##### 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, 2009
 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
(State of Incorporation)
    
    94-3300396
(IRS Employer Identification No.)
 3303 Monte Villa Parkway
Bothell, Washington 98021
 (425) 402-2000
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 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
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 1A. Risk Factors
    
    
    27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 3. Defaults Upon Senior Securities
    
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    28SIGNATURE
    
    
    29EX-31.1EX-31.2EX-32.1EX-32.2
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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,(In thousands)
    
    2009
    
    
    2008ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    37,868
    
    
    $
    34,655Accounts receivable, net of allowance for doubtful accounts of $1,489 and
$1,186, respectively
    
    
    22,982
    
    
    
    31,665Inventories
    
    
    25,973
    
    
    
    24,692Deferred income taxes
    
    
    8,197
    
    
    
    8,366Prepaid expenses and other current assets
    
    
    3,066
    
    
    
    3,144Total current assets
    
    
    98,086
    
    
    
    102,522Other assets
    
    
    388
    
    
    
    428Machinery and equipment, net of accumulated depreciation of
$16,292 and $15,190, respectively
    
    
    7,381
    
    
    
    6,994Deferred income taxes
    
    
    30,217
    
    
    
    28,452Intangible assets, net of accumulated amortization of $15,863 and $13,889,
respectively
    
    
    29,299
    
    
    
    31,278Investments in unconsolidated entities
    
    
    1,032
    
    
    
    534Total assets
    
    $
    166,403
    
    
    $
    170,208LIABILITIES AND EQUITYCurrent Liabilities:Accounts payable
    
    $
    10,022
    
    
    $
    12,711Accrued liabilities
    
    
    13,185
    
    
    
    13,535Warranty liability
    
    
    3,805
    
    
    
    3,796Deferred revenue
    
    
    7,248
    
    
    
    7,918Total current liabilities
    
    
    34,260
    
    
    
    37,960Equity: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, 2009 and December 31, 2008,
respectively
    
    
    
    
    
    
    Common stock (65,000,000 shares authorized), $0.001 par value, 23,344,804
and 22,998,364 shares issued and outstanding at June 30, 2009 and
December 31, 2008, respectively
    
    
    229,171
    
    
    
    227,303Accumulated other comprehensive income (loss)
    
    
    277
    
    
    
    (70
    )Accumulated deficit
    
    
    (98,174
    )
    
    
    (95,530
    )Total Cardiac Science Corporation shareholders equity
    
    
    131,274
    
    
    
    131,703Noncontrolling interests
    
    
    869
    
    
    
    545Total equity
    
    
    132,143
    
    
    
    132,248Total liabilities and equity
    
    $
    166,403
    
    
    $
    170,208
  Page 3 of 33




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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)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Products
    
    $
    31,653
    
    
    $
    47,257
    
    
    $
    66,918
    
    
    $
    91,596Service
    
    
    4,461
    
    
    
    4,875
    
    
    
    8,860
    
    
    
    9,495Total revenues
    
    
    36,114
    
    
    
    52,132
    
    
    
    75,778
    
    
    
    101,091Cost of Revenues:Products
    
    
    15,433
    
    
    
    22,929
    
    
    
    32,067
    
    
    
    44,461Service
    
    
    3,130
    
    
    
    3,240
    
    
    
    6,281
    
    
    
    6,469Total cost of revenues
    
    
    18,563
    
    
    
    26,169
    
    
    
    38,348
    
    
    
    50,930Gross profit
    
    
    17,551
    
    
    
    25,963
    
    
    
    37,430
    
    
    
    50,161Operating Expenses:Research and development
    
    
    3,617
    
    
    
    3,796
    
    
    
    7,088
    
    
    
    7,659Sales and marketing
    
    
    11,271
    
    
    
    13,047
    
    
    
    22,469
    
    
    
    25,236General and administrative
    
    
    6,349
    
    
    
    5,347
    
    
    
    11,965
    
    
    
    10,472Total operating expenses
    
    
    21,237
    
    
    
    22,190
    
    
    
    41,522
    
    
    
    43,367Operating income (loss)
    
    
    (3,686
    )
    
    
    3,773
    
    
    
    (4,092
    )
    
    
    6,794Other Income:Interest income
    
    
    19
    
    
    
    163
    
    
    
    32
    
    
    
    278Other income (loss), net
    
    
    545
    
    
    
    (125
    )
    
    
    397
    
    
    
    86Total other income
    
    
    564
    
    
    
    38
    
    
    
    429
    
    
    
    364Income (loss) before income tax benefit
(expense)
    
    
    (3,122
    )
    
    
    3,811
    
    
    
    (3,663
    )
    
    
    7,158Income tax benefit (expense)
    
    
    1,194
    
    
    
    (1,407
    )
    
    
    1,360
    
    
    
    (2,647
    )Net income (loss)
    
    
    (1,928
    )
    
    
    2,404
    
    
    
    (2,303
    )
    
    
    4,511Less: Net income atttributable to
noncontrolling interests
    
    
    (178
    )
    
    
    (118
    )
    
    
    (341
    )
    
    
    (171
    )Net income (loss) attributable to
CardiacScience Corporation
    
    $
    (2,106
    )
    
    $
    2,286
    
    
    $
    (2,644
    )
    
    $
    4,340Net income (loss) per share
attributable to
Cardiac Science Corporation:Basic
    
    $
    (0.09
    )
    
    $
    0.10
    
    
    $
    (0.11
    )
    
    $
    0.19Diluted
    
    $
    (0.09
    )
    
    $
    0.10
    
    
    $
    (0.11
    )
    
    $
    0.19Weighted average shares outstanding:Basic
    
    
    23,198,352
    
    
    
    22,806,307
    
    
    
    23,127,742
    
    
    
    22,729,858Diluted
    
    
    23,198,352
    
    
    
    23,246,240
    
    
    
    23,127,742
    
    
    
    23,277,135
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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)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Operating Activities:Net income (loss)
    
    $
    (1,928
    )
    
    $
    2,404
    
    
    $
    (2,303
    )
    
    $
    4,511Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Stock-based compensation
    
    
    554
    
    
    
    488
    
    
    
    1,213
    
    
    
    1,046Depreciation and amortization
    
    
    1,542
    
    
    
    1,624
    
    
    
    3,067
    
    
    
    3,233Deferred income taxes
    
    
    (1,398
    )
    
    
    1,292
    
    
    
    (1,765
    )
    
    
    2,462Changes in operating assets and liabilities, net of
businesses acquired:Accounts receivable, net
    
    
    730
    
    
    
    2,688
    
    
    
    8,717
    
    
    
    (313
    )Inventories
    
    
    (89
    )
    
    
    (141
    )
    
    
    (1,330
    )
    
    
    (749
    )Prepaid expenses and other assets
    
    
    (392
    )
    
    
    (61
    )
    
    
    36
    
    
    
    (624
    )Accounts payable
    
    
    (118
    )
    
    
    (1,857
    )
    
    
    (2,457
    )
    
    
    (236
    )Accrued liabilities
    
    
    1,045
    
    
    
    955
    
    
    
    (291
    )
    
    
    (384
    )Warranty liability
    
    
    111
    
    
    
    102
    
    
    
    9
    
    
    
    338Deferred revenue
    
    
    426
    
    
    
    (1,160
    )
    
    
    (670
    )
    
    
    (490
    )Net cash provided by operating activities
    
    
    483
    
    
    
    6,334
    
    
    
    4,226
    
    
    
    8,794Investing Activities:Maturities of short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350Purchases of machinery and equipment
    
    
    (769
    )
    
    
    (1,008
    )
    
    
    (1,654
    )
    
    
    (1,442
    )Proceeds from repayment of note
    
    
    10
    
    
    
    
    
    
    
    83
    
    
    
    Cash paid for acquisitions
    
    
    
    
    
    
    (268
    )
    
    
    (54
    )
    
    
    (424
    )Net cash used in investing activities
    
    
    (759
    )
    
    
    (1,276
    )
    
    
    (1,625
    )
    
    
    (1,516
    )Financing Activities:Proceeds from exercise of stock options and issuance of
shares under employee purchase plan
    
    
    502
    
    
    
    173
    
    
    
    736
    
    
    
    346Minimum tax withholding on restricted stock awards
    
    
    
    
    
    
    
    
    
    
    (97
    )
    
    
    (62
    )Net cash provided by financing activities
    
    
    502
    
    
    
    173
    
    
    
    639
    
    
    
    284Effect of exchange rate changes on cash and cash equivalents
    
    
    79
    
    
    
    
    
    
    
    (27
    )
    
    
    Net change in cash and cash equivalents
    
    
    305
    
    
    
    5,231
    
    
    
    3,213
    
    
    
    7,562Cash and cash equivalents, beginning of period
    
    
    37,563
    
    
    
    22,490
    
    
    
    34,655
    
    
    
    20,159Cash and cash equivalents, end of period
    
    $
    37,868
    
    
    $
    27,721
    
    
    $
    37,868
    
    
    $
    27,721Supplemental disclosure of noncash investing and financing activities:Machinery and equipment purchases accrued but not yet paid
    
    $
    153
    
    
    $
    
    
    
    $
    153
    
    
    $
    
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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
   Use of Estimates
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Net Income (Loss) Per Share
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands, except share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Numerator:Net income (loss) attributable to Cardiac
Science Corporation
    
    $
    (2,106
    )
    
    $
    2 ,286
    
    
    $
    (2,644
    )
    
    $
    4,340Denominator:Weighted average shares for basic calculation
    
    
    23,198,352
    
    
    
    22,806,307
    
    
    
    23,127,742
    
    
    
    22,729,858Incremental shares from employee stock
options, non-vested
stock awards and ESPP
    
    
    
    
    
    
    439,933
    
    
    
    
    
    
    
    547,277Weighted average shares for diluted calculation
    
    
    23,198,352
    
    
    
    23,246,240
    
    
    
    23,127,742
    
    
    
    23,277,135
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    2009
    
    2008Antidilutive shares issuable upon exercise of stock options
    
    
    3,094,822
    
    
    
    2,545,957
    
    
    
    3,094,822
    
    
    
    2,550,979Antidilutive shares issuable upon exercise of warrants
    
    
    212,776
    
    
    
    246,609
    
    
    
    212,776
    
    
    
    246,609Antidilutive shares related to non-vested stock awards and
ESPP
    
    
    935,039
    
    
    
    449,589
    
    
    
    935,039
    
    
    
    337,224Total
    
    
    4,242,637
    
    
    
    3,242,155
    
    
    
    4,242,637
    
    
    
    3,134,812
 Customer and Vendor Concentrations
   Recently Adopted Accounting Pronouncements
  Recognition of Presentation of Other-Than-Temporary Impairments
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Interim Disclosures about
Fair Value of Financial Instruments Determining the Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly Fair Value
Measurements
      Recent Accounting Pronouncements
 The FASB Accounting Standards Codification
and the
Hierarchy of Generally Accepted Accounting Principles,
 Page 8 of 33




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2. Commitments and Contingencies
           3. Equity and Comprehensive Income (Loss)
  Page 9 of 33




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Attributable toCardiac Science
    
    
    Noncontrolling
    
    
    Total(in thousands)
    
    Corporation
    
    
    Interests
    
    
    EquityEquity at March 31, 2008
    
    $
    229,939
    
    
    $
    180
    
    
    $
    230,119Comprehensive income:Net income
    
    
    2,286
    
    
    
    118
    
    
    
    2,404Unrealized gains on available for sale securities,
net of related tax of ($8)
    
    
    26
    
    
    
    
    
    
    
    26Comprehensive income
    
    
    2,312
    
    
    
    118
    
    
    
    2,430Stock-based transactions
    
    
    676
    
    
    
    
    
    
    
    676Equity at June 30, 2008
    
    $
    232,927
    
    
    $
    298
    
    
    $
    233,225Equity at March 31, 2009
    
    $
    131,880
    
    
    $
    658
    
    
    $
    132,538Comprehensive income (loss):Net income (loss)
    
    
    (2,106
    )
    
    
    178
    
    
    
    (1,928
    )Unrealized gains on available for sale securities,
net of related tax of ($183)
    
    
    402
    
    
    
    
    
    
    
    4 02Foreign currency translation adjustments
    
    
    54
    
    
    
    33
    
    
    
    87Comprehensive income (loss)
    
    
    (1,650
    )
    
    
    211
    
    
    
    (1,439
    )Stock-based transactions
    
    
    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, 2007
    
    $
    227,271
    
    
    $
    127
    
    
    $
    227,398Comprehensive income:Net income
    
    
    4,340
    
    
    
    171
    
    
    
    4,511Unrealized losses on available for sale securities,
net of related tax of $26
    
    
    (36
    )
    
    
    
    
    
    
    (36
    )Comprehensive income
    
    
    4,304
    
    
    
    171
    
    
    
    4,475Stock-based transactions
    
    
    1,352
    
    
    
    
    
    
    
    1,352Equity at June 30, 2008
    
    $
    232,927
    
    
    $
    298
    
    
    $
    233,225Equity at December 31, 2008
    
    $
    131,703
    
    
    $
    545
    
    
    $
    132,248Comprehensive income (loss):Net income (loss)
    
    
    (2,644
    )
    
    
    341
    
    
    
    (2,303
    )Unrealized gains 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
    
    
    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)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Defibrillation products
    
    $
    16,853
    
    
    $
    31,683
    
    
    $
    39,791
    
    
    $
    58,299Cardiac monitoring products
    
    
    14,800
    
    
    
    15,574
    
    
    
    27,127
    
    
    
    33,297Service
    
    
    4,461
    
    
    
    4,875
    
    
    
    8,860
    
    
    
    9,495Total
    
    $
    36,114
    
    
    $
    52,132
    
    
    $
    75,778
    
    
    $
    101,091
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Domestic
    
    $
    26,227
    
    
    $
    31,320
    
    
    $
    52,090
    
    
    $
    63,541Foreign
    
    
    9,887
    
    
    
    20,812
    
    
    
    23,688
    
    
    
    37,550Total
    
    $
    36,114
    
    
    $
    52,132
    
    
    $
    75,778
    
    
    $
    101,091
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5. Restructuring Costs
   6. Inventories
  June 30,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008Raw materials
    
    $
    19,267
    
    
    $
    20,871Finished goods
    
    
    6,706
    
    
    
    3,821Total inventories
    
    $
    25,973
    
    
    $
    24,692
  7. Intangible Assets
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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
    
    
    
    
    182
    
    
    
    
    
    
    
    182Total intangible assets not subject to
amortization
    
    
    
    
    14,962
    
    
    
    
    
    
    
    14,962Intangible assets subject to amortization:Cardiac Science customer relationships
    
    5 years
    
    
    8,650
    
    
    
    (6,632
    )
    
    
    2,018Cardiac Science developed technology
    
    8 years
    
    
    11,330
    
    
    
    (5,429
    )
    
    
    5,901Burdick distributor relationships
    
    10 years
    
    
    1,400
    
    
    
    (910
    )
    
    
    490Burdick developed technology
    
    7 years
    
    
    860
    
    
    
    (798
    )
    
    
    62Patents and patent applications
    
    5-10 years
    
    
    960
    
    
    
    (927
    )
    
    
    33Patent rights
    
    13 years
    
    
    7,000
    
    
    
    (1,167
    )
    
    
    5,833Total intangible assets subject to amortization
    
    
    
    
    30,200
    
    
    
    (15,863
    )
    
    
    14,337Total
    
    
    
    $
    45,162
    
    
    $
    (15,863
    )
    
    $
    29,299
  2009
    
    $
    3,9572010
    
    
    3,2582011
    
    
    2,1042012
    
    
    2,1022013
    
    
    1,483Thereafter
    
    
    3,410
 8. Credit Facility
  9. Warranty Liability
  Six months ended(in thousands)
    
    June 30, 2009Warranty liability, beginning of the period
    
    $
    3,796Charged to product cost of revenues, net
    
    
    1,616Warranty expenditures
    
    
    (1,607
    )Warranty liability, end of the period
    
    $
    3,805
 10. Stock-Based Compensation Plans
   Page 13 of 33




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Three months ended
    
    Six months endedJune 30,
    
    June 30,2009
    
    2008
    
    2009
    
    2008Stock options plans:Volatility
    
    
    54.0
    %
    
    
    48.2
    %
    
    
    53.7
    %
    
    
    48.4
    %Expected term (years)
    
    
    6.70
    
    
    
    6.25
    
    
    
    6.61
    
    
    
    6.25Risk-free interest rate
    
    
    2.7
    %
    
    
    3.5
    %
    
    
    2.6
    %
    
    
    3.4
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of options granted
    
    $
    2.30
    
    
    $
    4.84
    
    
    $
    2.16
    
    
    $
    4.35Employee stock purchase plan:Volatility
    
    
    40.0
    %
    
    
    27.0
    %
    
    
    40.0
    %
    
    
    27.0
    %Expected term (years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Risk-free interest rate
    
    
    2.1
    %
    
    
    4.5
    %
    
    
    2.1
    %
    
    
    4.5
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of employee stock
purchase rights
    
    $
    1.73
    
    
    $
    2.01
    
    
    $
    1.73
    
    
    $
    2.01Non-vested stock:Fair value of non-vested
stock awards granted
    
    $
    4.10
    
    
    $
    9.44
    
    
    $
    4.07
    
    
    $
    9.02
   Outstanding shares  2002 Plan
    
    
    2,280,914Outstanding shares  1997 Plan
    
    
    814,062Stock options available for grant
    
    
    402,608Outstanding non-vested stock awards
    
    
    845,064ESPP shares available for issuance
    
    
    671,282Total common shares
reserved for future
issuance
    
    
    5,013,930
 2002 Plan 
 Page 14 of 33




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##### Table of Contents



SharesSubject toOptionsOutstanding, December 31, 2008
    
    
    2,063,065Granted
    
    
    160,000Exercised
    
    
    (32,508
    )Forfeited or expired
    
    
    (26,675
    )Outstanding, March 31, 2009
    
    
    2,163,882Granted
    
    
    610,000Exercised
    
    
    (159,363
    )Forfeited or expired
    
    
    (333,605
    )Outstanding, June 30, 2009
    
    
    2,280,914Exercisable, June 30, 2009
    
    
    1,212,158
 Non-vested Stock Awards 
  SharesNon-vested balance, December 31, 2008
    
    
    388,002Granted
    
    
    24,853Vested
    
    
    (95,124
    )Forfeited
    
    
    (34,074
    )Non-vested balance, March 31, 2009
    
    
    283,657Granted
    
    
    579,271Vested
    
    
    (10,806
    )Forfeited
    
    
    (7,058
    )Non-vested balance, June 30, 2009
    
    
    845,064
 1997 Plan 
 Page 15 of 33




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##### Table of Contents



SharesSubject toOptionsOutstanding, December 31, 2008
    
    
    836,312Forfeited or expired
    
    
    Outstanding, March 31, 2009
    
    
    836,312Forfeited or expired
    
    
    (22,250
    )Outstanding, June 30, 2009
    
    
    814,062Exercisable, June 30, 2009
    
    
    794,375
 Employee Stock Purchase Plan 
  11. Income Taxes
     Page 16 of 33




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##### Table of Contents



12. Derivatives
    13. Fair Value Measurement
     Total carrying
    
    Quoted prices invalue at June 30,
    
    active markets(in thousands of dollars)
    
    2009
    
    (Level 1)Assets:Cash equivalents
    
    $
    26,610
    
    
    $
    26,610Investments in unconsolidated
entities
    
    $
    953
    
    
    $
    953
 14. Subsequent Events
  Page 17 of 33




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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 future results of
operations or financial position, 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 and financial condition could
differ materially from those 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, 2008 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, results
of operations and financial condition.
  Business Overview
 ® ® ® ®
 Critical Accounting Estimates and Policies
  Page 18 of 33




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##### Table of Contents



Deferred Tax Assets and Income Taxes
  Stock-Based Compensation.
 Goodwill.
 Intangible Assets.
   Page 19 of 33




---



##### Table of Contents



Accounts Receivable.
 Valuation of Long-Lived Assets.
 Inventories.
 Warranty.
 Software Revenue Recognition.
  Revenue Recognition.
 Page 20 of 33




---



##### Table of Contents



Results of Operations
 Summary of Results for the Three and Six Months Ended June 30, 2009
 
    
    Second quarter revenues were negatively impacted by the Companys decision to hold
shipments near the end of the second quarter while management investigated a possible
quality deficiency in certain components of its AED products. The decision to implement
this ship-hold negatively affected second quarter revenues by approximately $3.0
million. The Company was able to resume production of its AED products and shipments of
AED products that have been withheld since the latter part of the second quarter in
early August 2009 and expects that substantially all of the shipments held in the second
quarter will be shipped during the third quarter.
    
    We generated revenue of $36.1 million in the three months ended June 30, 2009, a
decrease of approximately 31% over the three month period ended June 30, 2008. Our
overall defibrillation revenue declined by approximately $14.8 million or 47%, mostly
due to reduced shipments to our Japanese OEM distribution partner, Nihon Kohden
Corporation, and the ship-hold placed on our AED products near quarter end. Our cardiac
monitoring revenues declined by 5% and service revenues declined by 9%.
    
    We generated revenue of $75.8 million in the six months ended June 30, 2009, a
decrease of approximately 25% over the six month period ended June 30, 2008, which
included a decline of 32% in defibrillation products revenue, a decline in cardiac
monitoring products revenue of 19% and a decline in service revenues of 7%.
    
    We incurred a net loss per diluted share attributable to Cardiac Science Corporation
of $0.09 and $0.11 for the three and six months ended June 30, 2009 compared with
diluted earnings per share attributable to Cardiac Science Corporation of $0.10 and
$0.19 for the three and six months ended June 30, 2008.
    
    We generated cash from operations of $0.5 million and $4.2 million for the three and
six months ended June 30, 2009 compared to cash provided by operations of $6.3 and $8.8
million for the three and six months ended June 30, 2008.
 Looking Forward
  Page 21 of 33




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##### Table of Contents



Revenues
   Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    % Change
    
    
    Ended
    
    
    Six Months Ended
    
    
    % Change
    
    
    Six Months Ended(dollars in thousands)
    
    June 30, 2009
    
    
    2008 to 2009
    
    
    June 30, 2008
    
    
    June 30, 2009
    
    
    2008 to 2009
    
    
    June 30, 2008Defibrillation products
    
    $
    16,853
    
    
    
    (46.8
    %)
    
    $
    31,683
    
    
    $
    39,791
    
    
    
    (31.7
    %)
    
    $
    58,299% of revenue
    
    
    46.7
    %
    
    
    
    
    
    
    60.8
    %
    
    
    52.5
    %
    
    
    
    
    
    
    57.7
    %Cardiac monitoring products
    
    
    14,800
    
    
    
    (5.0
    %)
    
    
    15,574
    
    
    
    27,127
    
    
    
    (18.5
    %)
    
    
    33,297% of revenue
    
    
    41.0
    %
    
    
    
    
    
    
    29.9
    %
    
    
    35.8
    %
    
    
    
    
    
    
    32.9
    %Service
    
    
    4,461
    
    
    
    (8.5
    %)
    
    
    4,875
    
    
    
    8,860
    
    
    
    (6.7
    %)
    
    
    9,495% of revenue
    
    
    12.4
    %
    
    
    
    
    
    
    9.4
    %
    
    
    11.7
    %
    
    
    
    
    
    
    9.4
    %Total revenues
    
    $
    36,114
    
    
    
    (30.7
    %)
    
    $
    52,132
    
    
    $
    75,778
    
    
    
    (25.0
    %)
    
    $
    101,091
 Page 22 of 33




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Gross Profit
   Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    % Change
    
    
    Ended
    
    
    Six Months Ended
    
    
    % Change
    
    
    Six Months Ended(dollars in thousands)
    
    June 30, 2009
    
    
    2008 to 2009
    
    
    June 30, 2008
    
    
    June 30, 2009
    
    
    2008 to 2009
    
    
    June 30, 2008Products
    
    $
    16,220
    
    
    
    (33.3
    %)
    
    $
    24,328
    
    
    $
    34,851
    
    
    
    (26.1
    %)
    
    $
    47,135% of products revenue
    
    
    51.2
    %
    
    
    
    
    
    
    51.5
    %
    
    
    52.1
    %
    
    
    
    
    
    
    51.5
    %Service
    
    
    1,331
    
    
    
    (18.6
    %)
    
    
    1,635
    
    
    
    2,579
    
    
    
    (14.8
    %)
    
    
    3,026% of service revenue
    
    
    29.8
    %
    
    
    
    
    
    
    33.5
    %
    
    
    29.1
    %
    
    
    
    
    
    
    31.9
    %Total gross profit
    
    $
    17,551
    
    
    
    (32.4
    %)
    
    $
    25,963
    
    
    $
    37,430
    
    
    
    (25.4
    %)
    
    $
    50,161% of total revenue
    
    
    48.6
    %
    
    
    
    
    
    
    49.8
    %
    
    
    49.4
    %
    
    
    
    
    
    
    49.6
    %
   Page 23 of 33




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Operating Expenses
      Three Months
    
    
    
    
    
    
    Three Months
    
    
    Six Months
    
    
    
    
    
    
    Six MonthsEnded
    
    
    % Change
    
    
    Ended
    
    
    Ended
    
    
    % Change
    
    
    Ended(dollars in thousands)
    
    June 30, 2009
    
    
    2008 to 2009
    
    
    June 30, 2008
    
    
    June 30, 2009
    
    
    2008 to 2009
    
    
    June 30, 2008Research and development
    
    $
    3,617
    
    
    
    (4.7
    %)
    
    $
    3,796
    
    
    $
    7,088
    
    
    
    (7.5
    %)
    
    $
    7,659% of total revenue
    
    
    10.0
    %
    
    
    
    
    
    
    7.3
    %
    
    
    9.4
    %
    
    
    
    
    
    
    7.6
    %Sales and marketing
    
    
    11,271
    
    
    
    (13.6
    %)
    
    
    13,047
    
    
    
    22,469
    
    
    
    (11.0
    %)
    
    
    25,236% of total revenue
    
    
    31.2
    %
    
    
    
    
    
    
    25.0
    %
    
    
    29.7
    %
    
    
    
    
    
    
    25.0
    %General and administrative
    
    
    6,349
    
    
    
    18.7
    %
    
    
    5,347
    
    
    
    11,965
    
    
    
    14.3
    %
    
    
    10,472% of total revenue
    
    
    17.6
    %
    
    
    
    
    
    
    10.3
    %
    
    
    15.8
    %
    
    
    
    
    
    
    10.4
    %Total operating expenses
    
    $
    21,237
    
    
    
    (4.3
    %)
    
    $
    22,190
    
    
    $
    41,522
    
    
    
    (4.3
    %)
    
    $
    43,367% of total revenue
    
    
    58.8
    %
    
    
    
    
    
    
    42.6
    %
    
    
    54.8
    %
    
    
    
    
    
    
    42.9
    %
    Other Income and Expense
   Page 24 of 33




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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, 2009
    
    
    2008 to 2009
    
    
    June 30, 2008
    
    
    June 30, 2009
    
    
    2008 to 2009
    
    
    June 30, 2008Cash provided by operating activities
    
    $
    483
    
    
    
    (92.4
    %)
    
    $
    6,334
    
    
    $
    4,226
    
    
    
    (51.9
    %)
    
    $
    8,794Cash used in investing activities
    
    
    (759
    )
    
    
    40.5
    %
    
    
    (1,276
    )
    
    
    (1,625
    )
    
    
    (7.2
    %)
    
    
    (1,516
    )Cash provided by financing activities
    
    
    502
    
    
    
    190.2
    %
    
    
    173
    
    
    
    639
    
    
    
    125.0
    %
    
    
    284Effect of exchange rates on cash and
cash equivalents
    
    
    79
    
    
    
    
    
    
    
    
    
    
    
    (27
    )
    
    
    
    
    
    
    Total change in cash and cash equivalents
    
    $
    305
    
    
    
    (94.2
    %)
    
    $
    5,231
    
    
    $
    3,213
    
    
    
    (57.5
    %)
    
    $
    7,562
   Page 25 of 33




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##### Table of Contents



Recent Accounting Pronouncements
 The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles, (
 
 Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4.
    
    Controls and Procedures
  Page 26 of 33




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
 Changes in tax laws and unanticipated tax liabilities could adversely affect our effective income
tax rate and profitability.
  We may be required to implement a costly product recall or voluntary field corrective action
   
 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 Security Holders
  Page 27 of 33




---



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For
    
    WithheldChristopher Davis
    
    
    17,095,358
    
    
    
    434,043Timothy C. Mickelson, Ph.D.
    
    
    17,014,020
    
    
    
    515,382
  
 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.
 Page 28 of 33




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SIGNATURE
  CARDIAC SCIENCE CORPORATIONBy:
    /s/ Michael K. MatysikMichael K. MatysikSenior Vice President and Chief Financial Officer
(Principal Financial Officer)  Page 29 of 33