##### 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, 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 LOGO)
Cardiac Science Corporation
  Delaware
(State of Incorporation)
    
    94-3300396
(IRS Employer Identification No.)
 3303 Monte Villa Parkway
Bothell, Washington 98021
 (425) 402-2000
 
 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
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    28PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    28Item 1A.
    
    Risk Factors
    
    
    28Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3.
    
    Defaults Upon Senior Securities
    
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    29Item 5.
    
    Other Information
    
    
    29Item 6.
    
    Exhibits
    
    
    29SIGNATURE
    
    
    
    
    30EX-10.1EX-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
 September 30,
    
    
    December 31,(In thousands)
    
    2009
    
    
    2008ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    31,628
    
    
    $
    34,655Accounts receivable, net of allowance for doubtful accounts
of $1,231 and
$1,186, respectively
    
    
    28,387
    
    
    
    31,665Inventories
    
    
    26,011
    
    
    
    24,692Deferred income taxes
    
    
    
    
    
    
    8,366Prepaid expenses and other current assets
    
    
    2,763
    
    
    
    3,144Total current assets
    
    
    88,789
    
    
    
    102,522Other assets
    
    
    358
    
    
    
    428Machinery and equipment, net of accumulated depreciation of
$16,867 and $15,190, respectively
    
    
    7,951
    
    
    
    6,994Deferred income taxes
    
    
    
    
    
    
    28,452Intangible assets, net of accumulated amortization of $16,867 and $13,889,
respectively
    
    
    28,672
    
    
    
    31,278Investments in unconsolidated entities
    
    
    664
    
    
    
    534Total assets
    
    $
    126,434
    
    
    $
    170,208LIABILITIES AND EQUITYCurrent Liabilities:Accounts payable
    
    $
    11,885
    
    
    $
    12,711Accrued liabilities
    
    
    12,568
    
    
    
    13,535Warranty liability
    
    
    3,861
    
    
    
    3,796AED field
initiative liability
    
    
    18,500
    
    
    
    Deferred revenue
    
    
    7,787
    
    
    
    7,918Total current liabilities
    
    
    54,601
    
    
    
    37,960Deferred
income taxes
    
    
    5,376
    
    
    
    Total liabilities
    
    
    59,977
    
    
    
    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 September 30, 2009 and December
31, 2008,
respectively
    
    
    
    
    
    
    Common stock (65,000,000 shares authorized), $0.001 par value,
23,402,586 and 22,998,364 shares issued and outstanding as of
September 30,
 2009 and December 31, 2008, respectively
    
    
    230,003
    
    
    
    227,303Accumulated other comprehensive income (loss)
    
    
    139
    
    
    
    (70
    )Accumulated deficit
    
    
    (164,720
    )
    
    
    (95,530
    )Total Cardiac Science Corporation shareholders equity
    
    
    65,422
    
    
    
    131,703Noncontrolling interests
    
    
    1,035
    
    
    
    545Total equity
    
    
    66,457
    
    
    
    132,248Total liabilities and equity
    
    $
    126,434
    
    
    $
    170,208
  Page 3 of 34




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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)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Products
    
    $
    34,646
    
    
    $
    49,387
    
    
    $
    101,564
    
    
    $
    140,984Service
    
    
    4,238
    
    
    
    4,619
    
    
    
    13,098
    
    
    
    14,113Total revenues
    
    
    38,884
    
    
    
    54,006
    
    
    
    114,662
    
    
    
    155,097Cost of Revenues:Products
    
    
    17,194
    
    
    
    24,799
    
    
    
    49,261
    
    
    
    69,260AED field
initiative
    
    
    18,500
    
    
    
    
    
    
    
    18,500
    
    
    
    Service
    
    
    3,095
    
    
    
    3,088
    
    
    
    9,376
    
    
    
    9,557Total cost of revenues
    
    
    38,789
    
    
    
    27,887
    
    
    
    77,137
    
    
    
    78,817Gross profit
    
    
    95
    
    
    
    26,119
    
    
    
    37,525
    
    
    
    76,280Operating Expenses:Research and development
    
    
    4,270
    
    
    
    4,103
    
    
    
    11,358
    
    
    
    11,762Sales and marketing
    
    
    11,923
    
    
    
    12,934
    
    
    
    34,392
    
    
    
    38,170General and administrative
    
    
    6,571
    
    
    
    5,096
    
    
    
    18,536
    
    
    
    15,568Total operating expenses
    
    
    22,764
    
    
    
    22,133
    
    
    
    64,286
    
    
    
    65,500Operating income (loss)
    
    
    (22,669
    )
    
    
    3,986
    
    
    
    (26,761
    )
    
    
    10,780Other Income:Interest income
    
    
    23
    
    
    
    156
    
    
    
    55
    
    
    
    434Other income, net
    
    
    158
    
    
    
    20
    
    
    
    555
    
    
    
    106Total other income
    
    
    181
    
    
    
    176
    
    
    
    610
    
    
    
    540Income (loss) before income tax expense
    
    
    (22,488
    )
    
    
    4,162
    
    
    
    (26,151
    )
    
    
    11,320Income tax expense
    
    
    (43,923
    )
    
    
    (1,598
    )
    
    
    (42,563
    )
    
    
    (4,245
    )Net income (loss)
    
    
    (66,411
    )
    
    
    2,564
    
    
    
    (68,714
    )
    
    
    7,075Less: Net income atttributable to
noncontrolling interests
    
    
    (135
    )
    
    
    (86
    )
    
    
    (476
    )
    
    
    (257
    )Net income (loss) attributable to Cardiac
Science Corporation
    
    $
    (66,546
    )
    
    $
    2,478
    
    
    $
    (69,190
    )
    
    $
    6,818Net income (loss) per share attributable
to
Cardiac Science Corporation:Basic
    
    $
    (2.85
    )
    
    $
    0.11
    
    
    $
    (2.98
    )
    
    $
    0.30Diluted
    
    $
    (2.85
    )
    
    $
    0.11
    
    
    $
    (2.98
    )
    
    $
    0.29Weighted average shares outstanding:Basic
    
    
    23,368,778
    
    
    
    22,892,161
    
    
    
    23,209,181
    
    
    
    22,840,524Diluted
    
    
    23,368,778
    
    
    
    23,413,042
    
    
    
    23,209,181
    
    
    
    23,402,011
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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)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Operating Activities:Net income (loss)
    
    $
    (66,411
    )
    
    $
    2,564
    
    
    $
    (68,714
    )
    
    $
    7,075Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Stock-based compensation
    
    
    674
    
    
    
    469
    
    
    
    1,887
    
    
    
    1,515Depreciation and amortization
    
    
    1,595
    
    
    
    1,544
    
    
    
    4,662
    
    
    
    4,777Deferred income taxes
    
    
    43,996
    
    
    
    1,493
    
    
    
    42,231
    
    
    
    3,955Changes in operating assets and liabilities, net of
businesses acquired:Accounts receivable, net
    
    
    (5,552
    )
    
    
    (526
    )
    
    
    3,165
    
    
    
    (1,169
    )Inventories
    
    
    9
    
    
    
    (929
    )
    
    
    (1,321
    )
    
    
    (1,678
    )Prepaid expenses and other assets
    
    
    509
    
    
    
    (151
    )
    
    
    545
    
    
    
    (445
    )Accounts payable
    
    
    1,672
    
    
    
    (591
    )
    
    
    (785
    )
    
    
    (827
    )Accrued liabilities
    
    
    (672
    )
    
    
    1,113
    
    
    
    (963
    )
    
    
    729Warranty liability
    
    
    56
    
    
    
    825
    
    
    
    65
    
    
    
    1,163AED field
initiative liability
    
    
    18,500
    
    
    
    
    
    
    
    18,500
    
    
    
    Deferred revenue
    
    
    539
    
    
    
    555
    
    
    
    (131
    )
    
    
    65Net cash provided by (used in) operating activities
    
    
    (5,085
    )
    
    
    6,366
    
    
    
    (859
    )
    
    
    15,160Investing Activities:Purchases of short-term investments
    
    
    
    
    
    
    (845
    )
    
    
    
    
    
    
    (845
    )Maturities of short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350Purchases of machinery and equipment
    
    
    (1,034
    )
    
    
    (983
    )
    
    
    (2,688
    )
    
    
    (2,425
    )Purchases of intangible assets
    
    
    (370
    )
    
    
    
    
    
    
    (370
    )
    
    
    Proceeds from repayment of note
    
    
    27
    
    
    
    38
    
    
    
    110
    
    
    
    38Cash paid for acquisitions
    
    
    
    
    
    
    (156
    )
    
    
    (54
    )
    
    
    (580
    )Net cash used in investing activities
    
    
    (1,377
    )
    
    
    (1,946
    )
    
    
    (3,002
    )
    
    
    (3,462
    )Financing Activities:Proceeds from exercise of stock options and issuance of
shares under employee stock purchase plan
    
    
    161
    
    
    
    541
    
    
    
    897
    
    
    
    887Minimum tax withholding on restricted stock awards
    
    
    (13
    )
    
    
    (87
    )
    
    
    (110
    )
    
    
    (149
    )Net cash provided by financing activities
    
    
    148
    
    
    
    454
    
    
    
    787
    
    
    
    738Effect of exchange rate changes on cash and cash equivalents
    
    
    74
    
    
    
    
    
    
    
    47
    
    
    
    Net change in cash and cash equivalents
    
    
    (6,240
    )
    
    
    4,874
    
    
    
    (3,027
    )
    
    
    12,436Cash and cash equivalents, beginning of period
    
    
    37,868
    
    
    
    27,721
    
    
    
    34,655
    
    
    
    20,159Cash and cash equivalents, end of period
    
    $
    31,628
    
    
    $
    32,595
    
    
    $
    31,628
    
    
    $
    32,595Supplemental disclosure of noncash investing and financing activities:Increase (decrease) in accrued machinery and equipment purchases
    
    $
    126
    
    
    $
    
    
    
    $
    (117
    )
    
    $
    Conversion of accounts receivable to note receivable
    
    $
    228
    
    
    $
    
    
    
    $
    228
    
    
    $
    330
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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
  Page 6 of 34




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Net Income (Loss) Per Share
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Numerator:Net income (loss) attributable to Cardiac
Science Corporation
    
    $
    (66,546
    )
    
    $
    2,478
    
    
    $
    (69,190
    )
    
    $
    6,818Denominator:Weighted average shares for basic calculation
    
    
    23,368,778
    
    
    
    22,892,161
    
    
    
    23,209,181
    
    
    
    22,840,524Incremental shares from employee stock
options, non-vested
stock awards and ESPP
    
    
    
    
    
    
    520,881
    
    
    
    
    
    
    
    561,487Weighted average shares for diluted calculation
    
    
    23,368,778
    
    
    
    23,413,042
    
    
    
    23,209,181
    
    
    
    23,402,011
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Antidilutive shares issuable upon exercise of stock options
    
    
    3,117,503
    
    
    
    2,408,583
    
    
    
    3,117,503
    
    
    
    2,451,399Antidilutive shares issuable upon exercise of warrants
    
    
    211,276
    
    
    
    245,109
    
    
    
    212,276
    
    
    
    246,109Antidilutive shares related to non-vested stock awards and
ESPP
    
    
    915,377
    
    
    
    391,967
    
    
    
    915,377
    
    
    
    308,544Total
    
    
    4,244,156
    
    
    
    3,045,659
    
    
    
    4,245,156
    
    
    
    3,006,052
 Customer and Vendor Concentrations
   Page 7 of 34




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Recent Accounting Pronouncements
   2. AED Field Initiative
    Page 8 of 34




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3. Commitments and Contingencies
       4. Equity and Comprehensive Income (Loss)
   Page 9 of 34




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Attributable toCardiac Science
    
    
    Noncontrolling
    
    
    Total(in thousands)
    
    Corporation
    
    
    Interests
    
    
    EquityEquity at June 30, 2008
    
    $
    232,927
    
    
    $
    298
    
    
    $
    233,225Comprehensive income:Net income
    
    
    2,478
    
    
    
    86
    
    
    
    2,564Unrealized gains on available for sale securities,
net of related tax of ($26)
    
    
    44
    
    
    
    
    
    
    
    44Foreign currency translation adjustments
    
    
    (70
    )
    
    
    
    
    
    
    (70
    )Comprehensive income
    
    
    2,452
    
    
    
    86
    
    
    
    2,538Stock-based transactions
    
    
    922
    
    
    
    
    
    
    
    922Equity at September 30, 2008
    
    $
    236,301
    
    
    $
    384
    
    
    $
    236,685Equity 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
    
    
    (213
    )
    
    
    
    
    
    
    (213
    )Foreign currency translation adjustments
    
    
    75
    
    
    
    31
    
    
    
    106Comprehensive income (loss)
    
    
    (66,684
    )
    
    
    166
    
    
    
    (66,518
    )Stock-based transactions
    
    
    832
    
    
    
    
    
    
    
    832Equity at September 30, 2009
    
    $
    65,422
    
    
    $
    1,035
    
    
    $
    66,457Equity at December 31, 2007
    
    $
    227,271
    
    
    $
    127
    
    
    $
    227,398Comprehensive income:Net income
    
    
    6,818
    
    
    
    257
    
    
    
    7,075Unrealized losses on available for sale securities,
net of related tax of$0
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Foreign currency translation adjustments
    
    
    (60
    )
    
    
    
    
    
    
    (60
    )Comprehensive income
    
    
    6,756
    
    
    
    257
    
    
    
    7,013Stock-based transactions
    
    
    2,274
    
    
    
    
    
    
    
    2,274Equity at September 30, 2008
    
    $
    236,301
    
    
    $
    384
    
    
    $
    236,685Equity 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
    
    
    161
    
    
    
    
    
    
    
    161Foreign currency translation adjustments
    
    
    48
    
    
    
    14
    
    
    
    62Comprehensive income (loss)
    
    
    (68,981
    )
    
    
    490
    
    
    
    (68,491
    )Stock-based transactions
    
    
    2,700
    
    
    
    
    
    
    
    2,700Equity at September 30, 2009
    
    $
    65,422
    
    
    $
    1,035
    
    
    $
    66,457
 5. Segment Reporting
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Defibrillation products
    
    $
    21,646
    
    
    $
    34,071
    
    
    $
    61,413
    
    
    $
    92,371Cardiac monitoring products
    
    
    13,000
    
    
    
    15,316
    
    
    
    40,151
    
    
    
    48,613Service
    
    
    4,238
    
    
    
    4,619
    
    
    
    13,098
    
    
    
    14,113Total
    
    $
    38,884
    
    
    $
    54,006
    
    
    $
    114,662
    
    
    $
    155,097
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Domestic
    
    $
    27,099
    
    
    $
    31,166
    
    
    $
    79,189
    
    
    $
    94,707Foreign
    
    
    11,785
    
    
    
    22,840
    
    
    
    35,473
    
    
    
    60,390Total
    
    $
    38,884
    
    
    $
    54,006
    
    
    $
    114,662
    
    
    $
    155,097
   6. Restructuring Costs
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7. Inventories
  September 30,
    
    
    December 31,(in thousands)
    
    2009
    
    
    2008Raw materials
    
    $
    19,686
    
    
    $
    20,871Finished goods
    
    
    6,325
    
    
    
    3,821Total inventories
    
    $
    26,011
    
    
    $
    24,692
  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
    
    
    
    
    
    
    189
    
    
    
    
    
    
    
    189Total intangible assets not subject to
amortization
    
    
    
    
    
    
    14,969
    
    
    
    
    
    
    
    14,969Intangible assets subject to amortization:Cardiac Science customer relationships
    
    5 years
    
    
    8,650
    
    
    
    (7,064
    )
    
    
    1,586Cardiac Science developed technology
    
    8 years
    
    
    11,330
    
    
    
    (5,783
    )
    
    
    5,547Burdick distributor relationships
    
    10 years
    
    
    1,400
    
    
    
    (945
    )
    
    
    455Burdick developed technology
    
    7 years
    
    
    860
    
    
    
    (829
    )
    
    
    31Patents and patent applications
    
    5-10 years
    
    
    1,330
    
    
    
    (945
    )
    
    
    385Patent rights
    
    13 years
    
    
    7,000
    
    
    
    (1,301
    )
    
    
    5,699Total intangible assets subject to amortization
    
    
    
    
    
    
    30,570
    
    
    
    (16,867
    )
    
    
    13,703Total
    
    
    
    
    
    $
    45,539
    
    
    $
    (16,867
    )
    
    $
    28,672
  2009
    
    $
    3,9572010
    
    
    3,2582011
    
    
    2,1042012
    
    
    2,1022013
    
    
    1,483Thereafter
    
    
    3,410
 9. Credit Facility
  Page 12 of 34




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10. Warranty Liability
  Nine months ended(in thousands)
    
    September 30, 2009Warranty liability, beginning of the period
    
    $
    3,796Charged to product cost of revenues, net
    
    
    2,114Warranty expenditures
    
    
    (2,049
    )Warranty liability, end of the period
    
    $
    3,861
 11. Stock-Based Compensation Plans
     Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Stock options plans:Volatility
    
    
    55.0
    %
    
    
    47.9
    %
    
    
    53.8
    %
    
    
    48.3
    %Expected term (years)
    
    
    6.00
    
    
    
    6.25
    
    
    
    6.50
    
    
    
    6.25Risk-free interest rate
    
    
    3.1
    %
    
    
    3.6
    %
    
    
    2.6
    %
    
    
    3.5
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of options granted
    
    $
    1.66
    
    
    $
    4.89
    
    
    $
    2.11
    
    
    $
    4.45Employee 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
    
    $
    3.04
    
    
    $
    9.55
    
    
    $
    4.05
    
    
    $
    9.05
 Page 13 of 34




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Outstanding shares  2002 Plan
    
    
    2,303,595Outstanding shares  1997 Plan
    
    
    814,062Stock options available for grant
    
    
    377,784Outstanding non-vested stock awards
    
    
    825,402ESPP shares available for issuance
    
    
    803,971Total common shares reserved for future issuance
    
    
    5,124,814
 2002 Plan 
  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
    
    
    2,280,914Granted
    
    
    90,000Exercised
    
    
    (1,227
    )Forfeited or expired
    
    
    (66,092
    )Outstanding, September 30, 2009
    
    
    2,303,595Exercisable, September 30, 2009
    
    
    1,232,587
 Non-vested Stock Awards 
 Page 14 of 34




---



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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
    
    
    845,064Granted
    
    
    13,073Vested
    
    
    (20,578
    )Forfeited
    
    
    (12,157
    )Non-vested balance, September 30, 2009
    
    
    825,402
 1997 Plan 
  SharesSubject toOptionsOutstanding, December 31, 2008
    
    
    836,312Forfeited or expired
    
    
    Outstanding, March 31, 2009
    
    
    836,312Forfeited or expired
    
    
    (22,250
    )Outstanding, June 30, 2009
    
    
    814,062Forfeited or expired
    
    
    Outstanding, September 30, 2009
    
    
    814,062Exercisable, September 30, 2009
    
    
    797,656
 Employee Stock Purchase Plan 
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12. Income Taxes
        Page 16 of 34




---



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13. Derivatives
    14. Fair Value Measurement
    Total carrying
    
    Quoted prices invalue at
    
    active markets(in thousands)
    
    September 30, 2009
    
    (Level 1)Assets:Cash equivalents
    
    $
    23,615
    
    
    $
    23,615Investments in
unconsolidated
entities
    
    $
    585
    
    
    $
    585
 15. Subsequent Events
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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 (the 10-K), Part II  Item
1A of our Quarterly Report on Form 10-Q for the three months ended June 30, 2009 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 34




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AED
Field Initiative
 Deferred Tax Assets and Income Taxes
  Stock-Based Compensation.
 Goodwill.
 Intangible Assets.
 Page 19 of 34




---



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Accounts Receivable.
 Valuation of Long-Lived Assets.
 Inventories.
 Warranty.
 Software Revenue Recognition.
 Page 20 of 34




---



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Revenue Recognition.
     Results of Operations
 Summary of Results for the Three and Nine Months Ended September 30, 2009
 
    
    In late June 2009, we implemented a voluntary ship-hold related to certain of our AED
products. We resumed shipments of our AED products on August 10, 2009 and we were able
to fulfill substantially all orders received prior to, and throughout the duration of
our ship-hold, as of September 30, 2009.
    
    We generated revenue of $38.9 million in the three months ended September 30, 2009, a
decrease of approximately 28% compared to the three month period ended September 30,
2008.
    
    Defibrillation revenue declined by approximately $12.4 million or 37% in the three
months ended September 30, 2009 as compared to the three month period ended
September 30, 2008, due primarily to reduced shipments to our Japanese OEM distribution
partner, Nihon Kohden Corporation (Nihon Kohden).
    
    We generated revenue of $114.7 million in the nine months ended September 30, 2009, a
decrease of approximately 26% compared to the nine month period ended September 30,
2008, which included a decline of 34% in defibrillation products revenue due primarily
to reduced shipments to Nihon Kohden.
 Page 21 of 34




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##### Table of Contents




    
    We recorded a charge of $18.5 million during the three month period ended September 30,
2009 related to estimated costs associated with a field initiative of approximately 300,000
of our AED products shipped between June 2003 and June 2009.
    
    We recorded an increase to the valuation allowance against
our deferred tax assets resulting in a non cash charge of $44.0
million to income tax expense during the three month period ended September 30, 2009.
    
    We incurred a net loss per diluted share attributable to Cardiac Science Corporation
of $2.85 and $2.98 for the three and nine months ended September 30, 2009 compared to
diluted earnings per share attributable to Cardiac Science Corporation of $0.11 and
$0.29 for the three and nine months ended September 30, 2008.
    
    We used cash from operations of $5.1 million and $0.9 million for the three and nine
months ended September 30, 2009 compared to cash provided by operations of $6.4 million
and $15.2 million for the three and nine months ended September 30, 2008.
 Looking Forward
        Page 22 of 34




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Revenues
   Three Months
    
    
    
    
    
    
    Three Months
    
    
    Nine Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    
    
    
    
    Ended
    
    
    Ended
    
    
    
    
    
    
    EndedSeptember 30,
    
    
    % Change
    
    
    September 30,
    
    
    September 30,
    
    
    % Change
    
    
    September 30,(dollars in thousands)
    
    2009
    
    
    2008 to 2009
    
    
    2008
    
    
    2009
    
    
    2008 to 2009
    
    
    2008Defibrillation products
    
    $
    21,646
    
    
    
    (36.5
    %)
    
    $
    34,071
    
    
    $
    61,413
    
    
    
    (33.5
    %)
    
    $
    92,371% of revenue
    
    
    55.7
    %
    
    
    
    
    
    
    63.1
    %
    
    
    53.6
    %
    
    
    
    
    
    
    59.6
    %Cardiac monitoring products
    
    
    13,000
    
    
    
    (15.1
    %)
    
    
    15,316
    
    
    
    40,151
    
    
    
    (17.4
    %)
    
    
    48,613% of revenue
    
    
    33.4
    %
    
    
    
    
    
    
    28.4
    %
    
    
    35.0
    %
    
    
    
    
    
    
    31.3
    %Service
    
    
    4,238
    
    
    
    (8.2
    %)
    
    
    4,619
    
    
    
    13,098
    
    
    
    (7.2
    %)
    
    
    14,113% of revenue
    
    
    10.9
    %
    
    
    
    
    
    
    8.6
    %
    
    
    11.4
    %
    
    
    
    
    
    
    9.1
    %Total revenues
    
    $
    38,884
    
    
    
    (28.0
    %)
    
    $
    54,006
    
    
    $
    114,662
    
    
    
    (26.1
    %)
    
    $
    155,097
     Gross Profit
  Page 23 of 34




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Three Months
    
    
    
    
    
    
    Three Months
    
    
    Nine Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    
    
    
    
    Ended
    
    
    Ended
    
    
    
    
    
    
    EndedSeptember 30,
    
    
    % Change
    
    
    September 30,
    
    
    September 30,
    
    
    % Change
    
    
    September 30,(dollars in thousands)
    
    2009
    
    
    2008 to 2009
    
    
    2008
    
    
    2009
    
    
    2008 to 2009
    
    
    2008Products
    
    $
    17,452
    
    
    
    (29.0
    %)
    
    $
    24,588
    
    
    $
    52,303
    
    
    
    (27.1
    %)
    
    $
    71,724% of products revenue
    
    
    50.4
    %
    
    
    
    
    
    
    49.8
    %
    
    
    51.5
    %
    
    
    
    
    
    
    50.9
    %AED field initiative
    
    
    (18,500
    )
    
    
    n/m
    
    
    
    
    
    
    
    (18,500
    )
    
    
    n/m
    
    
    
    Service
    
    
    1,143
    
    
    
    (25.3
    %)
    
    
    1,531
    
    
    
    3,722
    
    
    
    (18.3
    %)
    
    
    4,556% of service revenue
    
    
    27.0
    %
    
    
    
    
    
    
    33.1
    %
    
    
    28.4
    %
    
    
    
    
    
    
    32.3
    %Total gross profit
    
    $
    95
    
    
    
    (99.6
    %)
    
    $
    26,119
    
    
    $
    37,525
    
    
    
    (50.8
    %)
    
    $
    76,280% of total revenue
    
    
    0.2
    %
    
    
    
    
    
    
    48.4
    %
    
    
    32.7
    %
    
    
    
    
    
    
    49.2
    %
    .
 Operating Expenses
     Page 24 of 34




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Three Months
    
    
    
    
    
    
    Three Months
    
    
    Nine Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    
    
    
    
    Ended
    
    
    Ended
    
    
    
    
    
    
    EndedSeptember 30,
    
    
    % Change
    
    
    September 30,
    
    
    September 30,
    
    
    % Change
    
    
    September 30,(dollars in thousands)
    
    2009
    
    
    2008 to 2009
    
    
    2008
    
    
    2009
    
    
    2008 to 2009
    
    
    2008Research and development
    
    $
    4,270
    
    
    
    4.1
    %
    
    $
    4,103
    
    
    $
    11,358
    
    
    
    (3.4
    %)
    
    $
    11,762% of total revenue
    
    
    11.0
    %
    
    
    
    
    
    
    7.6
    %
    
    
    9.9
    %
    
    
    
    
    
    
    7.6
    %Sales and marketing
    
    
    11,923
    
    
    
    (7.8
    %)
    
    
    12,934
    
    
    
    34,392
    
    
    
    (9.9
    %)
    
    
    38,170% of total revenue
    
    
    30.7
    %
    
    
    
    
    
    
    23.9
    %
    
    
    30.0
    %
    
    
    
    
    
    
    24.6
    %General and administrative
    
    
    6,571
    
    
    
    28.9
    %
    
    
    5,096
    
    
    
    18,536
    
    
    
    19.1
    %
    
    
    15,568% of total revenue
    
    
    16.9
    %
    
    
    
    
    
    
    9.4
    %
    
    
    16.2
    %
    
    
    
    
    
    
    10.0
    %Total operating expenses
    
    $
    22,764
    
    
    
    2.9
    %
    
    $
    22,133
    
    
    $
    64,286
    
    
    
    (1.9
    %)
    
    $
    65,500% of total revenue
    
    
    58.5
    %
    
    
    
    
    
    
    41.0
    %
    
    
    56.1
    %
    
    
    
    
    
    
    42.2
    %
     Other Income and Expense
    Income Taxes
  Page 25 of 34




---



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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, 2009
    
    
    2008 to 2009
    
    
    September 30, 2008
    
    
    September 30, 2009
    
    
    2008 to 2009
    
    
    September 30, 2008Cash provided by (used in) operating
activities
    
    $
    (5,085
    )
    
    
    (179.9
    %)
    
    $
    6,366
    
    
    $
    (859
    )
    
    
    (105.7
    %)
    
    $
    15,160Cash used in investing activities
    
    
    (1,377
    )
    
    
    29.2
    %
    
    
    (1,946
    )
    
    
    (3,002
    )
    
    
    13.3
    %
    
    
    (3,462
    )Cash provided by financing activities
    
    
    148
    
    
    
    (67.4
    %)
    
    
    454
    
    
    
    787
    
    
    
    6.6
    %
    
    
    738Effect of exchange rates on cash and
cash equivalents
    
    
    74
    
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    Total change in cash and cash
equivalents
    
    $
    (6,240
    )
    
    
    (228.0
    %)
    
    $
    4,874
    
    
    $
    (3,027
    )
    
    
    (124.3
    %)
    
    $
    12,436
      Page 26 of 34




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Recent Accounting Pronouncements
   
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Page 27 of 34




---



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Item 4. Controls and Procedures
   
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 We face numerous challenges in implementing a field initiative 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
initiative.
   
    
    since we have no 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 $18.5
million estimate taken as a charge in the third quarter of 2009 due to a variety of
factors, including the number of impacted devices, the customer and geographical segments
related to the impacted devices, the logistical processes employed by the Company to carry
out any field upgrades involved in the initiative, the customer response rate in
implementing any field upgrades involved in the process and the level of required follow
up with customers, the extent to which we may rely on third
parties to carry out the field initiative and associated costs, and the length of time and other
resources required to complete the field initiative, among others;
 Page 28 of 34




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
    
    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;
    
    the plan will require the expenditure of significant amounts of cash which, in
combination with expected operating losses in 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; and
    
    the FDA may require us to implement a more costly corrective action plan or recall if
it does not concur with our proposed field initiative, in which case our business could be
subject to severe disruption and the cost involved could have a material adverse our
liquidity.
  
 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
  
 Item 5. Other Information
  
 Item 6. Exhibits
 No.
    
    Description10.1*
    
    Form of Separation and Release Agreement dated as of September 17, 2009 between Cardiac Science Corporation
and Feroze Motafram.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.
 
 *
    
    Indicates managements contract or compensatory plan or arrangement. Page 29 of 34




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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, 2009 Page 30 of 34