Overview

The Company, through its Medical Graphics Corporation subsidiary, designs and markets non-invasive cardiorespiratory diagnostic systems that are sold under the MedGraphics and New Leaf brand and trade names. These cardiorespiratory diagnostic systems have a wide range of applications in healthcare, wellness, and health and fitness. Revenues consist of equipment, supplies and accessories sales as well as service revenues. Equipment, supplies and accessories sales reflect sales of non-invasive cardiorespiratory diagnostic equipment and aftermarket sales of peripherals and supplies. Service revenues consist of revenues from extended service contracts, non-warranty service visits and additional training.

Total revenues for the fiscal second quarter of 2012 were $6.3 million, compared to $6.8 million in 2011. Operating expenses for the fiscal second quarter of 2012 were $3.8 million, a decrease of 3.5% from the same period in 2011. Net loss for the three months ended April 30, 2012 was ($409,000), or ($0.11) per basic and diluted share, compared to a net loss of ($138,000), or ($0.04) per basic and diluted share, for the same period in 2011. Total revenues for the six months ended April 30, 2012 were $13.3 million compared to $13.9 million in 2011. Operating expenses for the six months ended April 30, 2012 were $8.1 million, a decrease of 2.6 % from $8.3 million in the same period in 2011. Net loss for the six months ended April 30, 2012 was ($658,000), or ($0.17) per basic and diluted share, compared to a net loss of ($462,000), or ($0.12) per basic and diluted share, for the same period in 2011.

The Company has been reviewing its strategic options with respect to its New Leaf branded health and fitness business and entered into a non-binding Letter of Intent with a non-affiliated third party during the quarter ended April 30, 2012. The completion of the sale of the New Leaf business is subject to the negotiation and execution of definitive agreements with this third party, which is not deemed certain to occur at April 30, 2012 or through the date of this filing.

Results of Operations

   The following table contains selected information from the Company's
consolidated statements of comprehensive loss, expressed as a percentage of
revenues:


                                           Three months Ended        Six months Ended
                                               April 30,                April 30,
                                            2012         2011        2012        2011
  Revenues                                    100.0 %     100.0 %      100.0 %    100.0 %
  Cost of revenues                             44.6        42.7         44.1       43.2
  Gross margin                                 55.4        57.3         55.9       56.8
  Operating expenses:
  Selling and marketing                        30.8        30.6         30.0       29.8
  General and administrative                   15.4        13.8         16.1       16.8
  Research and development                     13.9        13.3         13.0       12.0
  Amortization of intangibles                   1.7         1.5          1.6        1.5
                                               61.8        59.2         60.7       60.1
  Operating loss                               (6.4 )      (1.9 )       (4.8 )     (3.3 )
  Interest income                               0.0         0.0          0.0        0.1
  Loss before taxes                            (6.4 )      (1.9 )       (4.8 )     (3.2 )
  Provision for taxes                           0.1         0.1          0.1        0.1
  Net loss                                     (6.5 )      (2.0 )       (4.9 )     (3.3 )
  Unrealized gain (loss) on securities          0.0         0.0          0.0        0.0
  Comprehensive Loss                           (6.5 %)     (2.0 %)      (4.9 %)    (3.3 %)

The following paragraphs discuss the Company's performance for the three- and six-month periods ending April 30, 2012 and 2011:

Seasonality

The Company experiences some seasonality in its revenues, with the first and fourth quarter of its fiscal year historically being its lowest and highest revenue quarters, respectively. The Company experiences additional variability in each quarter due to a number of factors, including customer budget cycles, product introductions, Company sales incentive programs, general economic conditions and the timing of customer orders.

Revenue

Total revenue for the three months ended April 30, 2012, was $6.3 million compared to $6.8 million in the same period in 2011. This 7.4% decrease resulted from the Company's accommodation of requested short-term delays in customer order deliveries near quarter end. This delayed revenue added approximately $700,000 to order backlog compared to April 30, 2011 levels and resulted from new customer facility-related delays, customer IT-related delays, and group purchasing organization contingencies. The Company expects to ship these orders and recognize substantially all the related revenue in the second half of fiscal 2012. These delays were the primary reason for the 5.1% decrease in domestic revenue during the three months ended April 30, 2012. International revenue decreased by 18.3% from prior year period levels primarily reflecting weaker performance in Canada and the Far East regions.

During the second quarter, equipment, supplies and accessories sales totaled $5.1 million, a decrease of 12.1% compared to $5.8 million during last year's period. Service revenue increased 16% to $1.1 million, versus $987,000 in last year's second quarter. Recurring revenue, comprised of supplies and service revenues, increased by 10.8% to $3.2 million and accounted for 51.5% of total revenues.

Gross Margin

Gross margin percentage for the three months ended April 30, 2012 was 55.4% compared to 57.3% in the same period in 2011, while the gross margin percentage for the six months ended April 30, 2012 was 55.9% compared to 56.8% in the 2011 period. The percentage decreases in the 2012 periods were primarily attributable to reduced sales volume and increased provisions for obsolete inventory of $70,000. We expect that gross margin percentage levels to remain in the mid-50% range during the remaining fiscal 2012 quarters.

Selling and Marketing

Selling and marketing expense decreased 6.8% to $1,937,000 for the three months ended April 30, 2012 from $2,079,000 for the comparable period of 2011. The $142,000 decrease in selling and marketing expense is primarily due to reduced sales commissions and marketing-related expenses totaling $155,000. The Company also reduced its management incentive accrual totaling $55,000 during the three-month period ending April 30, 2012. Offsetting these decreases, adjustments to selling and marketing personnel resulted in non-recurring expenses of $192,000 but resulted in savings within the quarter of $141,000. Additionally, group purchasing organization fees increased by $54,000 compared to the prior year period.

Selling and marketing expense decreased 2.9% to $4,008,000 for the six months ended April 30, 2012 from $4,126,000 for the comparable period of 2011. The $118,000 decrease in selling and marketing expense during the first half of fiscal 2012 is primarily from decreases in sales commissions and marketing-related expenses totaling $209,000. The Company also incurred reduced management incentive accruals of $88,000 during the first half of fiscal 2012. Offsetting these decreases, adjustments to selling and marketing personnel required non-recurring expense charges of $192,000, which with other first quarter personal savings, gave rise to personnel savings within the six months of $163,000. Additionally, group purchasing organization fees increased by $96,000 compared to the prior year period.

General and Administrative

General and administrative expense increased 3.2% to $967,000 for the three months ended April 30, 2012 from $937,000 for the comparable period of 2011. The $30,000 increase in general and administrative expense is primarily due to $148,000 in increased compensation and consultant related costs for the additional administrative staff that joined the Company in late fiscal 2011 and in the current fiscal 2012 period. This increase was partially offset by $88,000 in reduced accruals for management incentives and a $26,000 reversal of the allowance for doubtful accounts receivable due to collections of previously written off accounts.

General and administrative expense decreased 7.6% to $2,150,000 for the six months ended April 30, 2012 from $2,327,000 for the comparable period of 2011. The $177,000 decrease is primarily due to the absence of a one-time charge of $418,000 (net of stock-based compensation reversal of $33,000) related to the separation of a former chief executive officer, which occurred during the Company's first quarter of 2011. The remaining difference is primarily comprised of $266,000 in increased compensation and consultant related costs for the additional administrative staff that joined the Company in late fiscal 2011 and in the current fiscal 2012 period, as well as $77,000 in increased stock-based compensation. These increases were partially offset by $69,000 in reduced accruals for management incentives.

Research and Development

Research and development expense decreased 3.6% to $870,000 for the three months ended April 30, 2012 from $902,000 for the comparable period of 2011. The $32,000 decrease is primarily due to reduced recruitment cost and management incentive accruals of $55,000 and $23,000, respectively. These reductions were offset in part by additional staff costs of $39,000 and ongoing product development expense of $22,000. In addition, approximately $175,000 of incurred costs were capitalized in the second quarter of fiscal 2012, versus $48,000 in 2011, as software in progress related to development costs after the projects achieved "technological feasibility." As we have discussed previously, while this capitalized cost spending affects our cash flow and to a lesser extent our bottom line, we believe that both of these investments provide the foundation for a future product pipeline of new integrated patient care and consumer health programs that will deliver sustained growth. Portions of these software projects will be ongoing during the remainder of fiscal 2012, when we expect the benefits of this effort will become available for use in our product offerings.

Research and development expense increased 4.4% to $1,736,000 for the six months ended April 30, 2012 from $1,663,000 for the comparable period of 2011. The $73,000 increase is primarily due to additional staff costs of $107,000 and increased ongoing product development expense of $76,000. These increases were offset in part by decreases from reduced recruitment cost and management incentive accrual of $80,000 and $14,000, respectively. In addition, approximately $360,000 of incurred costs were capitalized in the first half of fiscal 2012, versus $138,000 in 2011 as software in progress as described above.

Amortization of Intangibles

Amortization of developed technology was $109,000 and $217,000 for the three and six months ended April 30, 2012, respectively, and $105,000 and $210,000 for the three and six months ended April 30, 2011. We expect $105,000 of these costs to be recurring quarterly through the remainder of fiscal 2012, when the related assets will be fully amortized. The release of products incorporating software currently being capitalized will require the amortization of those software costs in the periods following their expected releases.

Provision for Income Taxes

The Company is required to present the provision for taxes as if it were fully taxable in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification 852-740. In prior years, the Company used its pre-emergence bankruptcy NOLs in the calculation of its income taxes payable but is still required to pay U.S. and State alternative minimum taxes ("AMT") in certain jurisdictions, even though it has substantial federal and state NOL carry forwards available. During the three- and six-month periods ended April 30, 2012 and 2011, the Company did not use any tax benefits related to pre-emergence bankruptcy NOLs. See note 8 to the consolidated financial statements, "Income Taxes," in this Form 10-Q for additional discussion of the accounting for income taxes.

Liquidity and Capital Resources

The Company has financed its liquidity needs over the last several years through revenue generated by the operations of its Medical Graphics Corporation subsidiary.

The Company had cash, cash equivalents and investments of $9.3 million and working capital of $12.8 million as of April 30, 2012.

During the first half of fiscal 2012, the Company reported a net loss of $658,000. However, cash flows from operating activities for the period were $584,000, primarily due to reductions in accounts receivable of $1,945,000 and the add-back of non-cash expenses totaling $526,000 for depreciation, amortization and stock-based compensation expense. These favorable changes were offset in part by increases in inventory of $703,000 to prepare for the release of our Real Time Diffusion (RTD) product line and $395,000 for accounts payable reductions. We began to sell RTD products in late March 2012.

For the six months ended April 30, 2012, the Company used $505,000 of cash for the purchase of property and equipment and intangible assets, primarily $ 356,000 for software capitalization, and received $241,000 from the sale of maturing investment grade debt instruments.

The Company received cash from financing activities of $51,000 during the six months ended April 30, 2012, which primarily consisted of proceeds from the exercise of stock options and the issuance of shares under the Employee Stock Purchase Plan. The Company spent $10,000 within its currently authorized share repurchase program, which has $2,792,000 remaining in the current program authorized through July 31, 2013.

The Company believes that its liquidity and capital resource needs for fiscal 2012 and the following twelve months will be met through its cash flows resulting from operations, as well as current cash, cash equivalents and investments.

In addition, as previously discussed, the Company has developed a market-focused approach to strategically leverage the strength of its MedGraphics brand and worldwide selling and distribution capability. The Company has held discussions with various potential strategic product and technology partners. The Company may use some of its cash and capital resources in the acquisition of new technologies or businesses. Although the Company is continuing to look at a number of these opportunities, it currently has no agreements or understandings with any of these third parties.

Forward Looking Statements.

The discussion above contains forward-looking statements about Angeion's future financial results and business prospects that by their nature involve substantial risks and uncertainties. You can identify these statements by the use of words such as "anticipate," "believe," "estimate," "expect," "project," "intend," "plan," "will," "target," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance or business plans or prospects. Our actual results may differ materially depending on a variety of factors including: (1) national and worldwide economic and capital market conditions, including the continuing uncertainty in the European market; (2) continuing cost-containment efforts in our hospital, clinic and office markets; (3) remaining as a qualified provider for several large group purchasing organizations, thereby ensuring continued access to our market and efficiently increasing our sales potential to expanded numbers of companies using these buying groups; (4) any changes in the patterns of medical reimbursement that may result from national healthcare reform; (5) our ability to successfully operate our business, including successfully converting our increasing research and development expenditures into new and improved cardiorespiratory diagnostic products and services and selling these products and services under the MedGraphics and New Leaf brand names into existing and new markets; (6) our ability to complete our software development initiatives and migrate our MedGraphics and New Leaf platforms to a next generation technology; (7) our ability to maintain our cost structure at a level that is appropriate to our near to mid-term revenue expectations and that will enable us to increase revenues and profitability as opportunities develop; (8) our ability to expand our international revenue through our distribution partners and our Milan, Italy representative branch office; (9) our ability to successfully defend ourselves from product liability claims related to our cardiorespiratory diagnostic products and claims associated with our prior cardiac stimulation products; (10) our ability to defend our existing intellectual property and obtain protection for intellectual property we develop in the future; (11) our ability to develop and maintain an effective system of internal controls and procedures and disclosure controls and procedures; (12) our dependence on third-party vendors; and (13) the ability of new members of our senior management to make a successful transition into their new roles and for all members of senior management to ultimately develop and implement a strategic plan. Additional information with respect to the risks and uncertainties faced by the Company may be found in, and the above discussion is qualified in its entirety by, the other risk factors that are described from time to time in the Company's Securities and Exchange Commission reports, including the Annual Report on Form 10-K for the year ended October 31, 2011.