UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
Form 10-Q
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended October 31, 2013
OR
| o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 001-11807
______________________
DAEGIS INC.
(Exact name of registrant as specified in its
charter)
| Delaware | 94-2710559 |
| (State or other jurisdiction of | (I.R.S. Employer Identification |
| incorporation or organization) | Number) |
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.
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company x |
| (Do not check if a smaller reporting company) |
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 December 3, 2013.
DAEGIS INC.
FORM
10-Q
INDEX
| PART I. | FINANCIAL INFORMATION | 3 | ||
| Item 1. | Financial Statements | 3 | ||
| Unaudited Condensed Consolidated Balance Sheets as of October 31, 2013 and | 3 | |||
| April 30, 2013 | ||||
| Unaudited Condensed Consolidated Statements of Operations for the three and six | 4 | |||
| months ended October 31, 2013 and 2012 | ||||
| Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for | 5 | |||
| the three and six months ended October 31, 2013 and 2012 | ||||
| Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended | 6 | |||
| October 31, 2013 and 2012 | ||||
| Notes to Unaudited Condensed Consolidated Financial Statements | 7 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 | ||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 22 | ||
| Item 4. | Controls and Procedures | 23 | ||
| PART II. | OTHER INFORMATION | 24 | ||
| Item 1. | Legal Proceedings | 24 | ||
| Item 1A. | Risk Factors | 24 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 24 | ||
| Item 3. | Defaults Upon Senior Securities | 24 | ||
| Item 4. | Mine Safety Disclosure | 24 | ||
| Item 5. | Other Information | 24 | ||
| Item 6. | Exhibits | 25 | ||
| SIGNATURE | 26 | |||
| CERTIFICATIONS | 27 | |||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DAEGIS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In
thousands)
| October 31, | April 30, | |||||||
| 2013 | 2013 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 4,035 | $ | 5,459 | ||||
| Accounts receivable, net of allowances of $440 and $278, respectively | 7,584 | 10,594 | ||||||
| Prepaid expenses and other current assets | 659 | 1,203 | ||||||
| Assets held for sale | - | 926 | ||||||
| Total current assets | 12,278 | 18,182 | ||||||
| Property and equipment, net of accumulated depreciation of $5,029 and $5,526, respectively | 1,439 | 1,934 | ||||||
| Goodwill | 11,706 | 11,706 | ||||||
| Intangibles, net | 6,383 | 7,152 | ||||||
| Other assets | 609 | 733 | ||||||
| Total assets | $ | 32,415 | $ | 39,707 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 657 | $ | 243 | ||||
| Current portion of long-term debt | 1,349 | 2,519 | ||||||
| Accrued compensation and related expenses | 1,338 | 2,697 | ||||||
| Common stock warrant liability | 92 | 204 | ||||||
| Other accrued liabilities | 519 | 863 | ||||||
| Deferred revenue | 6,128 | 8,449 | ||||||
| Liabilities held for sale | - | 526 | ||||||
| Total current liabilities | 10,083 | 15,501 | ||||||
| Long term debt, net of current portion | 14,307 | 15,170 | ||||||
| Deferred tax liabilities, net | 938 | 923 | ||||||
| Other long-term liabilities | 1,220 | 1,429 | ||||||
| Total liabilities | 26,548 | 33,023 | ||||||
| Commitments and contingencies | — | — | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock | - | 2 | ||||||
| Common stock | 17 | 15 | ||||||
| Additional paid-in capital | 100,079 | 100,053 | ||||||
| Accumulated other comprehensive income | 280 | 280 | ||||||
| Accumulated deficit | (94,509 | ) | (93,666 | ) | ||||
| Total stockholders’ equity | 5,867 | 6,684 | ||||||
| Total liabilities and stockholders’ equity | $ | 32,415 | $ | 39,707 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
DAEGIS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(In thousands, except per share data)
| Three Months Ended | Six Months Ended | |||||||||||||||
| October 31, | October 31, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Revenues: | ||||||||||||||||
| eDiscovery | $ | 2,675 | $ | 4,043 | $ | 6,003 | $ | 8,116 | ||||||||
| Database, archive, and migration | 5,061 | 6,302 | 9,697 | 11,867 | ||||||||||||
| Total revenues | 7,736 | 10,345 | 15,700 | 19,983 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Direct costs of eDiscovery revenue | 1,461 | 2,099 | 3,085 | 4,247 | ||||||||||||
| Direct costs of database, archive, and migration revenue | 972 | 1,273 | 1,888 | 2,555 | ||||||||||||
| Product development | 1,618 | 1,802 | 3,288 | 3,686 | ||||||||||||
| Selling, general and administrative | 3,719 | 4,269 | 7,497 | 9,309 | ||||||||||||
| Sale of intangible trade name | - | - | - | (1,000 | ) | |||||||||||
| Total operating expenses | 7,770 | 9,443 | 15,758 | 18,797 | ||||||||||||
| Income (loss) from operations | (34 | ) | 902 | (58 | ) | 1,186 | ||||||||||
| Other income (expenses) | ||||||||||||||||
| Gain (loss) from change in fair value of common stock warrant | ||||||||||||||||
| liability | 210 | (188 | ) | 112 | 271 | |||||||||||
| Interest expense | (311 | ) | (400 | ) | (727 | ) | (842 | ) | ||||||||
| Other, net | 34 | (16 | ) | 3 | (108 | ) | ||||||||||
| Total other (income) expenses | (67 | ) | (604 | ) | (612 | ) | (679 | ) | ||||||||
| Income (loss) before income taxes | (101 | ) | 298 | (670 | ) | 507 | ||||||||||
| Provision for income taxes | 109 | 46 | 173 | 98 | ||||||||||||
| Net income (loss) | $ | (210 | ) | $ | 252 | $ | (843 | ) | $ | 409 | ||||||
| Income (loss) per share: | ||||||||||||||||
| Basic | $ | (0.01 | ) | $ | 0.01 | $ | (0.06 | ) | $ | 0.01 | ||||||
| Diluted | $ | (0.01 | ) | $ | 0.01 | $ | (0.06 | ) | $ | 0.01 | ||||||
| Weighted-average shares used in computing income (loss) per | ||||||||||||||||
| share: | ||||||||||||||||
| Basic | 16,384 | 14,718 | 15,841 | 14,718 | ||||||||||||
| Diluted | 16,384 | 14,729 | 15,841 | 14,723 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
DAEGIS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)
(In thousands)
| Three Months Ended | Six Months Ended | ||||||||||||||
| October 31, | October 31, | ||||||||||||||
| 2013 | 2012 | 2013 | 2012 | ||||||||||||
| Net income (loss) | $ | (210 | ) | $ | 252 | $ | (843 | ) | $ | 409 | |||||
| Other comprehensive loss: | |||||||||||||||
| Foreign currency translation adjustments | - | 38 | - | (52 | ) | ||||||||||
| Comprehensive income (loss) | $ | (210 | ) | $ | 290 | $ | (843 | ) | $ | 357 | |||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
DAEGIS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(In thousands)
| Six Months Ended | ||||||||
| October 31, | ||||||||
| 2013 | 2012 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | (843 | ) | $ | 409 | |||
| Reconciliation of net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation | 515 | 555 | ||||||
| Amortization of intangible assets | 769 | 769 | ||||||
| Loss on disposal of equipment | 75 | - | ||||||
| Sale of intangible trade name | - | (1,000 | ) | |||||
| Stock based compensation expense | 92 | 330 | ||||||
| Gain from change in fair value of common stock warrant liability | (112 | ) | (271 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 3,010 | 2,011 | ||||||
| Prepaid expenses and other current assets | 544 | 478 | ||||||
| Other assets | 124 | 112 | ||||||
| Accounts payable | 414 | (52 | ) | |||||
| Accrued compensation and related expenses | (1,359 | ) | (433 | ) | ||||
| Other accrued liabilities | (344 | ) | 44 | |||||
| Deferred revenue | (2,421 | ) | (1,674 | ) | ||||
| Other long term liabilities | (94 | ) | (12 | ) | ||||
| Net cash provided by operating activities | 370 | 1,266 | ||||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of intangible trade name | - | 1,000 | ||||||
| Purchases of property and equipment | (95 | ) | (166 | ) | ||||
| Proceeds from assets held for sale | 400 | - | ||||||
| Net cash provided by investing activities | 305 | 834 | ||||||
| Cash flows from financing activities: | ||||||||
| Payment of preferred stock dividends | (66 | ) | (66 | ) | ||||
| Principal payments under debt obligations | (1,947 | ) | (2,500 | ) | ||||
| Principal payments on capital leases | (86 | ) | (197 | ) | ||||
| Net cash used in financing activities | (2,099 | ) | (2,763 | ) | ||||
| Effect of exchange rate changes on cash | - | (52 | ) | |||||
| Net decrease in cash | (1,424 | ) | (715 | ) | ||||
| Cash, beginning of year | 5,459 | 4,752 | ||||||
| Cash, end of period | $ | 4,035 | $ | 4,037 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest | $ | 613 | $ | 758 | ||||
| Cash paid for income taxes | 117 | 172 | ||||||
| Supplemental non-cash investing and financing activities: | ||||||||
| Accrued preferred stock dividends | $ | 66 | $ | 136 | ||||
| Conversion of preferred stock to common stock | 2 | - | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
6
DAEGIS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
October 31, 2013
1. Basis of Presentation
The condensed consolidated financial statements have been prepared by Daegis Inc. (the “Company”, “we”, “us”, “our”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). 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 the Company considers 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, 2013, as filed with the SEC.
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. Stock Compensation Information
Stock-based compensation expense is determined from the estimated fair value of stock-based awards and is recognized over the vesting period of the awards, net of estimated forfeitures. For the three and six months ended October 31, 2013 and 2012, stock-based compensation expense was comprised of the following (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||
| October 31, | October 31, | |||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||
| Direct costs of revenue | $ | 4 | $ | 8 | $ | 9 | $ | 18 | ||||
| Product development | 6 | 23 | 19 | 48 | ||||||||
| Selling, general, and administrative | 29 | 123 | 64 | 264 | ||||||||
| Total equity-based compensation | $ | 39 | $ | 154 | $ | 92 | $ | 330 | ||||
The following table shows remaining unrecognized compensation expense on a pre-tax basis related to all types of nonvested equity awards outstanding as of October 31, 2013. This table does not include an estimate for grants that may be issued in the future (in thousands).
| Fiscal Year Ending April 30, | Amount | ||
| Remainder of 2014 | $ | 77 | |
| 2015 | 101 | ||
| 2016 | 77 | ||
| 2017 | 30 | ||
| 2018 | 5 | ||
| Total | $ | 290 |
The cost above is expected to be recognized over a weighted-average period of 1.6 years.
7
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 fair values of our stock options are estimated at the date of grant. The weighted-average input assumptions used and resulting fair values for six months ended October 31, 2013 and 2012, were as follows:
| Six Months Ended | |||||||
| October 31, | |||||||
| 2013 | 2012 | ||||||
| Expected term (in years) | 4.0 | 4.0 | |||||
| Risk-free interest rate | 0.9 | % | 0.5 | % | |||
| Volatility | 52 | % | 80 | % | |||
| Dividend yield | - | - | |||||
| Weighted-average fair value of stock options granted during the period | $ | 0.49 | $ | 1.02 | |||
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 common stock cash dividends in fiscal 2013 or year to date in fiscal 2014, 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.
We recognize expense only for the stock-based awards that are ultimately expected to vest. Therefore, we have developed an estimate of the number of awards expected to be forfeited prior to vesting (“forfeiture rate”). We use a forfeiture rate that is estimated based on historical forfeiture experience, and is applied to all stock-based awards. The forfeiture rate used for the six months ending October 31, 2013 and 2012 is 20%. We recognize stock-based compensation cost as an expense ratably on a straight-line basis over the requisite service period.
A summary of our stock option activity for the six months ended October 31, 2013 is as follows:
| Weighted- | Weighted- | ||||||||||
| average | average remaining | Aggregate | |||||||||
| exercise | contractual | intrinsic | |||||||||
| Shares | price | term (in years) | value (1) | ||||||||
| Outstanding at April 30, 2013 | 1,814,559 | $ | 2.83 | 6.92 | $ | 15,551 | |||||
| Granted | 292,000 | 1.21 | |||||||||
| Exercised | - | - | |||||||||
| Cancelled/expired | (585,657 | ) | 2.85 | ||||||||
| Outstanding at October 31, 2013 | 1,520,902 | 2.50 | 7.08 | - | |||||||
| (1) | Aggregate intrinsic value is defined as the difference between the current market value and the exercise price and is estimated using the closing price of our common stock on the last trading day of the periods ended as of the dates indicated. |
A summary of our non-vested stock option activity for the period ended October 31, 2013 is as follows:
| Weighted- | |||||
| average | |||||
| fair | |||||
| Shares | value | ||||
| Non-vested at April 30, 2013 | 447,516 | 1.32 | |||
| Granted | 292,000 | 0.47 | |||
| Vested | (107,224 | ) | 1.37 | ||
| Cancelled/expired | (140,504 | ) | 1.12 | ||
| Non-vested at October 31, 2013 | 491,788 | 0.77 | |||
8
There were no awards exercised during the six months ended October 31, 2013 and 2012. The total fair value of awards vested during the six months ended October 31, 2013 and 2012 was $0.1 million and $0.4 million, respectively. The total fair value of awards granted during the six months ended October 31, 2013 and 2012 was $0.1 million and $0.4 million, respectively.
3. Sales of Assets
On May 22, 2013, we sold certain assets and liabilities, including existing tangible assets which comprised the Composer Mainframe product line to Composer Solutions, LLP (“Composer Solutions”) for consideration of $0.4 million. Composer Solutions is owned by former employees of the Company, including our former CEO. At April 30, 2013, assets held for sale and liabilities held for sale related to the Composer Mainframe product line was $0.9 million and $0.5 million, respectively.
4. Goodwill and Intangible Assets
The following tables present details of the Company’s goodwill and intangible assets as of October 31, 2013 and April 30, 2013 (in thousands).
| Gross | Net | Weighted- | ||||||||||
| carrying | Accumulated | carrying | average | |||||||||
| October 31, 2013 | amount | amortization | amount | useful life | ||||||||
| Indefinite Lives: | ||||||||||||
| Goodwill | $ | 11,706 | $ | - | $ | 11,706 | - | |||||
| Finite Lives: | ||||||||||||
| Customer-related | 6,236 | (4,063 | ) | 2,173 | 7 years | |||||||
| Technology-based | 2,638 | (1,878 | ) | 760 | 5 years | |||||||
| Trademarks | 4,600 | (1,150 | ) | 3,450 | 10 years | |||||||
| Trade name | 100 | (100 | ) | - | 2 years | |||||||
| Total | $ | 25,280 | $ | (7,191 | ) | $ | 18,089 | |||||
| Gross | Net | Weighted- | ||||||||||
| carrying | Accumulated | carrying | average | |||||||||
| April 30, 2013 | amount | amortization | amount | useful life | ||||||||
| Indefinite Lives: | ||||||||||||
| Goodwill | $ | 11,706 | $ | - | $ | 11,706 | - | |||||
| Finite Lives: | ||||||||||||
| Customer-related | 6,236 | (3,723 | ) | 2,513 | 7 years | |||||||
| Technology-based | 2,638 | (1,722 | ) | 916 | 5 years | |||||||
| Trademarks | 4,600 | (877 | ) | 3,723 | 10 years | |||||||
| Trade name | 100 | (100 | ) | - | 2 years | |||||||
| Total | $ | 25,280 | $ | (6,422 | ) | $ | 18,858 | |||||
9
Acquired finite-lived intangibles are generally amortized on a straight-line basis over their estimated useful lives. The useful life of finite-lived intangibles is the period over which the asset is expected to contribute directly or indirectly to future cash flows of the Company. Intangible assets amortization expense for the three months ended October 31, 2013 and 2012 was $0.4 million for each quarter. Intangible assets amortization expense for the six months ended October 31, 2013 and 2012 was $0.8 million for each period. The estimated future amortization expense related to intangible assets as of October 31, 2013 is as follows (in thousands):
| Fiscal Year Ending April 30, | Amount | ||
| Remainder of 2014 | $ | 769 | |
| 2015 | 1,512 | ||
| 2016 | 1,096 | ||
| 2017 | 814 | ||
| 2018 | 774 | ||
| Thereafter | 1,418 | ||
| Total | $ | 6,383 |
5. Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
We value our warrants based on open form option pricing models which, based on the relevant inputs, render the fair value estimate Level 3. We based our estimates of fair value for liabilities on the amount we would pay a third-party market participant to transfer the liability and incorporates inputs such as equity prices, historical and implied volatilities, dividend rates and prices of convertible securities issued by comparable companies maximizing the use of observable inputs when available. The fair value hierarchy for valuation inputs gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Fair Value on a Recurring Basis
The table below categorizes assets and liabilities measured at fair value on a recurring basis as of October 31, 2013 (in thousands):
| Fair value | Fair value measurement using | |||||||||||
| October 31, 2013 | Level 1 | Level 2 | Level 3 | |||||||||
| Common stock warrant liability | $ | 92 | $ | - | $ | - | $ | 92 | ||||
10
The following table summarizes the activity of Level 3 inputs measured on a recurring basis for the six months ended October 31, 2013:
| (in thousands) | Common stock warrants | |||
| Balance at April 30, 2013 | $ | 204 | ||
| Change in fair value of common stock warrant liability | (112 | ) | ||
| Balance at October 31, 2013 | 92 | |||
6. Long-Term Debt
In July 2013, we entered into an amendment to our Revolving Credit and Term Loan Agreement with Wells Fargo Capital Finance (“Wells Fargo Credit Agreement”). Under the terms of the amendment, we are entitled to borrow up to $18.2 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 Wells Fargo Credit Agreement consists of two term notes and a revolving line of credit. Term Note A is for $12.2 million with quarterly principal payments of $306,000 plus an additional annual payment based on the Company’s free cash flow for the year with any remaining amount due at maturity, June 30, 2015. 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 4.5-5.0% per annum with a minimum rate of 6.5% (6.5% at October 31, 2013). Term Note B is for $1.0 million payable in full at maturity, June 30, 2015. The Company incurs interest at the prevailing LIBOR rate plus 9.0-10.0% per annum with a minimum rate of 12.0% (12.0% at October 31, 2013). 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 4.5-5.0% per annum with a minimum rate of 6.5% (6.5% as of October 31, 2013). The revolver has a maturity date of June 30, 2015. As of October 31, 2013, there is $2.5 million outstanding on the revolving line of credit, none of which is current.
Our long-term debt consists of the following at October 31, 2013 and April 30, 2013 (in thousands):
| October 31, | April 30, | |||||||
| 2013 | 2013 | |||||||
| Term Note A | $ | 11,936 | $ | 7,883 | ||||
| Term Note B | 1,000 | 4,000 | ||||||
| Revolving line of credit | 2,500 | 5,500 | ||||||
| Capital leases | 220 | 306 | ||||||
| 15,656 | 17,689 | |||||||
| Less current portion | (1,349 | ) | (2,519 | ) | ||||
| Total long term debt, net | $ | 14,307 | $ | 15,170 | ||||
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 Wells Fargo Credit Agreement also contains customary events of default, including without limitation events of default based on payment obligations, repudiation of guaranty obligations, material inaccuracies of representations and warranties, covenant defaults, insolvency proceedings, monetary judgments in excess of certain amounts, change in control, certain ERISA events, and defaults under certain other obligations.
11
We are in compliance with all such covenants and requirements at October 31, 2013.
A summary of future principal payments on long-term debt obligations as of October 31, 2013 is as follows (in thousands):
| Fiscal Year Ending April 30, | Amount | ||
| Remainder of 2014 | $ | 675 | |
| 2015 | 1,350 | ||
| 2016 | 13,631 | ||
| $ | 15,656 |
The summary of future principal payments on long-term debt obligations does not account for the annual payments based on our free cash flow under Term Note A as noted above. The amount of these payments is not known; however, when they are determined it will accelerate the payment schedule outlined above.
7. Other Long-Term Liabilities
Included in other long term liabilities is deferred rent resulting from escalation clauses related to office leases and liabilities related to the unfavorable lease terms associated with the acquisitions of AXS-One, Inc. and Strategic Office Solutions, Inc. (dba Daegis). Additionally there are liabilities related to mandatory employee severance costs associated with a French statutory government regulated plan covering all France employees and long-term deferred maintenance revenue. The table below presents the details at October 31, 2013 and April 30, 2013 (in thousands).
| October 31, | April 30, | |||||
| 2013 | 2013 | |||||
| Deferred rent related to : | ||||||
| Irving office | $ | 11 | $ | - | ||
| Roseville office | 41 | - | ||||
| New York office | 180 | 101 | ||||
| San Francisco office | 55 | 82 | ||||
| Unfavorable lease terms related to: | ||||||
| New Jersey office | 107 | 214 | ||||
| New York office | 25 | 131 | ||||
| Other: | ||||||
| Severance for French employees | 140 | 140 | ||||
| Long term deferred support revenue | 661 | 761 | ||||
| $ | 1,220 | $ | 1,429 | |||
8. Maintenance Contracts
We offer maintenance contracts to our customers at the time they enter into a product license agreement and renew those contracts, at the customers’ option, generally on an annual basis thereafter. The specific terms and conditions of these initial maintenance contracts and subsequent renewals vary depending upon the product licensed and the country in which we conduct business. Generally, maintenance contracts provide the customer with unspecified product maintenance updates and customer support services. Revenue from maintenance contracts is initially deferred and then recognized ratably over the term of the agreements.
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Changes in our deferred maintenance revenue were as follows (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| October 31, | October 31, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Beginning balance | $ | 7,579 | $ | 7,153 | $ | 8,861 | $ | 8,302 | ||||||||
| Revenue recognized during period | (3,494 | ) | (4,346 | ) | (7,039 | ) | (8,028 | ) | ||||||||
| New maintenance contracts | 2,518 | 3,795 | 4,781 | 6,328 | ||||||||||||
| Ending balance | $ | 6,603 | $ | 6,602 | $ | 6,603 | $ | 6,602 | ||||||||
Of the deferred maintenance revenue at October 31, 2013 and April 30, 2013, $0.7 million and $0.8 million, respectively, is long-term and is included in other long-term liabilities in the consolidated balance sheet.
9. 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, the Company is 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 October 31, 2013 and April 30, 2013, 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 six months ended October 31, 2013 and 2012.
10. 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 $66,000 of dividends on preferred stock ($0.04 per preferred share).
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11. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) less dividends payable on preferred stock by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share is computed similar to basic earnings (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.
| (in thousands, except per share amounts) | Three Months Ended | Six Months Ended | ||||||||||||||
| October 31, | October 31, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Net income (loss) | $ | (210 | ) | $ | 252 | $ | (843 | ) | $ | 409 | ||||||
| Dividends paid and payable on preferred stock | - | (101 | ) | (66 | ) | (202 | ) | |||||||||
| Net income (loss) available to common stockholders | $ | (210 | ) | $ | 151 | $ | (909 | ) | $ | 207 | ||||||
| Weighted-average shares of common stock outstanding, basic | 16,384 | 14,718 | 15,841 | 14,718 | ||||||||||||
| Effect of dilutive securities | - | 11 | - | 5 | ||||||||||||
| Weighted-average shares of common stock outstanding, diluted | 16,384 | 14,729 | 15,841 | 14,723 | ||||||||||||
| Income (loss) per share of common stock: | ||||||||||||||||
| Basic | $ | (0.01 | ) | $ | 0.01 | $ | (0.06 | ) | $ | 0.01 | ||||||
| Diluted | $ | (0.01 | ) | $ | 0.01 | $ | (0.06 | ) | $ | 0.01 | ||||||
| Antidilutive securities | ||||||||||||||||
| Stock options | 1,520,902 | 2,629,497 | 1,520,902 | 2,724,519 | ||||||||||||
| Warrants | 909,042 | 909,042 | 909,042 | 909,042 | ||||||||||||
| Preferred stock | - | 1,666,667 | - | 1,666,667 | ||||||||||||
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. On June 30, 2013, 1,666,667 shares of preferred stock were converted into shares of common stock on a 1-for-1 basis.
12. 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, beginning in the first quarter of fiscal year 2012, we determined that we have two reportable segments: (i) eDiscovery and (ii) database, archive, and migration. 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, 2013. 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 October 31, 2013 and 2012, total revenue from the United States was $5.0 million and $6.7 million, respectively. Total revenue from all other countries for the three months ended October 31, 2013 and 2012 was $2.7 million and $3.6 million, respectively. For the six months ended October 31, 2013 and 2012, total revenue from the United States was $10.5 million and $13.6 million, respectively. Total revenue from all other countries for the six months ended October 31, 2013 and 2012 was $5.2 million and $6.4 million, respectively. Total long-lived assets as of October 31, 2013 and April 30, 2013, for the United States, were $20.1 million and $21.5 million, respectively. Total long-lived assets in all other countries were $0 as of October 31, 2013 and $1,000 as of April 30, 2013.
| (in thousands) | Three Months Ended | Six Months Ended | ||||||||||||||
| October 31, | October 31, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Total revenues: | ||||||||||||||||
| eDiscovery | $ | 2,675 | $ | 4,043 | $ | 6,003 | $ | 8,116 | ||||||||
| Database, archive, and migration | 5,061 | 6,302 | 9,697 | 11,867 | ||||||||||||
| Total revenues | $ | 7,736 | $ | 10,345 | $ | 15,700 | $ | 19,983 | ||||||||
| Operating expenses: | ||||||||||||||||
| eDiscovery | $ | 2,963 | $ | 4,326 | $ | 6,240 | $ | 9,433 | ||||||||
| Database, archive, and migration | 3,062 | 3,577 | 5,967 | 7,130 | ||||||||||||
| Unallocated corporate expenses | 1,745 | 1,540 | 3,551 | 2,234 | ||||||||||||
| Total operating expenses | $ | 7,770 | $ | 9,443 | $ | 15,758 | $ | 18,797 | ||||||||
| Income (loss) from operations: | ||||||||||||||||
| eDiscovery | $ | (288 | ) | $ | (283 | ) | $ | (237 | ) | $ | (1,317 | ) | ||||
| Database, archive, and migration | 1,999 | 2,725 | 3,730 | 4,737 | ||||||||||||
| Unallocated corporate expenses | (1,745 | ) | (1,540 | ) | (3,551 | ) | (2,234 | ) | ||||||||
| Total income (loss) from operations | $ | (34 | ) | $ | 902 | $ | (58 | ) | $ | 1,186 | ||||||
| October 31, | April 30, | |||||||||||||||
| 2013 | 2013 | |||||||||||||||
| Total assets: | ||||||||||||||||
| eDiscovery | $ | 26,514 | $ | 27,700 | ||||||||||||
| Database, archive, and migration | 5,901 | 12,007 | ||||||||||||||
| Total assets | $ | 32,415 | $ | 39,707 | ||||||||||||
13. Subsequent Events
On December 3, 2013, we announced the completion of our organizational alignment in which the Archive and eDiscovery businesses were combined. We expect to incur a charge of approximately $1.2 million to $1.4 million related to this alignment in the second half of fiscal year 2014. As a result of this alignment, our operating segments will change in the third quarter to reflect how the chief operating decision maker evaluates the business.
On November 8, 2013, we filed a current report on Form 8-K related to a letter received from The Nasdaq Stock Market LLC (“NASDAQ”) indicating that, for the thirty consecutive business days ending November 6, 2013, the closing bid price for our common stock was below the minimum $1.00 per share requirement for continued listing on the Nasdaq Capital Market under Nasdaq Marketplace Rule 5550(a)(2). The notification has no immediate effect on the listing or trading of our common stock on the Nasdaq Capital Market.
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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, 2013, as filed with the SEC.
Overview
Daegis Inc. (the “Company”, “we”, “us” or “our”) is a global provider of eDiscovery, application development, data management, migration, and archiving software solutions. The Company sells its solutions through two segments. The segments are the eDiscovery segment and the database, archive, and migration segment.
Our customers 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 a Dallas suburb, Irving, Texas, with offices in Roseville, California, San Francisco, New York, New Jersey, Canada, Australia, France, Germany, and the United Kingdom (“UK”). We market and sell our solutions directly in the United States, Europe, Canada, Japan, Singapore and Australia and indirectly through global distributors and resellers on a worldwide basis.
Our eDiscovery solutions include technology and services that address the full spectrum of eDiscovery needs for corporate counsel and law firms. Our eDiscovery platform, Daegis Edge, delivers a comprehensive solution that helps clients lower costs in all phases of the eDiscovery lifecycle from information management through search and analysis to review and production. Our services include managed document review, project management, search analytics, consulting, and hosting of data.
Our database, archive, and migration business includes application development, data management and application modernization. Our tools and database software help companies to maximize value and reduce cost in the development, deployment, management and retention of business applications and data. Our application development and data management software products include Team Developer, SQLBase, Unify NXJ, DataServer, VISION and ACCELL. Our application modernization solutions include Composer Notes, Composer Sabertooth and Composer CipherSoft. Our enterprise archiving software enables our customers to preserve, manage, and dispose of their electronically stored information (“ESI”) for regulatory compliance and information governance.
On December 3, 2013, we announced the completion of our organizational realignment in which the archive and eDiscovery businesses were combined. We expect to incur a charge of $1.2 million related to this realignment in the second half of fiscal year 2014. Beginning in the third quarter, we will change our segment reporting to reflect the realignment.
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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:
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 second quarter of fiscal 2014, 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, 2013 provides a more complete discussion of our critical accounting policies and estimates.
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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:
| Three Months Ended | Six Months Ended | |||||||||||||||
| October 31, | October 31, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Revenues: | ||||||||||||||||
| eDiscovery | 34.6 | % | 39.1 | % | 38.2 | % | 40.6 | % | ||||||||
| Database, archive, and migration | 65.4 | 60.9 | 61.8 | 59.4 | ||||||||||||
| Total revenues | 100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Direct costs of eDiscovery revenue | 18.9 | 21.5 | 19.6 | 21.9 | ||||||||||||
| Direct costs of database, archive, and migration revenue | 12.6 | 12.3 | 12.2 | 12.8 | ||||||||||||
| Product development | 20.9 | 17.4 | 20.9 | 18.5 | ||||||||||||
| Selling, general and administrative | 48.0 | 40.1 | 47.7 | 45.9 | ||||||||||||
| Sale of intangible trade name | - | - | - | (5.0 | ) | |||||||||||
| Total operating expenses | 100.4 | 91.3 | 100.4 | 94.1 | ||||||||||||
| Income (loss) from operations | (0.4 | ) | 8.7 | (0.4 | ) | 5.9 | ||||||||||
| Other income (expense): | ||||||||||||||||
| Gain (loss) from change in fair value of common stock warrant | 2.7 | (1.8 | ) | 0.7 | 1.4 | |||||||||||
| Interest expense | (4.0 | ) | (3.9 | ) | (4.6 | ) | (4.2 | ) | ||||||||
| Other, net | 0.4 | (0.1 | ) | 0.0 | (0.6 | ) | ||||||||||
| Total other income (expense) | (0.9 | ) | (5.8 | ) | (3.9 | ) | (3.4 | ) | ||||||||
| Income (loss) before income taxes | (1.3 | ) | 2.9 | (4.3 | ) | 2.5 | ||||||||||
| Provision for income taxes | 1.4 | 0.5 | 1.1 | 0.5 | ||||||||||||
| Net income (loss) | (2.7 | ) | 2.4 | (5.4 | ) | 2.0 | ||||||||||
Total Revenues
We generate revenue from eDiscovery software and service sales, and database, archive and migration software and services. All of our eDiscovery software and services sales are sold by our direct sales force in the United States. The Company also generates database, archive, and migration revenue from software license sales and related services, including maintenance, support and consulting services. We sell our database, archive, and migration 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 second quarter of fiscal 2014 were $7.7 million, a decrease of $2.6 million from the second quarter of fiscal 2013, or 25%. Total revenues for the six months ended October 31, 2013 were $15.7 million, a decrease of $4.3 million from the same period last year, or 21%.
Total eDiscovery revenues in the second quarter of fiscal 2014 were $2.7 million, a decrease of $1.4 million from the second quarter of fiscal 2013, or 34%. Total eDiscovery revenues for the six months ended October 31, 2013 were $6.0 million, a decrease of $2.1 million from the same period last year, or 26%. The revenue from eDiscovery fluctuates depending on the activity of our clients’ legal matters. Accordingly, the decrease in eDiscovery revenue as compared to the prior year period is primarily related to our clients having fewer large legal matters in process during the period. In addition, we have begun transitioning our business model to bring to market a single solution for information governance, compliance and litigation readiness. This transition is negatively impacting our revenues during the second quarter and first half of fiscal 2014. Our largest client, which represented 21% of our consolidated revenue during fiscal year 2013, has declined to 18% of consolidated revenue during the second quarter of fiscal year 2014. This revenue relates to a large multi-year legal matter that is expected to conclude during the second half of fiscal year 2014. As a result, we expect the associated revenue to end during the second half of fiscal 2014.
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Excluding the results of the Mainframe Composer product line, which was sold at the beginning of fiscal year 2014, total database, archive, and migration revenues in the second quarter of fiscal 2014 were $5.1 million, a decrease of $1.0 million or 16% from the second quarter of fiscal 2013. Excluding the results of the Mainframe Composer product line, total database, archive, and migration revenues for the six months ended October 31, 2013 were $9.7 million, a decrease of $1.6 million from the same period last year, or 14%. The decrease in database, archive, and migration revenue as compared to the prior year period is due to the expected non-renewal of a $0.6 million maintenance contract, and a $0.3 million software license sales in the second quarter and first half of fiscal 2013 that did not occur in the first quarter of fiscal 2014.
Operating Expenses
Direct Costs of eDiscovery Revenue. Direct costs of eDiscovery revenue consist primarily of expenses related to employees, facilities, and third party contractors that were directly related to the generation of eDiscovery revenue. The majority of these costs are fixed in nature and generally don’t fluctuate with changes in revenue. Direct costs of eDiscovery revenue were $1.5 million for the second quarter of fiscal 2014 compared to $2.1 million in the same period of fiscal 2013. Direct costs of eDiscovery revenue were $3.1 million for the six months ended October 31, 2013 compared to $4.2 million in the same period of fiscal 2013. The decrease in direct costs of eDiscovery revenue is primarily due to a reduction in workforce during the second quarter of fiscal 2013.
Direct Costs of Database, Archive, and Migration Revenue. Direct costs of database, archive, and migration revenue consist primarily of expenses related to employees, facilities, third party contractors, royalty payments, and the amortization of purchased technology from third parties that were directly related to the generation of database, archive, and migration revenue. Direct costs of database, archive, and migration revenue were $1.0 million and $1.3 million for the second quarter of fiscal 2014 and fiscal 2013, respectively. Direct costs of database, archive, and migration revenue were $1.9 million for the six months ended October 31, 2013 compared to $2.6 million in the same period of fiscal 2013. The decrease in direct costs of database, archive, and migration revenue is primarily due to the sale of the Mainframe Composer product line which had costs of $0.2 million and $0.5 million during the second quarter and first half of fiscal year 2013, respectively.
Product Development. 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 in the second quarter of fiscal 2014 were $1.6 million compared to $1.8 million in the same period of fiscal 2013. Product development costs were $3.3 million for the six months ended October 31, 2013 compared to $3.7 million in the same period of fiscal 2013. The decrease in product development expenses is primarily due to lower wages and benefit related costs.
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 $3.7 million in the second quarter of fiscal 2014 and $4.3 million for the second quarter of fiscal 2013. SG&A expenses were $7.5 million for the six months ended October 31, 2013 compared to $9.3 million in the same period of fiscal 2013. The decrease in SG&A expense is primarily due to a reduction in work force during the second quarter of fiscal 2013, offset somewhat by increased costs related to the move of our corporate headquarters to the Dallas, Texas area.
Sale of Intangible Trade Name. We sold our Unify trade name for $1.0 million in the first quarter of fiscal 2013.
Gain/(loss) from Change in Fair Value of Common Stock Warrant Liability. The change in fair value of common stock warrant liability for the three months ended October 31, 2013 resulted in a gain of $0.2 million, compared to a loss of $0.2 million in same period last year. The change in fair value of common stock warrant liability for the six months ended October 31, 2013 resulted in a gain of $0.1 million, compared to a gain of $0.3 million in the same period last year. The changes in fair value of the common stock warrant liability are primarily the result of changes in the price of our common stock during the period. During the six months ended October 31, 2013, our stock price decreased resulting in a decrease in the fair value of the common stock warrant liability and a corresponding gain from the change in fair value.
Interest Expense. Interest expense is primarily the result of interest on outstanding debt. Interest expense for the second quarter of fiscal year 2014 was $0.3 million compared to $0.4 million for the same period last year. Interest expense for the six months ended October 31, 2013 was $0.7 million compared to $0.8 million for the same period last year. The decline in interest expense is the result of more favorable interest rates from the amendment of our Revolving Credit and Term Loan Agreement with Wells Fargo Capital Finance.
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Provision for Income Taxes. Our tax expense in the second quarter of fiscal year 2014 was $109,000 compared to $46,000 for the same period last year. Income tax expense for the six months ended October 31, 2013 was $173,000 compared to $98,000 in the same period last year. Our tax expense was primarily related to our state and foreign income taxes, as well as deferred income tax expense arising from an indefinite-lived asset.
Liquidity and Capital Resources
At October 31, 2013, the Company had cash of $4.0 million compared to $5.5 million at April 30, 2013. Cash declined primarily as a result of debt payments of $1.9 million, offset by proceeds from the sale of the Mainframe Composer product line $0.4 million. The Company had net accounts receivable of $7.6 million as of October 31, 2013 compared to $10.6 million as of April 30, 2013. The decline in accounts receivable is primarily the result of collection activities as well as lower revenue during the period.
In October 2013, the Company entered into an amendment to its Revolving Credit and Term Loan Agreement with Wells Fargo Capital Finance. Under the terms of the amendment, the Company is entitled to borrow up to $18.2 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. As of October 31, 2013, the Company was eligible to borrow an additional $1.2 million.
The Wells Fargo Credit Agreement consists of two term notes and a revolving credit note agreement. Term Note A is for $12.2 million with principal payments of $306,000 quarterly plus an additional annual payment based on the Company’s free cash flow for the year with any remaining amount due at maturity, June 30, 2015. 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 4.5-5.0% per annum with a minimum rate of 6.50% (6.50% at October 31, 2013).
Term Note B is for $1.0 million payable in full at maturity, June 30, 2015. The Company incurs interest at the prevailing LIBOR rate plus 9-10% per annum with a minimum rate of 12.0% (12.0% at October 31, 2013).
As of October 31, 2013 there is $12.9 million outstanding on the term notes of which $1.2 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 4.5-5.0% per annum with a minimum rate of 6.50% (6.50% at October 31, 2013). The revolver has a maturity date of June 30, 2015. As of October 31, 2013 there is $2.5 million borrowed on the revolving line of credit, none of which is current.
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 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 October 31, 2013.
In June 2011, the Company 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. The preferred stock automatically converted on a 1-for-1 basis into shares of common stock of the Company on June 30, 2013. The preferred stock included an annual dividend of $0.24 per share, payable in cash or stock at the Company’s option. In August 2013, the Company paid $66,000 in preferred stock dividends through the period through conversion.
We believe that funds generated from operations, plus our existing cash resources and amounts available under our credit agreement, will be sufficient to meet our anticipated working capital and other needs.
Operating Cash Flows. For the six months ended October 31, 2013 cash provided by operations was $0.4 million compared to $1.3 million for the same period last year. The reduction in operating cash flows was primarily the result the reduction in revenue, offset somewhat by lower costs.
Investing Cash Flows. Net cash provided by investing activities was $0.3 million for the six months ended October 31, 2013 and was primarily the result of proceeds from the sale of the Mainframe Composer product line. Net cash provided by investing activities was $0.8 million for the six months ended October 31, 2012 and was the result of proceeds from the sale of our Unify trade name.
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Financing Cash Flows. Net cash used in financing activities for the six months ended October 31, 2013 was $2.1 million compared to $2.8 million for the same period last year. The decline in financing cash outflows was primarily due to lower principal payments on the Wells Fargo term debt. The principal payment in the first quarter of each year includes an additional variable payment based on the Company’s free cash flow for the year.
A summary of certain contractual obligations is as follows (in thousands):
| as of October 31, 2013 (in thousands) | Payments Due by Period | ||||||||||||||
| 1 year | After | ||||||||||||||
| Contractual Obligations | Total | or less | 2-3 years | 4-5 years | 5 years | ||||||||||
| Debt financing | $ | 15,436 | $ | 1,224 | $ | 14,212 | $ | - | $ | - | |||||
| Estimated interest expense | 1,648 | 1,015 | 633 | - | - | ||||||||||
| Other liabilities | 251 | 111 | - | - | 140 | ||||||||||
| Capital lease obligations | 220 | 125 | 95 | - | - | ||||||||||
| Operating leases | 4,305 | 1,345 | 2,644 | 316 | - | ||||||||||
| Total contractual cash obligations | $ | 21,860 | $ | 3,820 | $ | 17,584 | $ | 316 | $ | 140 | |||||
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 investment portfolio, which consists of cash, and its long term debt, which contains notes with variable interest rates.
We do not believe our exposure to interest rate risk is material for cash, which totaled $4.0 million as of October 31, 2013.
The Wells Fargo Credit Agreement consists of a $11.9 million Term Note A, a $1.0 million Term Note B, and a revolving credit note agreement with $2.5 million outstanding. The Term Note A, Term Note B, and revolving line of credit have interest rate of LIBOR plus 4.50-5.00%, 9-10.00% and 4.50-5.00%, respectively. The minimum LIBOR used in the interest rate is 1.50% for Term Note A and the revolving line of credit and 2.00% for Term Note B. LIBOR at October 31, 2013 is approximately 0.17%. A hypothetical 1% increase in the LIBOR rate would have no impact on our interest expense for the three months ended October 31, 2013 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, the Company faces 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, the Company 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.
22
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 October 31, 2013. 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.
23
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 October 31, 2013, 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, 2013. 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
None
24
Item 6. Exhibits
| Exhibits | ||
| 31.1 | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Chief Executive Officer under 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 under 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | XBRL Instance Document. | |
| 101.SCH | XBRL Taxonomy Extension Schema. | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase. | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase. |
25
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.
| Date: December 6, 2013 | Daegis Inc. |
| (Registrant) | |
| By: | |
| /s/ SUSAN K. CONNER | |
| Susan K. Conner | |
| Chief Financial Officer | |
| (Principal Financial Officer) | |
26
Exhibit 31.1
CERTIFICATION OF
CHIEF EXECUTIVE
OFFICER
I, Timothy P. Bacci, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Daegis Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles; and
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ TIMOTHY P. BACCI | |
| Timothy P. Bacci | |
| Interim Chief Executive Officer | |
| (Principal Executive Officer) |
Dated: December 6, 2013
Exhibit 31.2
CERTIFICATION OF
CHIEF FINANCIAL
OFFICER
I, Susan K. Conner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Daegis Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles; and
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ SUSAN K. CONNER | |
| Susan K. Conner | |
| Chief Financial Officer | |
| (Principal Financial Officer) |
Dated: December 6, 2013
Exhibit 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
In connection with the Quarterly Report of Daegis Inc. (the “Registrant”) on Form 10-Q for the quarter ended October 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy P. Bacci, Interim Chief Executive Officer of the Registrant, do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:
(1) the Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
| Dated: December 6, 2013 | /s/ TIMOTHY P. BACCI | |
| Timothy P. Bacci | ||
| Interim Chief Executive Officer | ||
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Daegis Inc. and will be retained by Daegis Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 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
In connection with the Quarterly Report of Daegis Inc. (the “Registrant”) on Form 10-Q for the quarter ended October 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Susan K. Conner, Chief Financial Officer of the Registrant, do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
| Dated: December 6, 2013 | /s/ SUSAN K. CONNER | |
| Susan K. Conner | ||
| Chief Financial Officer | ||
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Daegis Inc. and will be retained by Daegis Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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Earnings (Loss) Per Share
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Oct. 31, 2013
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| Earnings (Loss) Per Share | 11. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) less dividends payable on preferred stock by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share is computed similar to basic earnings (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. On June 30, 2013, 1,666,667 shares of preferred stock were converted into shares of common stock on a 1-for-1 basis.
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