##### 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 September 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(State or Other Jurisdiction of 
Incorporation or Organization)
    
    94-3300396(I.R.S. Employer
Identification No.)3303 Monte Villa Parkway, Bothell, WA(Address of Principal Executive Offices)
    
    98021(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
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4.
    
    Controls and Procedures
    
    
    33PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    34Item 1A.
    
    Risk Factors
    
    
    34Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3.
    
    Defaults Upon Senior Securities
    
    
    35Item 4.
    
    Removed and Reserved
    
    
    35Item 5.
    
    Other Information
    
    
    35Item 6.
    
    Exhibits
    
    
    35SIGNATURE
    
    
    
    
    
    37EX-31.1EX-31.2EX-32.1EX-32.2
  Page 2 of 41




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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,(in thousands, except share amounts)
    
    2010
    
    
    2009ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    6,690
    
    
    $
    26,866Accounts receivable, net of allowance for doubtful accounts of $807 and
$1,017, respectively
    
    
    20,781
    
    
    
    24,228Inventories
    
    
    23,902
    
    
    
    23,581Prepaid expenses and other current assets
    
    
    2,775
    
    
    
    3,702Total current assets
    
    
    54,148
    
    
    
    78,377Other assets
    
    
    687
    
    
    
    872Machinery and equipment, net of accumulated depreciation and amortization
of $19,432 and $17,490, respectively
    
    
    8,019
    
    
    
    8,406Deferred income taxes
    
    
    31
    
    
    
    31Intangible assets, net of accumulated amortization of $20,671 and $17,876,
respectively
    
    
    25,183
    
    
    
    27,988Investments in unconsolidated entities
    
    
    308
    
    
    
    386Total assets
    
    $
    88,376
    
    
    $
    116,060LIABILITIES AND EQUITYCurrent Liabilities:Accounts payable
    
    $
    10,568
    
    
    $
    11,030Accrued liabilities
    
    
    13,323
    
    
    
    12,216Warranty liability
    
    
    3,933
    
    
    
    4,028Deferred revenue
    
    
    7,744
    
    
    
    7,919Corrective action liabilities
    
    
    18,757
    
    
    
    15,249Total current liabilities
    
    
    54,325
    
    
    
    50,442Deferred income taxes
    
    
    5,389
    
    
    
    5,389Total liabilities
    
    
    59,714
    
    
    
    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 September 30, 2010 and December 31, 2009,
respectively
    
    
    
    
    
    
    Common stock (65,000,000 shares authorized), $0.001 par value, 23,867,815
and 23,566,320 shares issued and outstanding at
September 30, 2010 and December 31, 2009, respectively
    
    
    233,094
    
    
    
    231,159Accumulated other comprehensive income
    
    
    117
    
    
    
    304Accumulated deficit
    
    
    (206,000
    )
    
    
    (172,527
    )Total Cardiac Science Corporation shareholders equity
    
    
    27,211
    
    
    
    58,936Noncontrolling interests
    
    
    1,451
    
    
    
    1,293Total equity
    
    
    28,662
    
    
    
    60,229Total liabilities and equity
    
    $
    88,376
    
    
    $
    116,060
  Page 3 of 41




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CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands, except share and per share data)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues:Products
    
    $
    29,985
    
    
    $
    34,646
    
    
    $
    90,424
    
    
    $
    101,564Service
    
    
    4,495
    
    
    
    4,238
    
    
    
    13,266
    
    
    
    13,098Total revenues
    
    
    34,480
    
    
    
    38,884
    
    
    
    103,690
    
    
    
    114,662Cost of Revenues:Products
    
    
    15,244
    
    
    
    17,194
    
    
    
    46,319
    
    
    
    49,261Corrective action costs
    
    
    
    
    
    
    18,500
    
    
    
    11,000
    
    
    
    18,500Service
    
    
    3,149
    
    
    
    3,095
    
    
    
    9,499
    
    
    
    9,376Total cost of revenues
    
    
    18,393
    
    
    
    38,789
    
    
    
    66,818
    
    
    
    77,137Gross profit
    
    
    16,087
    
    
    
    95
    
    
    
    36,872
    
    
    
    37,525Operating Expenses:Research and development
    
    
    4,266
    
    
    
    4,270
    
    
    
    13,100
    
    
    
    11,358Sales and marketing
    
    
    11,215
    
    
    
    11,923
    
    
    
    36,429
    
    
    
    34,392General and administrative
    
    
    7,058
    
    
    
    6,571
    
    
    
    20,652
    
    
    
    18,536Total operating expenses
    
    
    22,539
    
    
    
    22,764
    
    
    
    70,181
    
    
    
    64,286Operating loss
    
    
    (6,452
    )
    
    
    (22,669
    )
    
    
    (33,309
    )
    
    
    (26,761
    )Other Income:Interest income
    
    
    7
    
    
    
    23
    
    
    
    25
    
    
    
    55Other income
    
    
    229
    
    
    
    158
    
    
    
    323
    
    
    
    555Total other income
    
    
    236
    
    
    
    181
    
    
    
    348
    
    
    
    610Loss before income tax expense
    
    
    (6,216
    )
    
    
    (22,488
    )
    
    
    (32,961
    )
    
    
    (26,151
    )Income tax expense
    
    
    (117
    )
    
    
    (43,923
    )
    
    
    (308
    )
    
    
    (42,563
    )Net loss
    
    
    (6,333
    )
    
    
    (66,411
    )
    
    
    (33,269
    )
    
    
    (68,714
    )Less: Net income attributable to noncontrolling
interests
    
    
    (43
    )
    
    
    (135
    )
    
    
    (204
    )
    
    
    (476
    )Net loss attributable to Cardiac Science Corporation
    
    $
    (6,376
    )
    
    $
    (66,546
    )
    
    $
    (33,473
    )
    
    $
    (69,190
    )Net loss per share attributable to CardiacScience Corporation:Basic
    
    $
    (0.27
    )
    
    $
    (2.85
    )
    
    $
    (1.41
    )
    
    $
    (2.98
    )Diluted
    
    $
    (0.27
    )
    
    $
    (2.85
    )
    
    $
    (1.41
    )
    
    $
    (2.98
    )Weighted average shares outstanding:Basic
    
    
    23,831,807
    
    
    
    23,368,778
    
    
    
    23,717,287
    
    
    
    23,209,181Diluted
    
    
    23,831,807
    
    
    
    23,368,778
    
    
    
    23,717,287
    
    
    
    23,209,181
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CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Operating Activities:Net loss
    
    $
    (6,333
    )
    
    $
    (66,411
    )
    
    $
    (33,269
    )
    
    $
    (68,714
    )Adjustments to reconcile net loss to net cash used in
operating activities:Stock-based compensation
    
    
    577
    
    
    
    674
    
    
    
    1,797
    
    
    
    1,887Depreciation and amortization
    
    
    1,516
    
    
    
    1,595
    
    
    
    4,724
    
    
    
    4,662Amortization of debt issuance costs
    
    
    45
    
    
    
    
    
    
    
    45
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    43,996
    
    
    
    
    
    
    
    42,231Changes in operating assets and liabilities, net of
businesses acquired:Accounts receivable, net
    
    
    3,237
    
    
    
    (5,552
    )
    
    
    3,219
    
    
    
    3,165Inventories
    
    
    634
    
    
    
    9
    
    
    
    (363
    )
    
    
    (1,321
    )Prepaid expenses and other assets
    
    
    553
    
    
    
    509
    
    
    
    1,213
    
    
    
    545Accounts payable
    
    
    (1,976
    )
    
    
    1,672
    
    
    
    (250
    )
    
    
    (785
    )Accrued liabilities
    
    
    593
    
    
    
    (672
    )
    
    
    1,172
    
    
    
    (963
    )Warranty liability
    
    
    (48
    )
    
    
    56
    
    
    
    (63
    )
    
    
    65Corrective action liabilities
    
    
    (2,695
    )
    
    
    18,500
    
    
    
    3,508
    
    
    
    18,500Deferred revenue
    
    
    (55
    )
    
    
    539
    
    
    
    (175
    )
    
    
    (131
    )Net cash used in operating activities
    
    
    (3,952
    )
    
    
    (5,085
    )
    
    
    (18,442
    )
    
    
    (859
    )Investing Activities:Purchases of machinery and equipment
    
    
    (289
    )
    
    
    (1,034
    )
    
    
    (1,634
    )
    
    
    (2,688
    )Purchase of intangible assets
    
    
    
    
    
    
    (370
    )
    
    
    
    
    
    
    (370
    )Proceeds from repayment of note
    
    
    80
    
    
    
    
    
    
    
    82
    
    
    
    110Cash paid for acquisitions
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    (54
    )Net cash used in investing activities
    
    
    (209
    )
    
    
    (1,377
    )
    
    
    (1,552
    )
    
    
    (3,002
    )Financing Activities:Proceeds from exercise of stock options and issuance of
shares under employee stock purchase plan
    
    
    73
    
    
    
    161
    
    
    
    225
    
    
    
    897Minimum tax withholding on restricted stock awards
    
    
    (12
    )
    
    
    (13
    )
    
    
    (106
    )
    
    
    (110
    )Debt issuance costs
    
    
    (181
    )
    
    
    
    
    
    
    (181
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (120
    )
    
    
    148
    
    
    
    (62
    )
    
    
    787Effect of exchange rate changes on cash and cash equivalents
    
    
    86
    
    
    
    74
    
    
    
    (120
    )
    
    
    47Net change in cash and cash equivalents
    
    
    (4,195
    )
    
    
    (6,240
    )
    
    
    (20,176
    )
    
    
    (3,027
    )Cash and cash equivalents, beginning of period
    
    
    10,885
    
    
    
    37,868
    
    
    
    26,866
    
    
    
    34,655Cash and cash equivalents, end of period
    
    $
    6,690
    
    
    $
    31,628
    
    
    $
    6,690
    
    
    $
    31,628Supplemental disclosures of noncash investing and financing activities:Increase (decrease) in accrued machinery and equipment purchases
    
    $
    (8
    )
    
    $
    126
    
    
    $
    (93
    )
    
    $
    (117
    )Conversion of accounts receivable to notes receivable
    
    $
    
    
    
    $
    228
    
    
    $
    
    
    
    $
    228
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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
  Net Loss Per Share
  Page 6 of 41




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except share data)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:Net loss attributable to Cardiac Science
Corporation
    
    $
    (6,376
    )
    
    $
    (66,546
    )
    
    $
    (33,473
    )
    
    $
    (69,190
    )Denominator:Weighted average shares for basic calculation
    
    
    23,831,807
    
    
    
    23,368,778
    
    
    
    23,717,287
    
    
    
    23,209,181Weighted average shares for diluted calculation
    
    
    23,831,807
    
    
    
    23,368,778
    
    
    
    23,717,287
    
    
    
    23,209,181
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Antidilutive shares issuable upon exercise of stock options
    
    
    2,749,718
    
    
    
    3,117,503
    
    
    
    2,749,718
    
    
    
    3,117,503Antidilutive shares issuable upon exercise of warrants
    
    
    12,500
    
    
    
    211,276
    
    
    
    12,500
    
    
    
    212,276Antidilutive shares related to non-vested stock awards and
ESPP
    
    
    1,450,508
    
    
    
    915,377
    
    
    
    1,450,508
    
    
    
    915,377Total
    
    
    4,212,726
    
    
    
    4,244,156
    
    
    
    4,212,726
    
    
    
    4,245,156
 Customer and Vendor Concentrations
   Recent Accounting Pronouncements
   Page 7 of 41




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2. Subsequent Events
 Proposed Merger with Opto Circuits
   Merger
   Page 8 of 41




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Pending Sale of Biotel, Inc. Investment
   3. Liquidity
      Page 9 of 41




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4. Corrective Action Liabilities
 November 2009 Corrective Actions
     Page 10 of 41




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February 2010 Corrective Action
  Recorded Charges
   Charged toBeginning
    
    product cost
    
    
    
    
    
    
    
    
    
    End of(in thousands)
    
    of period
    
    of revenues
    
    Adjustments
    
    Expenditures
    
    periodNine months ended
September 30, 2010
    
    $
    15,249
    
    
    $
    11,000
    
    
    $
    
    
    
    $
    (7,492
    )
    
    $
    18,757
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5. Equity and Comprehensive Income (Loss)
    Attributable toCardiac Science
    
    
    Noncontrolling
    
    
    Total(in thousands)
    
    Corporation
    
    
    Interests
    
    
    EquityEquity at June 30, 2010
    
    $
    32,884
    
    
    $
    1,276
    
    
    $
    34,160Comprehensive loss:Net income (loss)
    
    
    (6,376
    )
    
    
    43
    
    
    
    (6,333
    )Realized loss on available sale securities
    
    
    (76
    )
    
    
    
    
    
    
    (76
    )Unrealized losses on available for sale securities
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Foreign currency translation adjustments
    
    
    148
    
    
    
    132
    
    
    
    280Comprehensive income (loss)
    
    
    (6,312
    )
    
    
    175
    
    
    
    (6,137
    )Stock-based transactions and compensation expense under
employee benefit plans
    
    
    639
    
    
    
    
    
    
    
    639Equity at September 30, 2010
    
    $
    27,211
    
    
    $
    1,451
    
    
    $
    28,662Equity at June 30, 2009
    
    $
    131,274
    
    
    $
    869
    
    
    $
    132,143Comprehensive income (loss):Net income (loss)
    
    
    (66,546
    )
    
    
    135
    
    
    
    (66,411
    )Unrealized losses on available for sale securities,
net of related tax of $125
    
    
    (213
    )
    
    
    
    
    
    
    (213
    )Foreign currency translation adjustments
    
    
    75
    
    
    
    31
    
    
    
    106Comprehensive income (loss)
    
    
    (66,684
    )
    
    
    166
    
    
    
    (66,518
    )Stock-based transactions and compensation expense under
employee benefit plans
    
    
    832
    
    
    
    
    
    
    
    832Equity at September 30, 2009
    
    $
    65,422
    
    
    $
    1,035
    
    
    $
    66,457
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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)
    
    
    (33,473
    )
    
    
    204
    
    
    
    (33,269
    )Realized loss on available for sale securities
    
    
    (76
    )
    
    
    
    
    
    
    (76
    )Unrealized gains on available for sale securities
    
    
    7
    
    
    
    
    
    
    
    7Foreign currency translation adjustments
    
    
    (118
    )
    
    
    (46
    )
    
    
    (164
    )Comprehensive income (loss)
    
    
    (33,660
    )
    
    
    158
    
    
    
    (33,502
    )Stock-based transactions and compensation expense under
employee benefit plans
    
    
    1,935
    
    
    
    
    
    
    
    1,935Equity at September 30, 2010
    
    $
    27,211
    
    
    $
    1,451
    
    
    $
    28,662Equity at December 31, 2008
    
    $
    131,703
    
    
    $
    545
    
    
    $
    132,248Comprehensive income (loss):Net income (loss)
    
    
    (69,190
    )
    
    
    476
    
    
    
    (68,714
    )Unrealized gains on available for sale securities,
net of related tax of ($44)
    
    
    161
    
    
    
    
    
    
    
    161Foreign currency translation adjustments
    
    
    48
    
    
    
    14
    
    
    
    62Comprehensive income (loss)
    
    
    (68,981
    )
    
    
    490
    
    
    
    (68,491
    )Stock-based transactions and compensation expense under
employee benefit plans
    
    
    2,700
    
    
    
    
    
    
    
    2,700Equity at September 30, 2009
    
    $
    65,422
    
    
    $
    1,035
    
    
    $
    66,457
 6. Segment Reporting
     Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Defibrillation products
    
    $
    18,149
    
    
    $
    21,646
    
    
    $
    53,062
    
    
    $
    61,413Cardiac monitoring products
    
    
    11,836
    
    
    
    13,000
    
    
    
    37,362
    
    
    
    40,151Service
    
    
    4,495
    
    
    
    4,238
    
    
    
    13,266
    
    
    
    13,098Total
    
    $
    34,480
    
    
    $
    38,884
    
    
    $
    103,690
    
    
    $
    114,662
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Domestic
    
    $
    25,698
    
    
    $
    27,099
    
    
    $
    76,103
    
    
    $
    79,189Foreign
    
    
    8,782
    
    
    
    11,785
    
    
    
    27,587
    
    
    
    35,473Total
    
    $
    34,480
    
    
    $
    38,884
    
    
    $
    103,690
    
    
    $
    114,662
  7. Inventories
  September 30,
    
    
    December 31,(in thousands)
    
    2010
    
    
    2009Raw materials
    
    $
    16,283
    
    
    $
    18,752Finished goods
    
    
    7,619
    
    
    
    4,829Total inventories
    
    $
    23,902
    
    
    $
    23,581
  8. 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
    
    
    
    
    182
    
    
    
    
    
    
    
    182Total intangible assets not subject to
amortization
    
    
    
    
    14,962
    
    
    
    
    
    
    
    14,962Intangible assets subject to amortization:Cardiac Science customer relationships
    
    5 years
    
    
    8,650
    
    
    
    (8,650
    )
    
    
    Cardiac Science developed technology
    
    8 years
    
    
    11,330
    
    
    
    (7,199
    )
    
    
    4,131Burdick distributor relationships
    
    10 years
    
    
    1,400
    
    
    
    (1,085
    )
    
    
    315Burdick developed technology
    
    7 years
    
    
    860
    
    
    
    (860
    )
    
    
    Patents and patent applications
    
    5-10 years
    
    
    960
    
    
    
    (940
    )
    
    
    20Patent rights
    
    6-13 years
    
    
    7,692
    
    
    
    (1,937
    )
    
    
    5,755Total intangible assets subject to amortization
    
    
    
    
    30,892
    
    
    
    (20,671
    )
    
    
    10,221Total
    
    
    
    $
    45,854
    
    
    $
    (20,671
    )
    
    $
    25,183
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2010 (Q4 only)
    
    $
    5482011
    
    
    2,1902012
    
    
    2,1872013
    
    
    1,5672014
    
    
    623Thereafter
    
    
    3,106
 9. Credit Facility
   10. Warranty Liability
  Nine Months Ended(in thousands)
    
    September 30, 2010Warranty liability, beginning of the period
    
    $
    4,028Charged to product cost of revenues, net
    
    
    1,316Warranty expenditures
    
    
    (1,411
    )Warranty liability, end of the period
    
    $
    3,933
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11. Stock-Based Compensation Plans
   Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2010
    
    2009
    
    2010
    
    2009Stock options plans:Volatility
    
    
    
    
    
    
    55.0
    %
    
    
    55.5
    %
    
    
    53.8
    %Expected term (years)
    
    
    
    
    
    
    6.00
    
    
    
    6.00
    
    
    
    6.50Risk-free interest rate
    
    
    
    
    
    
    3.1
    %
    
    
    3.3
    %
    
    
    2.6
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of options granted
    
    $
    
    
    
    $
    1.66
    
    
    $
    1.03
    
    
    $
    2.11Employee 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
    
    $
    
    
    
    $
    3.04
    
    
    $
    2.32
    
    
    $
    4.05
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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
    
    
    1,451,103Granted
    
    
    Vested
    
    
    (17,924
    )Forfeited
    
    
    (24,465
    )Non-vested balance, September 30, 2010
    
    
    1,408,714
 th
  12. Commitments and Contingencies
      Lionel Patenaude v. Cardiac Science Corp., et
al. Mindy Creamer v. Cardiac Science Corp., et al. Robert Gluck v. Ruediger Naumann-Etienne, et
al. Mark Rapport v.
David Marver, et al. Bagge v. Naumann-Etienne, et al.
  Page 17 of 41




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13. Income Taxes
       14. Derivatives
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15. Fair Value Measurement
    16. 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 (Cardiac Science), including forward-looking statements relating to the
proposed acquisition of Cardiac Science by Opto Circuits (India) Limited (Opto Circuits) and the
expected timetable for completing the transaction. Such statements are based on the current
assumptions and expectations of Cardiac Science and Opto Circuits management and are neither
promises nor guarantees. 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, closing of the proposed transaction with Opto Circuits; the effects of disruption from the
proposed transaction with Opto Circuits on the Companys business and other matters, made in this
Quarterly Report on Form 10-Q are forward looking. Additionally, actual results of the proposed
transaction with Opto Circuits could vary materially as a result of a number of factors, including:
uncertainties as to whether the holders of sufficient shares of Cardiac Science common stock are
tendered in the Offer and whether the conditions to closing of the Offer are met; the possibility
that competing offers will be made; the risk that stockholder litigation in connection with the
Offer or the Merger may result in significant costs of defense, indemnification and liability and
the possibility that the Merger Agreement may be terminated under certain circumstances. 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 quarters ended March 31, 2010 and June 30,
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 22 of 41




---



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Software Revenue Recognition.
  Revenue Recognition.
    Page 23 of 41




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Recent Accounting Pronouncements
    Pending Merger Transaction
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Results of Operations
 Summary of Results for the Three and Nine Months Ended September 30, 2010
 
    
   We generated revenue of $34.5 million for the three month period ended September 30,
2010, representing a decrease of approximately 11% over the three month period ended
September 30, 2009. This decrease was due mostly to a reduction in AED sales in Japan
and, to a lesser extent, softness in the market for medical devices, among other
factors.
    
    We generated revenue of $103.7 million for the nine month period ended September 30,
2010, representing a decrease of approximately 10% over the nine month period ended
September 30, 2009. This decrease was also due mostly to reductions in AED sales in
Japan and, to a lesser extent, softness in the market for medical devices.
    
    We recorded a charge of $11.0 million during the nine month period ended September
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 of repair or replacement of
certain devices located outside of the United States that the Company believes that it
is probable that it would be required to be performed in the future.
    
    We incurred a net loss of $6.4 million and $33.5 million for the three and nine month
periods ended September 30, 2010, respectively, compared a net loss of $66.5 million and
$69.2 million for the three and nine month periods ended September 30, 2009,
respectively.
    
    We used cash from operations of $4.0 million and $18.4 million for the three and nine
month periods ended September 30, 2010, respectively, compared to cash used in
operations of $5.1 million and $0.9 million for the three and nine month periods ended
September 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 introduced multiple cardiac monitoring products, including two new Cardiac Stress
Systems.
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Looking Forward
       Page 26 of 41




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Revenues
   Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    % Change
    
    
    Ended
    
    
    Nine Months Ended
    
    
    % Change
    
    
    Nine Months Ended(dollars in thousands)
    
    September 30, 2010
    
    
    2009 to 2010
    
    
    Septemebr 30, 2009
    
    
    September 30, 2010
    
    
    2009 to 2010
    
    
    September 30, 2009Defibrillation products
    
    $
    18,149
    
    
    
    (16.2
    %)
    
    $
    21,646
    
    
    $
    53,062
    
    
    
    (13.6
    %)
    
    $
    61,413% of revenue
    
    
    52.7
    %
    
    
    
    
    
    
    55.7
    %
    
    
    51.2
    %
    
    
    
    
    
    
    53.6
    %Cardiac monitoring products
    
    
    11,836
    
    
    
    (9.0
    %)
    
    
    13,000
    
    
    
    37,362
    
    
    
    (6.9
    %)
    
    
    40,151% of revenue
    
    
    34.3
    %
    
    
    
    
    
    
    33.4
    %
    
    
    36.0
    %
    
    
    
    
    
    
    35.0
    %Service
    
    
    4,495
    
    
    
    6.1
    %
    
    
    4,238
    
    
    
    13,266
    
    
    
    1.3
    %
    
    
    13,098% of revenue
    
    
    13.0
    %
    
    
    
    
    
    
    10.9
    %
    
    
    12.8
    %
    
    
    
    
    
    
    11.4
    %Total revenues
    
    $
    34,480
    
    
    
    (11.3
    %)
    
    $
    38,884
    
    
    $
    103,690
    
    
    
    (9.6
    %)
    
    $
    114,662
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Gross Profit
   Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    % Change
    
    
    Ended
    
    
    Nine Months Ended
    
    
    % Change
    
    
    Nine Months Ended(dollars in thousands)
    
    September 30, 2010
    
    
    2009 to 2010
    
    
    September 30, 2009
    
    
    September 30, 2010
    
    
    2009 to 2010
    
    
    September 30, 2009Products
    
    $
    14,741
    
    
    
    (15.5
    %)
    
    $
    17,452
    
    
    $
    44,104
    
    
    
    (15.7
    %)
    
    $
    52,303% of products revenue
    
    
    49.2
    %
    
    
    
    
    
    
    50.4
    %
    
    
    48.8
    %
    
    
    
    
    
    
    51.5
    %Corrective action costs
    
    
    
    
    
    
    n/m
    
    
    
    (18,500
    )
    
    
    (11,000
    )
    
    
    40.5
    %
    
    
    (18,500
    )Service
    
    
    1,346
    
    
    
    17.8
    %
    
    
    1,143
    
    
    
    3,768
    
    
    
    1.2
    %
    
    
    3,722% of service revenue
    
    
    29.9
    %
    
    
    
    
    
    
    27.0
    %
    
    
    28.4
    %
    
    
    
    
    
    
    28.4
    %Total gross profit
    
    $
    16,087
    
    
    
    16833.7
    %
    
    $
    95
    
    
    $
    36,872
    
    
    
    (1.7
    %)
    
    $
    37,525% of total revenue
    
    
    46.7
    %
    
    
    
    
    
    
    0.2
    %
    
    
    35.6
    %
    
    
    
    
    
    
    32.7
    %
   Page 28 of 41




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Operating Expenses
      % Change 2010 to
    
    
    
    
    
    
    
    
    
    
    % ChangeThree Months
    
    
    2009
    
    
    Three Months
    
    
    Nine Months
    
    
    2010 to 2009
    
    
    Nine MonthsEnded
    
    
    (Increase) /
    
    
    Ended
    
    
    Ended
    
    
    (Increase) /
    
    
    Ended(dollars in thousands)
    
    September 30, 2010
    
    
    Decrease
    
    
    September 30, 2009
    
    
    September 30, 2010
    
    
    Decrease
    
    
    September 30, 2009Research and development
    
    $
    4,266
    
    
    
    0.1
    %
    
    $
    4,270
    
    
    $
    13,100
    
    
    
    (15.3
    %)
    
    $
    11,358% of total revenue
    
    
    12.4
    %
    
    
    
    
    
    
    11.0
    %
    
    
    12.6
    %
    
    
    
    
    
    
    9.9
    %Sales and marketing
    
    
    11,215
    
    
    
    5.9
    %
    
    
    11,923
    
    
    
    36,429
    
    
    
    (5.9
    %)
    
    
    34,392% of total revenue
    
    
    32.5
    %
    
    
    
    
    
    
    30.7
    %
    
    
    35.1
    %
    
    
    
    
    
    
    30.0
    %General and administrative
    
    
    7,058
    
    
    
    (7.4
    %)
    
    
    6,571
    
    
    
    20,652
    
    
    
    (11.4
    %)
    
    
    18,536% of total revenue
    
    
    20.5
    %
    
    
    
    
    
    
    16.9
    %
    
    
    19.9
    %
    
    
    
    
    
    
    16.2
    %Total operating expenses
    
    $
    22,539
    
    
    
    1.0
    %
    
    $
    22,764
    
    
    $
    70,181
    
    
    
    (9.2
    %)
    
    $
    64,286% of total revenue
    
    
    65.4
    %
    
    
    
    
    
    
    58.5
    %
    
    
    67.7
    %
    
    
    
    
    
    
    56.1
    %
    Page 29 of 41




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Other Income and Expense
   Income Taxes
     Page 30 of 41




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Liquidity and Capital Resources
 Three Months
    
    
    
    
    
    
    Three Months
    
    
    Nine Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    % Change
    
    
    Ended
    
    
    Ended
    
    
    % Change
    
    
    Ended(dollars in thousands)
    
    September 30, 2010
    
    
    2009 to 2010
    
    
    September 30, 2009
    
    
    September 30, 2010
    
    
    2009 to 2010
    
    
    September 30, 2009Cash used in operating activities
    
    $
    (3,952
    )
    
    
    22.3
    %
    
    $
    (5,085
    )
    
    $
    (18,442
    )
    
    
    (2046.9
    %)
    
    $
    (859
    )Cash used in investing activities
    
    
    (209
    )
    
    
    84.8
    %
    
    
    (1,377
    )
    
    
    (1,552
    )
    
    
    48.3
    %
    
    
    (3,002
    )Cash provided by (used in) financing
activities
    
    
    (120
    )
    
    
    (181.1
    %)
    
    
    148
    
    
    
    (62
    )
    
    
    (107.9
    %)
    
    
    787Effect of exchange rates on cash and
cash equivalents
    
    
    86
    
    
    
    16.2
    %
    
    
    74
    
    
    
    (120
    )
    
    
    (355.3
    %)
    
    
    47Net change in cash and cash equivalents
    
    $
    (4,195
    )
    
    
    (32.8
    %)
    
    $
    (6,240
    )
    
    $
    (20,176
    )
    
    
    (566.5
    %)
    
    $
    (3,027
    )
      Page 31 of 41




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   Page 33 of 41




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Lionel Patenaude v. Cardiac Science Corp., et al. Mindy Creamer v. Cardiac
Science Corp., et al. Robert Gluck v. Ruediger Naumann-Etienne, et al. Mark Rapport v. David Marver, et al. Bagge v. Naumann-Etienne, et al.
   
 Item 1A. Risk Factors
 Failure to complete the proposed merger with Opto Circuits could negatively impact our stock price
and adversely affect our future financial condition, operations and prospects.
  
    
    uncertainties as to whether sufficient shares may be tendered by the Companys
stockholders needed to satisfy the minimum tender condition to the closing of the
tender offer
    
    the existence of a Company Material Adverse Effect as defined in the merger
agreement
    
    the risk that competing offers or acquisition proposals may be made
    
    the possibility that various conditions to the consummation of the tender offer or
the merger may not be satisfied or waiver, including that a governmental entity may
prohibit, delay or refuse to grant approval for the consummation of the offer or the
merger
    
    the risk that stockholder litigation in connection with the tender offer or the
merger may result in significant costs of defense, indemnification and liability or
result in a delay in closing the transaction.
   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.
  Page 34 of 41




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We may be unable to comply with our financial covenants.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Removed and Reserved
 
 Item 5. Other Information
  
 Item 6. Exhibits
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No.
    
    Description2.1
    
    Agreement and Plan of Merger, dated as of October 19, 2010, by and among Cardiac Science Corporation,
Opto Circuits (India) Ltd. and Jolt Acquisition Company. (1)2.2
    
    Amendment No. 1 to Agreement and Plan of Merger, dated as of October 29, 2010, by and among Cardiac
Science Corporation, Opto Circuits (India) Ltd. and Jolt Acquisition Company. (2)31.1
    
    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.
 
 (1)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K (File No
000-51512) filed on October 19, 2010.(2)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K (File No 000-51512)
filed on October 29, 2010. Page 36 of 41




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SIGNATURE
  CARDIAC SCIENCE CORPORATIONBy:
    /s/ Michael K. MatysikMichael K. MatysikSenior Vice President and Chief Financial Officer
(Principal Financial Officer)Date: November 9, 2010 Page 37 of 41