )
    
    
    (2031.9
    %)
    
    $
    483
    
    
    $
    (14,490
    )
    
    
    (442.9
    %)
    
    $
    4,226Cash used in investing activities
    
    
    (669
    )
    
    
    11.9
    %
    
    
    (759
    )
    
    
    (1,343
    )
    
    
    17.4
    %
    
    
    (1,625
    )Cash provided by (used in) financing activities
    
    
    (7
    )
    
    
    (101.4
    %)
    
    
    502
    
    
    
    58
    
    
    
    (90.9
    %)
    
    
    639Effect of
exchange rates on cash and cash equivalents
    
    
    (113
    )
    
    
    (243.0
    %)
    
    
    79
    
    
    
    (206
    )
    
    
    (663.0
    %)
    
    
    (27
    )Net change in cash and cash equivalents
    
    $
    (10,120
    )
    
    
    (3418.0
    %)
    
    $
    305
    
    
    $
    (15,981
    )
    
    
    (597.4
    %)
    
    $
    3,213
   Page 29 of 35




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Page 30 of 35




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   Page 31 of 35




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 We face numerous challenges in implementing a field corrective action plan to address the
component issue that led to our AED ship-hold in late June 2009 and our business, financial
position and results of operations may be negatively impacted by the costs and other commitments
needed to carry out the plan.
   
    
    since we have limited history and experience designing and carrying out a field
initiative or other corrective action plan of the magnitude under contemplation, we are
likely to encounter challenges that could cause a delay in the implementation of the
field initiative or negatively impact its effectiveness;
    
    the actual costs to implement the proposed field initiative could exceed the $29.5
million estimate taken as a charge of $18.5 million in the third quarter of 2009 and an
additional $11.0 million charge in the second quarter of 2010. Actual costs could vary
due to a variety of factors, including the outcome of discussions or negotiations with
applicable regulatory bodies in geographies outside the United States, the number of
impacted devices, the customer and geographical segments related to the impacted devices,
the logistical processes we employ to address the issues, the customer response rate in
implementing the corrective action plans, the level of required follow up with customers,
the extent to which we rely on third party assistance to carry out the corrective
actions, the extent to which AED units recovered from affected customers can be repaired
and used as replacement units for other customers, and the length of time and other
resources required to complete the corrective actions, among others
    
    implementation of the proposed field initiative, as well as attendant publicity, may
create a negative perception of our AED products in the market, leading to a decline in
sales that could materially adversely impact our financial position and results of
operations;
    
    we will need to devote technical, management, logistics and other resources to the
implementation of the proposed field initiative, which could detract from our ability to
operate our core business and hinder our ability to carry out initiatives relating to new
products or product enhancements;
    
    despite implementation of the field initiative, some devices may still fail at a time
when they are being used to deliver therapy, which could lead to product liability claims
against us that, if successful, could adversely impact our financial position and results
of operations or negatively impact the markets perception of our products; and
    
    the plan, including the expanded scope announced in July 2010, will require the
expenditure of significant amounts of cash which, in combination with expected operating
losses during 2010, may negatively impact our liquidity or at
least constrain our ability to pursue strategic initiatives such as acquisitions, new
product development, or other growth initiatives.
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Our cash and cash equivalents may not be sufficient to fund future operations and we may not be
able to secure additional sources of financing or obtain financing on acceptable terms.
     
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Removed and Reserved
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Item 5. Other Information
  
 Item 6. Exhibits
 No.
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.10.1
    
    Third Amended and Restated Loan and Security Agreement dated as of July 16, 2010 between Silicon
Valley Bank and Cardiac Science Corporation. (1)10.2
    
    Loan and Security Agreement (EX IM Loan Facility) dated as of July 16, 2010 between Silicon Valley
Bank and Cardiac Science Corporation. (1)10.3
    
    Export-Import Bank of the United States Working Capital Guarantee Program Borrower Agreement dated as
of July 16, 2010 entered into by Cardiac Science Corporation in favor of the Export-Import Bank of
the United States and Silicon Valley bank. (1)10.4
    
    Form of Executive Incentive Plan dated as of June 1, 2010
 
 (1)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K (File No
000-51512) filed on July 19, 2010. Page 34 of 35




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SIGNATURE
  CARDIAC SCIENCE CORPORATIONBy:
    /s/ Michael K. MatysikMichael K. MatysikSenior Vice President and Chief Financial Officer
(Principal Financial Officer)  Page 35 of 35