UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

______________________

Form 10-Q

For the quarterly period ended July 31, 2014

OR

Commission File Number: 001-11807

______________________

DAEGIS INC.
(Exact name of registrant as specified in its charter)

Address of principal executive offices: 600 E. Las Colinas Blvd., Suite 1500, Irving, Texas 75039

Registrant’s telephone number, including area code: (214) 584-6400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES    x     NO    o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act),

YES    o     NO    x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 16,384,444 shares of common stock, $0.001 par value, as of August 26, 2014.

DAEGIS INC.
FORM 10-Q

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DAEGIS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

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DAEGIS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

See accompanying notes to unaudited condensed consolidated financial statements.

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DAEGIS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

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DAEGIS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2014

1. Basis of Presentation

The condensed consolidated financial statements prepared by Daegis Inc. (the “Company”, “we”, “us”, “our”) have been derived from our audited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations.

The accompanying condensed consolidated financial statements include our accounts and those of our subsidiaries that we control due to ownership of a controlling interest. Intercompany transactions and balances have been eliminated. While the interim financial information contained in this filing is unaudited, such financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) which we consider necessary for a fair presentation. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2014, as filed with the SEC.

In the third quarter of fiscal year 2014, after the alignment of our archive and eDiscovery operations, we determined that we have two reportable segments: (i) Archive and eDiscovery and (ii) Development, Database and Migration tools. As a result, we have restated historical results to reflect those new reporting segments.

Certain prior period balances in our consolidated statements of operations have been reclassified between direct costs of eDiscovery revenue and selling, general and administrative expenses to conform with current presentation.

2. Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards update No. 2014-09 Revenue from Contracts with Customers (ASU 204-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP.

The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting periods with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.

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3. Intangible Assets

Intangible asset balances by major asset class are as follows (in thousands):

Acquired finite-lived intangible assets are generally amortized on a straight-line basis over their estimated useful lives. The useful life of finite-lived intangible assets is the period over which the asset is expected to contribute directly or indirectly to future cash flows of the Company. Intangible asset amortization expense for the three months ended July 31, 2014 and 2013 was $0.4 million for each quarter. The estimated future amortization expense related to intangible assets as of July 31, 2014 is as follows (in thousands):

4. Accrued Restructuring Charge

On December 3, 2013, we announced the completion of our organizational alignment in which the Archive and eDiscovery businesses were combined. The alignment included movement of our operations, workforce reductions, abandonment of excess facilities and other charges in the Archive and eDiscovery reportable segment.

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A summary of the restructuring and other costs recognized for the three months ended July 31, 2014 are as follows:.

At July 31, 2014, the accrued liability associated with the realignment consisted of the following:

The restructuring and other related charges are included in the selling, general administrative expense line item in the Consolidated Statements of Operations.

5. Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

In determining fair value, we use various valuation approaches and establish a hierarchy for inputs used in measuring fair value that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows:

• Level 1 – Quoted prices in active markets for identical assets and liabilities.
• Level 2 – Observable inputs other than those included in Level 1, such as quoted market prices for similar assets and liabilities in active markets or quoted prices for identical assets in inactive markets.
• Level 3 – Unobservable inputs are used when little or no market data is available and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

We value our common stock warrant liability on a recurring basis based on open form option pricing models which, based on the relevant inputs, render the fair value estimate Level 3. Changes in the fair value of the warrants are reflected in the consolidated statements of operations as “Gain (loss) from change in fair value of common stock warrant liability.”

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Fair Value on a Recurring Basis

The following table summarizes the activity of Level 3 inputs measured on a recurring basis for the three months ended July 31, 2014:

6. Long-Term Debt

Effective July 31, 2014, the Company entered into an amendment to its Revolving Credit and Term Loan Agreement with Wells Fargo Capital Finance (the “Credit Agreement”). In order to secure its obligations under the Wells Fargo Credit Agreement, the Company has granted the lender a first priority security interest in substantially all of our assets. Under the terms of the amendment, the Company is entitled to borrow up to $15.1 million. The total amount that can be borrowed under the Credit Agreement is based on a multiplier factor of the trailing twelve months of maintenance and Software-as-a-Service revenue.

The Credit Agreement consisted of two term notes and a revolving credit note agreement. The Amendment extended the term of the Credit Agreement through June 30, 2017, reduced the interest rate and modified certain financial covenants. This Amendment, in conjunction with a prepayment made on July 31, 2014, under the Credit Agreement, reduced the outstanding principal balance on the Term A Loan to $10.1 million, and the Term B Loan, which incurred a minimum interest rate of 12.0%, has now been fully repaid. The Term Note A requires quarterly principal payments of $252,000 plus an additional annual payment based on the Company’s free cash flow for the year with any remaining amount due at maturity. To the extent the Company makes annual principal payments based on free cash flow, the quarterly principal payments will be reduced. The Company incurs interest at the prevailing LIBOR rate plus 3.5-4.0% per annum with a minimum rate of 5.0%. During the first quarter of fiscal year 2015, we incurred interest at the pre-amendment minimum rate of 6.5%.

Our long-term debt consists of the following (in thousands):

The Wells Fargo Credit Agreement requires ongoing compliance with certain affirmative and negative covenants. The affirmative covenants include, but are not limited to: (i) maintenance of existence and conduct of business; (ii) compliance with laws; (iii) use of proceeds; and (iv) books and records and inspection. The negative covenants set forth in the Wells Fargo Credit Agreement include, but are not limited to, restrictions on our ability (and on our subsidiaries): (i) with certain limited exceptions, to create, incur, assume or allow to exist indebtedness; (ii) with certain limited exceptions, to create, incur, assume or allow to exist liens on properties; (iii) with certain limited exceptions, to make certain payments, transfers of property, or investments; or (iv) with certain limited exceptions, to make acquisitions.

We are obligated to maintain certain minimum consolidated adjusted EBITDA levels, certain minimum liquidity levels, certain total leverage ratios, and certain fixed charge coverage ratios, all as calculated in accordance with the terms and definitions determining such amounts as contained in the Wells Fargo Credit Agreement. The Wells Fargo Credit Agreement also contains various information and financial reporting requirements. The Company is in compliance with all such covenants and requirements at July 31, 2014.

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A summary of expected future principal payments, excluding any annual principal payments based on free cash flow, on long-term debt obligations as of July 31, 2014 is as follows (in thousands):

7. Stock Compensation Information

Stock-based compensation expense is determined from the estimated fair value of stock-based awards at the date of grant and is recognized over the vesting period of the awards, net of estimated forfeitures. For the three months ended July 31, 2014 and 2013, stock-based compensation expense was comprised of the following (in thousands):

We estimate the fair value of our stock-based awards using the Black-Scholes option pricing model. The Black-Scholes option pricing model incorporates various assumptions including expected term, interest rates and expected volatility. Changes in the assumptions can materially affect the fair value estimates and ultimately how much we recognize as stock-based compensation expense. The weighted-average input assumptions used and resulting fair values were as follows:

We base our expected term assumption on our historical experience and on the terms and conditions of the stock awards we grant to employees. The risk-free interest rate is based upon United States Treasury interest rates appropriate for the expected term of the awards. The expected volatility is based on the historical volatility of our common stock over the most recent period commensurate with the estimated expected term of our stock options. We did not pay cash dividends to common stockholders in fiscal 2014 or year to date in fiscal 2015, and do not anticipate paying any cash dividends on common stock in the foreseeable future. Accordingly, an expected dividend yield of zero is used in the Black-Scholes option pricing model.

At July 31, 2014, there was approximately $0.3 million of unrecognized compensation expense related to unvested stock-based awards granted. The unrecognized expense is expected to be recognized over a weighted-average period of 3.2 years.

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A summary of our stock option activity for the three months ended July 31, 2014 is as follows:

There were no awards exercised during the three months ended July 31, 2014 and 2013. The total fair value of awards vested during the three months ended July 31, 2014 and 2013 was $27 thousand and $53 thousand, respectively. The total fair value of awards granted during the three months ended July 31, 2014 and 2013 was $0.1 million and $0.1 million, respectively.

8. Income Taxes

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

We are subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In general, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the fiscal years before 2008. We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months. Therefore, no reserves for uncertain income tax positions have been recorded.

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of July 31, 2014 and April 30, 2014, we did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor did we record any interest expense associated with any unrecognized tax benefits in the three months ended July 31, 2014 and 2013.

9. Preferred Stock

In June 2011, we issued, through a private placement, 1,666,667 shares of preferred stock to a group of related party institutional investors at a price of $2.40 per share for a total of $4.0 million. These shares of preferred stock were automatically converted on a 1-for-1 basis into shares of common stock on June 30, 2013. The preferred stock included an annual dividend of $0.24 per share payable in cash or stock at our option. In August 2013, we paid a final dividend of $66,000 on this preferred stock ($0.04 per preferred share).

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10. Loss Per Share

Basic loss per share is computed by dividing net loss less dividends payable on preferred stock by the weighted-average number of common shares outstanding during the reporting period. Diluted loss per share is computed similar to basic loss per share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.

Potentially dilutive securities that are not included in the diluted net loss calculation are antidilutive because the exercise prices of these securities are greater than the average market price of the stock during the respective periods. As noted above, the 1,666,667 shares of preferred stock were converted into shares of common stock on a 1-for-1 basis on June 30, 2013.

11. Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer. We have evaluated our approach for making operating decisions and assessing the performance of our business and, in the third quarter of fiscal year 2014 after the alignment of our Archive and eDiscovery operations, we determined that we have two reportable segments: (i) Archive and eDiscovery and (ii) Development, Database and Migration Tools. As a result, we have adjusted historical results to reflect those new reporting segments.

The accounting policies of the segments are the same as those described Note 1 of Part III, Item 15 of our Annual Report on Form 10-K for our fiscal year ended April 30, 2014. We evaluate performance based on income from operations (total revenues less operating costs). We do not allocate certain corporate costs to each segment and therefore disclose these amounts separately in our segment table.

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For the three months ended July 31, 2014 and 2013, total revenue from the United States was $4.2 million and $5.5 million, respectively. Total revenue from all other countries for the three months ended July 31, 2014 and 2013 was $2.5 million and $2.5 million, respectively. Total long-lived assets as of July 31, 2014 and April 30, 2014, for the United States, were $18.3 million and $18.8 million, respectively. There were no long-lived assets in other countries as of July 31, 2014 and April 30, 2014.

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DAEGIS INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion in this Quarterly Report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about the software and eDiscovery industries and certain assumptions made by the Company’s management. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, statements that refer to the anticipated impacts of acquisitions, statements made on goodwill, intangible assets, and impairment, statements about the ability to utilize deferred tax assets, and statements about other characterizations of future events or circumstances are forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include, but are not limited to, those set forth in the Company’s Annual Report on Form 10-K under “Business – Risk Factors” and in the Company’s other filings with the Securities and Exchange Commission (“SEC”). Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents the Company files from time to time with the SEC, particularly the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

The following discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the audited Consolidated Financial Statements and Notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2014, as filed with the SEC.

Overview

Daegis Inc. (the “Company”, “we”, “us” or “our”) is a global provider of archive, eDiscovery, application development, data management and migration software solutions. In fiscal 2014, we completed the restructuring and realignment of our company to meet customer and market needs and to operate with a more effective cost structure. We combined our Archive and eDiscovery businesses to offer a complete, cohesive information governance and eDiscovery solution that provides end-to-end data preservation and litigation readiness for our customers and clients. Accordingly, today we sell our solutions through two segments: the Archive and eDiscovery segment and the Development, Database, and Migration Tools segment.

Our archive and eDiscovery solutions simplify and reduce the cost of information governance and eDiscovery while mitigating risk by improving data management. Our software includes Daegis AXS-One archiving for managing the preservation, collection, review and disposal of structured and unstructured data; Daegis Edge, our hosted, end-to-end eDiscovery software for processing, search, review and production of data; and Daegis Acumen technology-assisted review. Our services include managed document review, project management, search analytics consulting, collection and hosting of data.

Our development, database, and migration tools business, Gupta Technologies (“Gupta”), includes mobile, Web and .NET application development, data management and application modernization software. Gupta Technologies delivers highly productive application development software for developers of all skill levels. Gupta’s data management solutions are highly scalable and high performance. Gupta’s Composer Technologies product line offers automated software and services for migrating Lotus Notes and Oracle Forms applications. Our products include TD Mobile, Team Developer, SQLBase, Report Builder, NXJ, DataServer, VISION, ACCELL, Composer Notes and Composer CipherSoft.

Our customers and clients include corporate legal departments, law firms, information technology (“IT”) departments, software value-added resellers (“VARs”), solutions integrators (“SIs”) and independent software vendors (“ISVs”) from a variety of industries. We are headquartered in Irving, Texas, with offices in Roseville, California and Rutherford, New Jersey and international offices in Australia, Canada, France, Germany, and the United Kingdom (“UK”). We market and sell our software directly in the United States, Europe, Canada, Japan, Singapore and Australia and indirectly through global distributors and resellers on a worldwide basis.

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Certain prior period balances in our consolidated statements of operations have been reclassified between direct costs of eDiscovery revenue and selling, general and administrative expenses to conform with current presentation.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as set forth in the Financial Accounting Standards Board’s Accounting Standards Codification (Codification) and consider the various staff accounting bulletins and other applicable guidance issued by the SEC. GAAP, as set forth within the Codification, requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

• Revenue Recognition
• Goodwill and Intangible Assets 
• Deferred Tax Asset Valuation Allowance 
• Accounts Receivable and Allowances for Doubtful Accounts 
• Accounting for Stock-based Compensation 
• Fair Value of Common Stock Warrant Liability

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures with the Audit Committee of the Board of Directors.

During the first quarter of fiscal 2015, there were no significant changes to our critical accounting policies and estimates. Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended April 30, 2014 provides a more complete discussion of our critical accounting policies and estimates. In the first quarter of fiscal 2015, we recorded an additional restructuring charge related to the lease abandonment of $150 thousand. As of July 31, 2014, our accrued liability for unpaid restructuring charges was $0.4 million and is expected to be paid at various dates through May 2016.

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Results of Operations

The following table sets forth our consolidated statement of operations expressed as a percentage of total revenues for the periods indicated:

Total Revenues

We generate revenue from Archive and eDiscovery software and service sales as well as maintenance, support and consulting services. Our Archive and eDiscovery solutions are sold by our direct sales force in the United States and Europe. We also generate Development, Database, and Migration Tools revenue from software license sales and related services, including maintenance, support and consulting services. We sell our Development, Database, and Migration Tools solutions through our direct sales force in the United States and Europe, and through indirect channels comprised of distributors, ISVs, VARs, and other partners worldwide.

Total revenues in the first quarter of fiscal 2015 were $6.7 million, a decrease of $1.3 million from the first quarter of fiscal 2014, or 16%.

Total Archive and eDiscovery revenues in the first quarter of fiscal 2015 were $4.1 million, a decrease of $1.3 million from the first quarter of fiscal 2014, or 24%. The revenue from Archive and eDiscovery fluctuates depending on the activity of our clients’ legal matters as well as the timing of Archive license sales and performance of professional service engagements. The decrease in Archive and eDiscovery revenue as compared to the prior year period is primarily related to a reduction in our professional services and hosting revenues. We have a continued reduction in services to our largest client as the consulting services for this particular matter was substantially complete at the end of fiscal year 2014. This client, which represented 20% of our consolidated revenue during the first quarter of fiscal year 2014, has declined to 15% of consolidated revenue during the first quarter of fiscal year 2015. In addition, we have begun transitioning our business model to bring to market a single managed solution for information governance, compliance and litigation readiness. This transition is negatively impacting our revenues during the first quarter of fiscal year 2015 due to longer sales cycles with this type of business model.

Development, Database and Migration revenues in the first quarter of fiscal year 2014 were $2.6 million compared to $2.5 million in the prior year period, an increase of $0.1 million. This increase is the result of a growing interest in our migration tools license sales.

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Operating Expenses

Direct Costs of archive and eDiscovery Revenue. Direct costs of archive and eDiscovery revenue consist primarily of expenses related to employees, facilities, third party assistance and the amortization of purchased technology from third parties that were directly related to the generation of Archive and eDiscovery revenue. Direct costs of Archive and eDiscovery revenue were $1.6 million for the first quarter of fiscal 2015 compared to $2.2 million in the same period of fiscal 2014, a decline of $0.6 million. This decrease for the first quarter is a result of actions related to the organizational alignment during the third quarter of fiscal 2014.

Direct Costs of Development, Database, and Migration Tools Revenue. Direct costs of development, database and migration tools revenue consist primarily of expenses related to employees, facilities, third party assistance, and royalty payments that were directly related to the generation of database and migration revenue. Direct costs of development, database and migration tools revenue were $0.5 million and $0.4 million for the first quarter of fiscal 2015 and fiscal 2014, respectively. The increase in direct costs of development, database and migration tools revenue is primarily due to a slight increase in salaries and related costs.

Product Development. Product development efforts are focused on on-going enhancements and increased functionality for all of our core products: Daegis Edge, Daegis Acumen, Daegis AXS-One Archive, Team Developer, SQLBase, Report Builder, NXJ, VISION, Composer CipherSoft and Composer Notes. Within Gupta Technologies, we developed a new mobile enterprise application development product, TD Mobile. Product development expenses consist primarily of employee and facilities costs incurred in the development and testing of new products and in the porting of new and existing products to additional hardware platforms and operating systems. Product development costs decreased $0.5 million to $1.2 million for the first quarter of fiscal 2015 from $1.7 million in the first quarter of fiscal 2014. The decrease in product development expenses is primarily a result of open positions.

Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and benefits, marketing programs, travel expenses, professional services, facilities expenses, amortization of intangible assets, and bad debt expense. SG&A expenses were $3.4 million in the first quarter of fiscal 2015 and $3.7 million for the first quarter of fiscal 2014. The decrease in SG&A expense is primarily due to a reduction in outside consulting costs and employee benefits costs.

Gain/(loss) from Change in Fair Value of Common Stock Warrant Liability. The change in fair value of common stock warrant liability for the third quarter of fiscal year 2015 resulted in a gain of $0.1 million, compared to a loss of $0.1 million in same period last year. This gain and loss are due primarily to changes in our common stock share price during the periods.

Interest Expense. Interest expense for the first quarter of fiscal year 2015 was $0.3 million compared to $0.4 million for the same period last year. The decrease in interest expense in fiscal 2014 is due primarily to the amendment of our Revolving Credit and Term Loan Agreement with Wells Fargo in July 2013 which allowed us to move more of our debt from the higher interest bearing Term Note B to Term Note A as well as a decrease in the total outstanding debt as a result of the additional annual payment based on the Company’s free cash flow.

Other, Net. Other, net consists primarily of foreign exchange rate gains and losses and other income. Other, net was a loss of $0.1 million for the first quarter of fiscal 2015 and $31 thousand for the same period last year.

Provision for Income Taxes. The provision for income taxes was a benefit of $3,000 for the first quarter of fiscal year 2015 and was primarily related to a federal tax benefit. The provision for income tax was $64,000 for the first quarter of fiscal year 2014. For the first quarter of fiscal year 2014, we recorded $20 thousand in foreign tax expense and $44 thousand in state and federal tax expense.

Liquidity and Capital Resources

At July 31, 2014, the Company had cash of $5.1 million compared to $7.2 million at April 30, 2014. Cash declined primarily as a result of our excess cash flow debt payments of $1.9 million and our quarterly principal payment of $0.3 million. The Company had net accounts receivable of $5.1 million as of July 31, 2014 compared to $6.7 million as of April 30, 2014. The decline in accounts receivable is primarily the result of collection activities as well as lower revenue during the period.

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Effective July 31, 2014, the Company entered into an amendment to its Revolving Credit and Term Loan Agreement with Wells Fargo Capital Finance (the “Credit Agreement”). In order to secure its obligations under the Wells Fargo Credit Agreement, the Company has granted the lender a first priority security interest in substantially all of our assets. Under the terms of the amendment, the Company is entitled to borrow up to $15.1 million. The total amount that can be borrowed under the Credit Agreement is based on a multiplier factor of the trailing twelve months of maintenance and Software-as-a-Service revenue.

The Credit Agreement consisted of two term notes and a revolving credit note agreement. The Amendment extended the term of the Credit Agreement through June 30, 2017, reduced the interest rate and modified certain financial covenants. This Amendment, in conjunction with a prepayment made on July 31, 2014, under the Credit Agreement, reduced the outstanding principal balance on the Term A Loan to $10.1 million, and the Term B Loan, which incurred a minimum interest rate of 12.0%, has now been fully repaid. The Term Note A requires quarterly principal payments of $252,000 plus an additional annual payment based on the Company’s free cash flow for the year with any remaining amount due at maturity. To the extent the company makes annual principal payments based on free cash flow, the quarterly principal payments will be reduced. The Company incurs interest at the prevailing LIBOR rate plus 3.5-4.0% per annum with a minimum rate of 5.0%. During the first quarter of fiscal year 2015, we incurred interest at the pre-amendment minimum rate of 6.5%.

As of July 31, 2014 there is $10.1 million outstanding on the term note of which $1.0 million is current.

Under the terms of the revolving line of credit, the Company can borrow up to $5.0 million. The Company incurs interest expense on funds borrowed at the prevailing LIBOR rate plus 3.5-4.0% per annum with a minimum rate of 5.0%. The revolver has a maturity date of June 30, 2017. As of July 31, 2014 there is $2.5 million borrowed on the revolving line of credit, none of which is current. As of July 31, 2014, the Company was eligible to borrow an additional $1.6 million.

The Company is obligated to maintain certain minimum consolidated adjusted EBITDA levels, certain minimum liquidity levels, certain total leverage ratios, and certain fixed charge coverage ratios, all as calculated in accordance with the terms and definitions determining such amounts as contained in the Credit Agreement. The Credit Agreement also contains various information and financial reporting requirements. The Company is in compliance with all such covenants and requirements at July 31, 2014.

We believe our existing cash, along with forecasted operating cash flows and the revolving line of credit under the Wells Fargo Credit Agreement, will provide us with sufficient working capital for us to meet our operating plan for fiscal year 2015.

Operating Cash Flows. For the three months ended July 31, 2014 cash provided by operations was $0.2 million compared to $0.9 million for the same period last year. The reduction in operating cash flows was primarily the result of a smaller reduction in accounts receivable in the first quarter of fiscal 2015 as compared to the prior year.

Investing Cash Flows. Net cash used in investing activities was $33,000 for the three months ended July 31, 2014 and consisted of capital expenditures. Net cash provided by investing activities was $0.4 million for the three months ended July 31, 2013 and was the result of proceeds from the sale of our Composer Mainframe product line, offset by capital expenditures.

Financing Cash Flows. Net cash used in financing activities for the three months ended July 31, 2014 was $2.3 million compared to $1.7 million for the same period last year and consisted primarily of principal payments on the Credit Agreement.

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A summary of certain contractual obligations is as follows (in thousands):

Other liabilities primarily include mandatory severance costs associated with a French statutory government regulated plan covering all France employees.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk. The Company’s exposure to market rate risk for changes in interest rates relates primarily to its long term debt, which contains notes with variable interest rates.

The Wells Fargo Credit Agreement consists of outstanding balances of a $10.1 million Term Note A and a revolving line of credit agreement of $2.5 million. The Term Note A and revolving line of credit bear interest at LIBOR plus 3.5-4.0%. The minimum LIBOR used in the interest rate is 1. 0% for Term Note A and the revolving line of credit. LIBOR at July 31, 2014 is approximately 0.24%. A hypothetical 1% increase in the LIBOR rate would have no impact on our interest expense for the three months ended July 31, 2014 as the minimum LIBOR rate under the credit agreement was more than the current LIBOR rate plus 1%.

Foreign Currency Exchange Rate Risk. As a global concern, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have an adverse impact on the Company’s business, operating results and financial position. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations on its future operating results. A hypothetical 1% change in foreign currency rates would not have a significant impact on the Company’s business, operating results and financial position.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of July 31, 2014. The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective. Management recognizes that any disclosure controls and procedures no matter how well designed and operated, can only provide reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b) Changes in Internal Controls. There have been no changes in our internal control over financial reporting that occurred during that period that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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DAEGIS INC.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Litigation

The Company is subject to legal proceedings and claims arising in the ordinary course of business. If such matters arise, the Company cannot assure that it would prevail in such matters, nor can it assure that any remedy could be reached on mutually agreeable terms, if at all. Due to the inherent uncertainties of litigation, were there any such matters, the Company would not be able to accurately predict their ultimate outcome. As of July 31, 2014, there were no current proceedings or litigation involving the Company that management believes would have a material adverse impact on its financial position, results of operations, or cash flows.

Item 1A. Risk Factors

A description of the risks associated with our business, financial condition, and results of operations is set forth in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended April 30, 2014. There have been no material changes in our risks from such descriptions.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosure

Not applicable

Item 5. Other Information

Termination Benefits Arrangement

Effective August 20, 2014, the Company entered into a termination benefits arrangement with a continuing executive, Mr. Frank Verardi, Vice President and General Manager – Database, Development and Migration Tools Division. The termination agreement provides for payment to Mr. Verardi of six months of his base salary and the reimbursement for health benefits for six months if his employment is terminated by the Company other than for “cause” or as a result of a “change in control”. The termination benefits arrangement is attached hereto as Exhibit 10.1.

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Item 6. Exhibits

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DAEGIS INC.
SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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