For the quarterly period ended January 31, 2012

OR

Commission File Number: 001-11807

_______________________________

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

Address of principal executive offices: 1420 Rocky Ridge Drive, Suite 380, Roseville, California 95661

Registrant’s telephone number, including area code: (916) 218-4700

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: 14,717,777 shares of common stock, $0.001 par value, as of February 29, 2012.

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.

4

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
January 31, 2012

1. Basis of Presentation

The condensed consolidated financial statements have been prepared by Daegis Inc. (formerly Unify Corporation) (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, 2011, as filed with the SEC.

Revenue Recognition

The Company generates revenue from software license sales and related services, including maintenance and support, hosting, and consulting and implementation services. The Company licenses its products to end-user customers, including corporate legal and IT departments, law firms, independent software vendors (“ISVs”), international distributors and value-added resellers (“VARs”). The Company’s products are generally sold with a perpetual license. The Company’s contracts with ISVs, VARs and international distributors do not include special considerations such as rights of return, stock rotation, price protection or special acceptance. The Company exercises judgment in connection with the determination of the amount of revenue to be recognized in each accounting period. The nature of each contractual arrangement determines how revenues and related costs are recognized.

For software license arrangements that do not require significant modification or customization of the underlying software, revenue is recognized when the software product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance are resolved, collectability is probable and persuasive evidence of an arrangement exists.

For fixed price arrangements that require significant modification or customization of software, the Company uses the percentage-of-completion method for revenue recognition. Under the percentage-of-completion method, progress towards completion is generally measured by labor hours.

The Company considers a signed non-cancelable license agreement, a customer purchase order, a customer purchase requisition, or a sales quotation signed by an authorized purchaser of the customer to be persuasive evidence that an arrangement exists such that revenue can be recognized.

The Company’s customer contracts may include multi-element arrangements that include a delivered element (a software license) and undelivered elements (such as maintenance and support and/or consulting). The value allocated to the undelivered elements is unbundled from the delivered element based on vendor-specific objective evidence (VSOE) of the fair value of the maintenance and support and/or consulting, regardless of any separate prices stated within the contract. VSOE of fair value is defined as: (i) the price charged when the same element is sold separately, or (ii) if the element has not yet been sold separately, the price for the element established by management having the relevant authority when it is probable that the price will not change before the introduction of the element into the marketplace. The Company then allocates the remaining balance to the delivered element (a software license) regardless of any separate prices stated within the contract using the residual method as the VSOE of all undelivered elements is determinable.

We defer revenue for any undelivered elements, and recognize revenue for delivered elements only when the VSOE of undelivered elements are known, uncertainties regarding customer acceptance are resolved, and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. If we cannot objectively determine the fair value of any undelivered element included in bundled software and service arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

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An assessment of the ability of the Company’s customers to pay is another consideration that affects revenue recognition. In some cases, the Company sells to undercapitalized customers. In those circumstances, revenue recognition is deferred until cash is received, the customer has established a history of making timely payments or the customer’s financial condition has improved. Furthermore, once revenue has been recognized, the Company evaluates the related accounts receivable balance at each period end for amounts that we believe may no longer be collectible. This evaluation is largely done based on a review of the financial condition via credit agencies and historical experience with the customer. Any deterioration in credit worthiness of a customer may impact the Company’s evaluation of accounts receivable in any given period.

Revenue from support and maintenance activities, which consist of fees for ongoing support and unspecified product updates, are recognized ratably over the term of the maintenance contract, typically one year, and the associated costs are expensed as incurred. Consulting and implementation services are performed on a “best efforts” basis and may be billed under time-and-materials or fixed price arrangements. Revenues and expenses relating to providing consulting services are generally recognized as the services are performed. Revenue from hosting activities, which consist of fees for storing customer data, are recognized as the services are performed, and the associated costs are expensed as incurred.

Recently Issued Accounting Standards

In December 2011, the Financial Accounting Standards Board (FASB) issued authoritative guidance on the disclosure of offsetting assets and liabilities. Under the new guidance, entities are required to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The new guidance will be effective for Daegis beginning May 1, 2013. This guidance will not a have a material effect on the Company’s financial statements.

In September 2011, the FASB issued authoritative guidance on when to perform the two-step impairment test for goodwill. Under the new guidance, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The new guidance includes examples of events and circumstances that an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The new guidance was adopted by Daegis upon issuance. We will implement this guidance in our next goodwill impairment test.

In June 2011, the FASB issued authoritative guidance on the presentation of other comprehensive income. Under the new guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance will be effective for Daegis beginning May 1, 2012. This guidance will not a have a material effect on the Company’s financial statements.

Reclassifications

During the third quarter of fiscal year 2012, the Company revised the statements of cash flows for the nine months ended January 31, 2011. The revisions were related to certain debt issuance costs and capital lease transactions of which both reclassifications were deemed to be immaterial. The Company reclassified cash outflows of $1,231,000 from the operating activities section of the cash flow statement to the financing section of the cash flow statement. These reclassifications had no effect on net income.

Additionally, certain reclassifications have been made to the prior period consolidated statement of operations to conform to the current period presentation. These reclassifications had no effect on net income.

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2. Acquisitions

AXS-One Inc.

On June 30, 2009, the Company acquired all of the issued and outstanding shares of common stock and warrants of AXS-One. The common stock and warrants were converted into, in the aggregate, 1,000,000 shares of Company common stock. The outstanding convertible notes of AXS-One with an aggregate outstanding principal and interest balance of approximately $13 million were exchanged for 1,642,600 shares of Company common stock. The note holders were also issued additional shares of Company common stock based on revenue generated from AXS-One’s products over 13 months after the effective date of the merger.

AXS-One provides integrated content archiving software solutions which enables organizations to implement secure, scalable and enforceable policies that address records management for corporate governance, legal discovery and industry regulations. The acquisition of AXS-One advanced the Company’s growth strategy to acquire superior technology companies that could leverage its technology strengths, extensive customer base and worldwide distribution channel while enabling the combined company to meet a broader set of customers’ needs, accelerate direct and channel sales, and achieve cost synergies.

The goodwill of $11.2 million arising from the acquisition consists of increased market presence and opportunities, enhanced product mix and operating efficiencies expected from combining the operations of the Company and AXS-One. All of the goodwill was assigned to the Database, Archive, and Migrations segment. None of the goodwill recognized is deductible for income tax purposes.

The following table summarizes the consideration paid for AXS-One and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date, June 30, 2009 (in thousands):

The fair value of the 2,642,600 common shares issued as part of the consideration paid for AXS-One ($8,853,000) was determined on the basis of the closing market price of the Company’s common shares on the acquisition date.

The contingent consideration arrangement required the Company to issue to the former holders of AXS-One convertible notes 0.35 shares of Company common stock for every $1 of AXS-One net license revenue over the first $2,000,000 for the 13 month period following the acquisition date. The number of shares that the Company issued under the contingent consideration arrangement was 415,422. The fair value of the contingent consideration was $1.3 million, which resulted in a reduction in the acquisition liability in the nine months ended January 31, 2012 and 2011 of $0 and $164,000, respectively, and a corresponding reduction in operating expenses.

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Strategic Office Solutions, Inc., dba Daegis

On June 29, 2010, the Company acquired all of the issued and outstanding shares of common stock of Strategic Office Solutions, Inc., dba Daegis, for approximately $37.4 million. Payment was made in the form of $24.0 million in cash, $7.2 million in equity, and $6.2 million in convertible notes. The Company issued 2,085,714 shares of common stock to the former owners of Daegis at $3.46 per share (closing market price on the acquisition date) for a total of $7.2 million. The notes consisted of a $5.0 million Subordinated Purchase Note and a $1.2 million Subordinated Indemnity (Escrow) Note. Under the terms of the Subordinated Purchase Note the Company incurred interest at 8% per annum. On September 1, 2010 the Company converted the Subordinated Purchase Note and all related accrued interest into 1,448,614 shares of common stock at a conversion price of $3.50 per share. Under the terms of the Subordinated Indemnity (Escrow) Note the Company incurred interest at 3% per annum for the first eighteen months and 8% per annum thereafter. On September 1, 2010 the Company converted the Subordinated Indemnity (Escrow) Note and all related accrued interest into 344,667 shares of common stock at a conversion price of $3.50 per share. Both notes were cancelled upon conversion.

Daegis is a provider of eDiscovery solutions for corporate legal departments and law firms. The Company believes that its eDiscovery solutions compliment its integrated content archiving product and that this acquisition advances the Company’s growth strategy to acquire superior software and services companies that can leverage its technology strengths and extensive customer base while enabling the combined company to meet a broader set of customer and market needs.

The goodwill of $19.5 million arising from the acquisition consists of increased market presence and opportunities, enhanced product mix and operating efficiencies expected from combining the operations of the two entities. All of the goodwill was assigned to the eDiscovery segment. All of the goodwill recognized is deductible for income tax purposes.

The following table summarizes the consideration paid for Daegis and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date, June 29, 2010 (in thousands):

The fair value of the 2,085,714 common shares issued as part of the consideration paid for Daegis ($7,216,570) was determined on the basis of the closing market price of the Company’s common shares on the acquisition date.

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3. Stock Compensation Information

Share-based compensation expense includes the estimated fair value for share-based awards. Share-based compensation expenses are recognized over the vesting period of the awards, net of estimated forfeitures. For the three and nine months ended January 31, 2012 and 2011, equity-based compensation expense from operations was comprised of the following (in thousands):

The following table shows remaining unrecognized compensation expense on a pre-tax basis related to all types of non-vested equity awards outstanding as of January 31, 2012. This table does not include an estimate for future grants that may be issued (in thousands).

The cost above is expected to be recognized over a weighted-average period of 1.30 years.

We estimate the fair value of our share-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 the nine months ended January 31, 2012 and 2011, were as follows:

The Company bases its expected term assumption on its historical experience and on the terms and conditions of the stock awards it grants 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 the Company’s common stock over the most recent period commensurate with the estimated expected term of the Company’s stock options. The Company did not pay cash dividends in fiscal 2011 or year to date in fiscal 2012, and does not anticipate paying any cash dividends in the foreseeable future. Consequently, 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, the Company has developed an estimate of the number of awards expected to be forfeited prior to vesting (“forfeiture rate”). The Company’s uses a forfeiture rate that is estimated based on historical forfeiture experience, and is applied to all stock-based awards. The Company recognizes stock-based compensation cost as an expense ratably on a straight-line basis over the requisite service period.

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In the second quarter of fiscal 2011, the Company’s shareholders approved the 2010 Stock Plan (the “2010 Stock Plan”). Under the 2010 Stock Plan the Company may make awards to issue up to 1,500,000 shares of common stock to eligible employees, consultants and directors. Stock options granted under the 2010 Stock Plan generally vest over four years, are exercisable to the extent vested and expire 10 years from the date of grant. Under the 2010 Stock Plan the Company may grant options at prices not less than the fair market value at the date of grant. Under the 2001 Stock Option Plan (the “2001 Option Plan”) which expired as of September 2010, the Company was able to grant options to eligible employees, directors, and consultants at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory stock options. Options granted under the 2001 Option Plan generally vest over four years, are exercisable to the extent vested, and expire 10 years from the date of grant.

A summary of the Company’s stock option activity for the nine months ended January 31, 2012 is as follows:

Total intrinsic value of awards exercised during the quarters ended January 31, 2012 and January 31, 2011 was $20,084 and $0, respectively. The total fair value of awards vested during the quarters ended January 31, 2012 and January 31, 2011 was $261,865 and $247,215, respectively.

A summary of the Company’s nonvested stock option activity for the period ended January 31, 2012 is as follows:

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4. Goodwill and Intangible Assets

The following tables present details of the Company’s goodwill and intangible assets as of January 31, 2012 and April 30, 2011 (in thousands).

Acquired finite-lived intangibles are generally amortized on a straight line basis over their estimated useful life. 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 nine months ended January 31, 2012 was $1,632,000. Amortization expense for the nine months ended January 31, 2011 was $2,679,000. The estimated future amortization expense related to intangible assets as of January 31, 2012 is as follows (in thousands):

The following table summarizes the activity in the Company's goodwill account during the nine months ended January 31, 2012 and 2011:

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Goodwill at January 31, 2012, represents the excess of purchase prices over the sum of the amounts assigned to assets acquired less liabilities assumed. The Company believes these acquisitions will produce the following results:

• Increased Market Presence and Opportunities: The addition of the acquired companies should increase the combined Company’s market presence and opportunities for growth in sales and earnings.
   
• Enhanced Product Mix: The complementary nature of the Company’s products with its acquisitions should benefit current customers and provide the combined company with the ability to access new customers.
   
• Operating Efficiencies: The combination of the Company with its acquisitions provides the opportunity for potential economies of scale and cost savings.

The Company believes these primary factors support the amount of goodwill recognized as a result of the purchase price for companies it has acquired. Goodwill is tested for impairment on an annual basis as of April 30, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach.

Pursuant to the accounting guidance for goodwill and other intangible assets, the measurement of impairment of goodwill consists of two steps. If the Company determines it is not more likely than not that the fair value of a business unit is less than its carrying amount, then the first step is performed. In the first step, the fair value of the Company is compared to its carrying value. The Company determined that the asset group to be tested for recoverability is at the business unit level as it was the lowest level at which cash flows were identifiable. The seconds step is to determine the implied fair values of the business units’ goodwill, and to compare them to the carrying values of the business units’ goodwill. This second step includes valuing all of the tangible and intangible assets and liabilities of the business units as if they had been acquired in a business combination to determine the implied fair values of goodwill. The business units that contain the goodwill and intangible assets are Unify, Daegis, and AXS-One.

5. Credit Facility

On June 30, 2011, the Company entered into a revolving credit note agreement with Wells Fargo. Under the terms of the agreement, the Company is entitled to borrow up to $8.0 million. The total amount that can be borrowed under the revolver is based on a multiplier factor of the trailing twelve months of maintenance revenue. As of January 31, 2012, the Company was eligible to borrow the entire $8.0 million. Interest expense is recorded on funds borrowed at the prevailing LIBOR rate plus 5.00% per annum with a minimum rate of 6.25% (6.25% as of January 31, 2012) and has a maturity date of June 30, 2015. As of January 31, 2012, there was $5.5 million outstanding on the revolver.

6. Fair Value of Financial Instruments

We adopted the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements.

Under ASC Topic 820, 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.

The Company bases its estimates of fair value for liabilities on the amount it 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 is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.

• Level 1 – Quoted prices in active markets for identical assets and liabilities. Level 1 is generally considered the most reliable measurement of fair value under ASC 820.
   
• Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
   
• Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company values its warrants based on open form option pricing models which, based on the relevant inputs, render the fair value estimate Level 3.

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Fair Value on a Recurring Basis

The table below categorizes assets and liabilities measured at fair value on a recurring basis as of January 31, 2012:

The following table summarizes the activity of Level 3 inputs measured on a recurring basis for the quarter ended January 31, 2012:

7. Long-Term Debt

The Company’s debt consists of the following at January 31, 2012 and April 30, 2011 (in thousands):

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The discount on notes payable is related to warrants granted to the Hercules Technology II, L.P. in association with the issuance of the term note. The Company provided Hercules with 718,860 warrants to purchase shares of Company common stock at $2.45 per share. The warrants have an expiration date of June 29, 2020. The Company values its warrants based on open form option pricing models. Amortization of the discount on notes payable for the three months January 31, 2012 and 2011 was $0 and $66,000 respectively. Amortization of the discount on notes payable for the nine months ended January 31, 2012 and 2011 was $43,000 and $153,000, respectively.

In June 2011 the Company incurred a loss on extinguishment of debt of $2.2 million as a result of the refinancing of the Hercules Term Loan and Credit Facility. The loss included $1.0 million of unamortized loan costs and $0.8 million of warrant discounts on notes payable that were associated with the borrowings under the Hercules Term Loan and Credit Facility. Additionally, the Company was assessed prepayment fees of $0.4 million.

In June 2011 the Company entered into the Wells Fargo Credit Agreement. The Wells Fargo Credit Agreement consists of a $12.0 million Term Note A, a $4.0 million Term Note B, and a revolving credit note agreement whereby Wells Fargo would provide up to $8.0 million. The Term Note A, Term Note B, and revolving line of credit have interest rate of LIBOR plus 5.00%, 10.00% and 5.00%, respectively. The minimum LIBOR used in the interest rate is 1.25% for Term Note A and the revolving line of credit and 2.00% for Term Note B. The company capitalized $0.6 million of loan costs related to Wells Fargo Credit Agreement.

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 the ability of the Company (and the Company’s 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.

The Company is obligated to maintain certain minimum consolidated adjusted EBITDA levels 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 January 31, 2012.

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.

In March 2012, the Company amended the Wells Fargo Credit Agreement. As part of the amendment, the minimum LIBOR used in the interest rate for Term Note A and the revolving line of credit was increased to 1.50%. Additionally, modifications were made to certain financial covenants.

A summary of future payments on long-term debt obligations as of January 31, 2012 is as follows (in thousands):

The summary of future payments on long-term debt obligations does not account for the annual payments based on the Company’s 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.

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8. Other Long-Term Liabilities

Included in other long term liabilities as of January 31, 2012 is deferred rent resulting from escalation clauses related to the Roseville and New York offices of $102,000 and $126,000, respectively. Included in other long term liabilities as of April 30, 2011 is deferred rent resulting from escalation clauses related to the Roseville, New York, and Chicago offices of $156,000, $112,000, and $11,000, respectively. Also included in other long term liabilities as of January 31, 2012 are $314,000 and $209,000 related to the unfavorable lease terms associated with the Rutherford, New Jersey office lease assumed in the acquisition of AXS-One, Inc. and the New York office lease assumed in the acquisition of Daegis, respectively. Included in other long term liabilities as of April 30, 2011 are $374,000 and $256,000 related to the unfavorable lease terms associated with the Rutherford, New Jersey office lease assumed in the acquisition of AXS-One, Inc. and the New York office lease assumed in the acquisition of Daegis, respectively. Additionally, as of January 31, 2012 and April 30, 2011 there is long-term deferred maintenance revenue of $214,000 and $513,000, respectively, included in other long-term liabilities. Additionally, as of January 31, 2012 and April 30, 2011, there is $80,000 and $91,000, respectively, related to mandatory employee severance costs associated with a French statutory government regulated plan covering all France employees.

9. Maintenance Contracts

The Company offers maintenance contracts to its customers at the time they enter into a product license agreement and renew those contracts at the customers’ option, generally annually thereafter. These maintenance contracts are priced as a percentage of the value of the related license agreement. The specific terms and conditions of these initial maintenance contracts and subsequent renewals vary depending upon the product licensed and the country in which the Company does 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.

Changes in the Company’s deferred maintenance revenue were as follows (in thousands):

Of the deferred maintenance revenue at January 31, 2012 and April 30, 2011, $0.2 million and $0.5 million, respectively, is long-term and is included in other long-term liabilities.

10. Income Taxes

The Company recognizes 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.

The Company is 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 2006. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. Therefore, no reserves for uncertain income tax positions have been recorded.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of January 31, 2012 and April 30, 2011, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor did the Company record any interest expense associated with any unrecognized tax benefits in the nine months ended January 31, 2012 and 2011.

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11. Preferred Stock

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 will automatically convert on a 1-for-1 basis into shares of common stock of the Company upon the earlier of the second anniversary of the financing, June 30, 2013, or the date on which the Company’s common stock has an average closing price above $4.00 per share during the preceding 30 trading days. The preferred stock includes an annual dividend of 10% payable in cash or stock at the Company’s option. The preferred stock has no other provisions or preferences. As of January 31, 2012, the Company had accrued $236,000 of dividends payable on preferred stock included in other accrued liabilities.

12. Comprehensive Income

Comprehensive income includes net income (loss) and net foreign currency translation adjustments. A comprehensive gain (loss) on foreign currency translations for the three months ended January 31, 2012 and 2011 was ($81,000) and $2,000, respectively. A comprehensive gain (loss) on foreign currency translations for the nine months ended January 31, 2012 and 2011 was ($98,000) and $13,000, respectively.

13. Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net earnings (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. For the three and nine months ended January 31, 2012 and the three and nine months ended January 31, 2011, because of our net loss available to shareholders, potentially dilutive securities were excluded from the per share computations due to their anti-dilutive effect.

The dilutive securities above represent only those stock options, warrants, convertible debt, and preferred stock whose exercise prices were less than the average market price of the stock during the respective periods and therefore were dilutive. Potentially dilutive securities that are not included in the diluted net loss calculation because they would be antidilutive are employee stock options of 2,725,546 and common stock warrants of 1,344,986 for the three and nine months ended January 31, 2012. Potentially dilutive securities that are not included in the diluted net loss calculation because they would be antidilutive are employee stock options of 2,286,459 and common stock warrants of 1,344,986 for the three and nine months ended January 31, 2011. Potentially dilutive securities that are not included in the diluted net loss calculation because they would be antidilutive are preferred stock shares of 1,666,667 for the three and nine months ended January 31, 2012 and zero for the three and nine months ended January 31, 2011.

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14. 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 have determined that we have two reportable segments: (i) eDiscovery and (ii) Database, Archive, and Migration. Prior to the first quarter of fiscal year 2012, the Company maintained two reportable segments, Database and Development Products (“DDP”) and Modernization and Migration Solutions, and eDiscovery and Integrated Content Archiving Solutions. The accounting policies of the segments are the same as those described in Note 1. 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.

For the third quarter of fiscal 2012 and 2011, total revenue from the United States was $6.5 million and $9.2 million, respectively. Total revenue from all other countries was $4.6 million in the third quarter of fiscal 2012 and $3.2 million for the third quarter of fiscal 2011. Total long-lived assets as of January 31, 2012 and April 30, 2011, for the United States, was $39.9 million and $41.3 million, respectively. Total long-lived assets in all other countries were $36,000 as of January 31, 2012 and $48,000 as of April 30, 2011.

Financial information for the Company’s reportable segments is summarized below (in thousands). Fiscal 2011 segment information has been reclassified to conform to the fiscal 2012 presentation.

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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 industry 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 herein under “Volatility of Stock Price and General Risk Factors Affecting Quarterly Results” and in the Company’s Annual Report on Form 10-K under “Business – Risk Factors.” 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, 2011, as filed with the SEC.

Overview

Daegis Inc. (formerly Unify Corporation) (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 Migrations segment.

The Company’s 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 Roseville, California, with offices in San Francisco, New York, Chicago, 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 delivers a comprehensive solution that helps clients increase defensibility and lower costs in all phases of the eDiscovery lifecycle from information management through search and analysis to review and production. Our services include document review, project management, search analytics and consulting.

Our database, archive, and migrations business includes application development, data management and application modernization. Our tools and database software helps 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, Composer CipherSoft and Composer Mainframe. The Company’s enterprise archiving software enables corporations to preserve, manage, and dispose of their electronically stored information (ESI) for regulatory compliance, eDiscovery and information governance.

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Critical Accounting Policies

The following discussion and analysis of the Company’s financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, management evaluates its estimates and judgments. Actual results may differ from these estimates under different assumptions or conditions. The areas that require significant judgment are as follows.

Revenue Recognition

The Company generates revenue from software license sales and related services, including maintenance and support, hosting, and consulting and implementation services. The Company licenses its products to end-user customers, including corporate legal and IT departments, law firms, independent software vendors (“ISVs”), international distributors and value-added resellers (“VARs”). The Company’s products are generally sold with a perpetual license. The Company’s contracts with ISVs, VARs and international distributors do not include special considerations such as rights of return, stock rotation, price protection or special acceptance. The Company exercises judgment in connection with the determination of the amount of revenue to be recognized in each accounting period. The nature of each contractual arrangement determines how revenues and related costs are recognized.

For software license arrangements that do not require significant modification or customization of the underlying software, revenue is recognized when the software product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance are resolved, collectability is probable and persuasive evidence of an arrangement exists.

For fixed price arrangements that require significant modification or customization of software, the Company uses the percentage-of-completion method for revenue recognition. Under the percentage-of-completion method, progress towards completion is generally measured by labor hours.

The Company considers a signed non-cancelable license agreement, a customer purchase order, a customer purchase requisition, or a sales quotation signed by an authorized purchaser of the customer to be persuasive evidence that an arrangement exists such that revenue can be recognized.

The Company’s customer contracts may include multi-element arrangements that include a delivered element (a software license) and undelivered elements (such as maintenance and support and/or consulting). The value allocated to the undelivered elements is unbundled from the delivered element based on vendor-specific objective evidence (VSOE) of the fair value of the maintenance and support and/or consulting, regardless of any separate prices stated within the contract. VSOE of fair value is defined as: (i) the price charged when the same element is sold separately, or (ii) if the element has not yet been sold separately, the price for the element established by management having the relevant authority when it is probable that the price will not change before the introduction of the element into the marketplace. The Company then allocates the remaining balance to the delivered element (a software license) regardless of any separate prices stated within the contract using the residual method as the VSOE of all undelivered elements is determinable.

We defer revenue for any undelivered elements, and recognize revenue for delivered elements only when the VSOE of undelivered elements are known, uncertainties regarding customer acceptance are resolved, and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. If we cannot objectively determine the fair value of any undelivered element included in bundled software and service arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

An assessment of the ability of the Company’s customers to pay is another consideration that affects revenue recognition. In some cases, the Company sells to undercapitalized customers. In those circumstances, revenue recognition is deferred until cash is received, the customer has established a history of making timely payments or the customer’s financial condition has improved. Furthermore, once revenue has been recognized, the Company evaluates the related accounts receivable balance at each period end for amounts that we believe may no longer be collectible. This evaluation is largely done based on a review of the financial condition via credit agencies and historical experience with the customer. Any deterioration in credit worthiness of a customer may impact the Company’s evaluation of accounts receivable in any given period.

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Revenue from support and maintenance activities, which consist of fees for ongoing support and unspecified product updates, are recognized ratably over the term of the maintenance contract, typically one year, and the associated costs are expensed as incurred. Consulting and implementation services are performed on a “best efforts” basis and may be billed under time-and-materials or fixed price arrangements. Revenues and expenses relating to providing consulting services are generally recognized as the services are performed. Revenue from hosting activities, which consist of fees for storing customer data, are recognized as the services are performed, and the associated costs are expensed as incurred.

Goodwill and Intangible Assets

Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment on an annual basis as of April 30, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach. Intangible assets are amortized using the straight-line method over their estimated period of benefit. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. As a result of the impairment test, the Company recorded $1.5 million and $14.5 million in the fourth quarter of fiscal 2011 for the impairments of goodwill and intangible assets of CipherSoft and AXS-One, respectively. The Unify and Daegis business units were not at risk of failing step one of the impairment test.

Deferred Tax Asset Valuation Allowance

Deferred taxes are recorded for the difference between the financial statement and tax basis of the Company’s assets and liabilities and net operating loss carryforwards. A valuation allowance is recorded to reduce deferred tax assets to an amount whose realization is more likely than not. U.S. income taxes are not provided on the undistributed earnings of foreign subsidiaries as they are considered to be permanently reinvested.

As of April 30, 2011, the Company had $21.2 million of deferred tax assets related principally to net operating loss and capital loss carryforwards, reserves and other accruals, and various tax credits. The Company’s ability to utilize net operating loss carryforwards may not be fully realized because of certain limitations imposed by the tax law related to changes in ownership. In addition, the Company’s ability to ultimately realize its deferred tax assets is contingent upon the Company achieving taxable income in the future. There is no assurance that this will occur in amounts sufficient to utilize the deferred tax assets. Accordingly, management concluded that a valuation allowance be recorded to offset these deferred tax assets. Should we determine that Daegis would be able to realize the deferred tax assets in the future in excess of the recorded amount, an adjustment to the valuation allowance would be recognized in the period such determination was made.

Account Receivable and Allowance for Doubtful Accounts

We record trade accounts receivable at the invoiced amount and they do not bear interest. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We make these estimates based on an analysis of accounts receivable using available information on our customers’ financial status and payment histories as well as the age of the account receivable. Historically, bad debt losses have not differed materially from our estimates.

Accounting for Stock-based Compensation

For our share-based payment awards, we make estimates and assumptions to determine the underlying value of stock options, including volatility, expected life and forfeiture rates. Additionally, for awards which are performance-based, we make estimates as to the probability of the underlying performance being achieved. Changes to these estimates and assumptions may have a significant impact on the value and timing of stock-based compensation expense recognized, which could have a material impact on our financial statements.

Fair Value of Common Stock Warrant Liability

The Company accounts for common stock warrants in accordance with applicable accounting guidance provided in ASC 815 - “Derivatives and Hedging — Contracts in Entity’s Own Equity”. The Company values its warrants based on open form option pricing models which, based on the relevant inputs, render the fair value estimate Level 3. The Company bases its estimates of fair value for liabilities on the amount it 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. Changes in the fair value of the warrants are reflected in the consolidated statement of operations as “Gain (loss) from change in fair value of common stock warrant liability.”

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Results of Operations

The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenue:

Total Revenues

The Company generates revenue from eDiscovery software and service sales. All of our eDiscovery software and services sales are sold by our direct sales force in the United States. The Company generates database, archive, and migrations 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 third quarter of fiscal 2012 were $11.1 million, a decrease of $1.3 million from the third quarter of fiscal 2011. This represents a decrease of 11% from the third quarter of fiscal 2011 revenues of $12.4 million. Total revenues for the nine months ended January 31, 2012 were $33.7 million, a decrease of $1.5 million over revenues for the nine months ended January 31, 2011. This represents a decrease of 4% over revenues from the nine months ended January 31, 2011 of $35.2 million. Total eDiscovery revenues in the third quarter of fiscal 2012 were $4.2 million, a decrease of $2.3 million from the third quarter of fiscal 2011. This represents a decrease of 36% over the third quarter of fiscal 2011 revenues of $6.5 million. The decrease in eDiscovery revenue for the third quarter of fiscal 2012 is primarily related to having fewer large legal matters in process in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011. Total eDiscovery revenues for the nine months ended January 31, 2012 were $15.7 million, a decrease of $0.9 million from the nine months ended January 31, 2011. This represents a decrease of 5% in revenue from the nine months ended January 31, 2011 revenues of $16.6 million. The decrease is primarily related to having fewer large legal matters in process in fiscal 2012 compared to the fiscal 2011. This is partially offset by having three months of eDiscovery revenue in the first quarter of fiscal 2012 and only one month of eDiscovery revenue in the first quarter of fiscal 2011. Total database, archive, and migrations revenues in the third quarter of fiscal 2012 were $6.9 million, an increase of $1.0 million from the third quarter of 2011. This represents an increase of 17% from the third quarter of fiscal 2011 revenues of $5.9 million. The increase in database, archive, and migrations revenue for the three months ending January 31, 2012 is primarily due to a large license and maintenance sale that did not exist in fiscal 2011 and the receipt of a large maintenance renewal. Total database, archive, and migrations revenues for the nine months ended January 31, 2012 were $17.9 million, a decrease of $0.7 million from the nine months ended January 31, 2011. This represents a decrease of 3% in revenue from the nine months ended January 31, 2011 revenues of $18.6 million. The decrease in database, archive, and migrations revenue for the nine months ending January 31, 2012 is primarily due to current year delays in large government migration projects and fewer archive sales and is partially offset by the large license and maintenance sale noted above.

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For the third quarter of fiscal 2012 and 2011, total revenues from the United States were 58% and 74% of total revenues, respectively. Total revenue from the United States in absolute dollars was $6.5 million for the third quarter of fiscal 2012 and $9.2 million for the third quarter of fiscal 2011. Total revenue from all other countries was $4.6 million in the third quarter of fiscal 2012 and $3.2 million for the third quarter of fiscal 2011. On a percentage basis, revenue from other countries was 42% for the third quarter of fiscal 2012 and 26% for the third quarter of fiscal 2011.

Operating Expenses

Direct Costs of eDiscovery Revenue. Direct costs of eDiscovery revenue consist primarily of expenses related to employees, facilities, and third party assistance that were directly related to the generation of eDiscovery revenue. Direct costs of eDiscovery revenue were $2.5 million and $2.2 million for the third quarter of fiscal 2012 and fiscal 2011, respectively. For the first nine months ended January 31, 2012 and 2011, the direct costs of eDiscovery revenue were $7.1 million and $4.7 million, respectively. The increase in the nine months ended January 31, 2012 is primarily related to the fact that eDiscovery only had one month of costs included in the first quarter of fiscal 2011.

Direct Costs of Database, Archive, and Migrations Revenue. Direct costs of database, archive and migrations revenue consist primarily of expenses related to employees, facilities, third party assistance, royalty payments, and the amortization of purchased technology from third parties that were directly related to the generation of database, archive, and migrations revenue. Direct costs of database, archive and migrations revenue were $1.3 million for both the third quarter of fiscal 2012 and fiscal 2011. For the nine months ended January 31, 2012 and 2011, direct costs of database, archive and migrations revenue were $4.0 million and $4.3 million, respectively. The decrease in direct costs of database, archive and migrations revenue for the nine month period over the comparable prior year expenses is primarily due to a reallocation of employees to eDiscovery departments combined with a small reduction in force.

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 third quarter of fiscal 2012 were $1.8 million compared to $2.0 million in the same period of fiscal 2011. For both the nine months ended January 31, 2012 and 2011, product development expenses were $5.7 million.

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 and bad debt expense. SG&A expenses were $4.9 million in the third quarter of fiscal 2012 and $5.9 million for the third quarter of fiscal 2011. The major components of SG&A for the third quarter of fiscal 2012 were sales expenses of $2.0 million, marketing expenses of $0.6 million and general and administrative expenses of $2.3 million. For the third quarter of fiscal 2011, the major components of SG&A were sales expenses of $1.9 million, marketing expenses of $0.7 million and general and administrative expenses of $3.3 million. As a percentage of total revenue, SG&A expenses were 44% in the third quarter of fiscal 2012 and 47% in the third quarter of fiscal 2011. In the nine months ended January 31, 2012 and 2011, our SG&A expenses were $14.3 million and $19.0 million, respectively. The major components of SG&A for the nine month period ended January 31, 2012 were sales expenses of $5.8 million, marketing expenses of $1.8 million and general and administrative expenses of $6.7 million. The major components of SG&A for the nine month period ended January 31, 2011 were sales expenses of $5.9 million, marketing expenses of $1.9 million and general and administrative expenses of $11.2 million. As a percentage of total revenue, SG&A expenses were 42% in the first nine months of fiscal 2012 and 54% in the first nine months of fiscal 2011. The decrease in SG&A costs for the three and nine months ended January 31, 2012 is primarily related to decreases in amortization expense due to the impairment of intangible assets in the fourth quarter of fiscal 2011, reduced incentive compensation payments and decreases in outside labor expense. This is combined with approximately $1.4 million of transaction costs for the Daegis acquisition included in the first quarter of 2011.

Change in Fair Value of Contingent Consideration. In applying ASC 805 to the June 2009 acquisition of AXS-One, the Company calculated the fair value of contingent consideration related to net license revenue on a quarterly basis and recorded any change in the calculated amount as adjustments in the statement of operations. The contingent consideration arrangement was completed and paid in full in fiscal 2011. There were no contingent consideration arrangements related to the June 2010 acquisition of Daegis.

Loss on Extinguishment of Debt. The loss on extinguishment of debt is the result of the refinancing of the Hercules Term Loan and Credit Facility on June 30, 2011. The Company expensed $1.8 million of unamortized loan costs and warrant discounts on notes payable that were associated with the borrowings under the Hercules Term Loan and Credit Facility. Additionally, the Company was assessed prepayment fees of $0.4 million.

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Gain from Change in Fair Value of Common Stock Warrant Liability. The change in fair value of common stock warrant liability for the three and nine months ended January 31, 2012 resulted in a gain of $34,000 and $636,000, respectively. The change in fair value of common stock warrant liability for the three and nine months ended January 31, 2011 resulted in a loss of $240,000 and a gain of $427,000, respectively. The gains are due primarily to a decrease in the Company’s common stock share price during the period. The loss is due primarily to an increase in the Company’s common stock share price during the period.

Interest Expense. Interest expense consists primarily of interest incurred on outstanding debt obligations, plus the amortization of related debt issuance costs and the amortization of the discount on notes payable. Interest expense for the third quarter of fiscal 2012 and 2011 was $0.5 million and $1.0 million, respectively. Interest expense for the nine months ended January 31, 2012 and 2011 was $1.8 million and $2.5 million, respectively. The decrease in the interest expense for the three and nine months ended January 31, 2012 is due to the lower interest rates on debt that resulted from our refinancing. This is partially offset in the nine months ending January 31, 2012 because the debt associated with the acquisition of Daegis was outstanding for only one month in the first quarter of fiscal 2011.

Other, Net. Other, net consists primarily of foreign exchange rate gains and losses and other income. Foreign exchange rate losses for the third quarter of fiscal 2012 and 2011 were $95,000 and $1,000, respectively. Foreign exchange rate losses for the nine months ended January 31, 2012 and 2011 were $74,000 and $220,000, respectively. Other income for the third quarter of fiscal 2012 and 2011 was $2,000 and $3,000, respectively. Other income for the nine months ended January 31, 2012 was $8,000. Other income for the nine months ended January 31, 2011 was $58,000.

Provision for Income Taxes. For the third quarter of fiscal 2012, the Company recorded $30,000 in federal, state, and foreign income tax expense. For the third quarter of fiscal 2011, the Company recorded $97,000 in federal, state, and foreign income tax expense. For the nine months ended January 31, 2012 the Company recorded $150,000 in federal, state, and foreign income tax expense. For the nine months ended January 31, 2011 the Company recorded $219,000 in federal, state, and foreign income tax expense.

Liquidity and Capital Resources

At January 31, 2012, the Company had cash and cash equivalents of $6.5 million, compared to $4.6 million at April 30, 2011. The Company had net accounts receivable of $10.9 million as of January 31, 2012, and $15.7 million as of April 30, 2011.

In June 2011, the Company entered into a new Revolving Credit and Term Loan Agreement with Wells Fargo (the “Wells Fargo 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 its assets. The Wells Fargo Credit Agreement consists of two term notes and a revolving credit note agreement. Term Note A is for $12.0 million payable over four years with principal payments of $300,000 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. The Company incurs interest at the prevailing LIBOR rate plus 5.0% per annum with a minimum rate of 6.25% (6.25% at January 31, 2012). Term Note B is a four year note for $4.0 million payable in full at maturity, June 30, 2015. The Company incurs interest at the prevailing LIBOR rate plus 10% per annum with a minimum rate of 12.0% (12.0% at January 31, 2012). As of January 31, 2012 there is $15.7 million outstanding on the term notes of which $1.2 million is current. Under the terms of the revolver, the Company can borrow up to $8.0 million. The Company incurs interest expense on funds borrowed at the prevailing LIBOR rate plus 5.0% per annum with a minimum rate of 6.25% (6.25% at January 31, 2012). The revolver has a maturity date of June 30, 2015. The total amount that can be borrowed under the Term Note A and the revolver is based on a multiplier factor of the trailing twelve months of maintenance revenue. As of January 31, 2012, the Company was eligible to borrow the entire amount of $8.0 million. As of January 31, 2012 there is $5.5 million borrowed on the revolving line of credit, none of which is current.

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 the ability of the Company (and the Company’s 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.

The Company is obligated to maintain certain minimum consolidated adjusted EBITDA levels 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 January 31, 2012.

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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.

In March 2012, the Company amended the Wells Fargo Credit Agreement. As part of the amendment, the minimum LIBOR used in the interest rate for Term Note A and the revolving line of credit was increased to 1.50%. Additionally, modifications were made to certain financial covenants.

In June 2011, the Company issued through a private placement 1,666,667 shares of preferred stock to a group of institutional investors at a price of $2.40 per share for a total of $4.0 million. The preferred stock will automatically convert on a 1-for-1 basis into shares of common stock of the Company upon the earlier of the second anniversary of the financing, June 30, 2013, or the date on which the Company’s common stock has an average closing price above $4.00 per share during the preceding 30 trading days. The preferred stock includes an annual dividend of 10% payable in cash or stock at the Company’s option. As of January 31, 2012, the Company had accrued $236,000 of dividends payable on preferred stock. The preferred stock has no other provisions or preferences.

Except for the Wells Fargo Credit Agreement, as of January 31, 2012 the Company had no other notes payable outstanding.

As of January 31, 2012, the Company has $747,000 in capital leases payable, $394,000 of which is current.

Operating Cash Flows. For the first nine months of fiscal year 2012 cash provided by operations was $5.9 million. Cash flows provided by operations for the first nine months of fiscal 2012 principally resulted from a decrease in accounts receivable of $4.7 million, amortization of intangible assets of $1.6 million, depreciation of $0.8 million, loss on extinguishment of debt of $2.2 million, interest added to long term debt principal of $0.1 million, and stock based compensation expense of $0.7 million. Offsetting these amounts was a net loss of $0.9 million, an increase in prepaid expenses and other current assets of $0.2 million, a decrease in accounts payable of $1.0 million, a decrease in accrued compensation and related expenses of $0.7 million, a decrease in other accrued liabilities of $0.8 million, a decrease in other long term liabilities of $0.1 million, and a gain from change in fair value of common stock warrant liability of $0.6 million.

For the first nine months of fiscal year 2011 cash used by operations was $1.2 million. Cash flows used in operations for the first nine months of fiscal 2011 principally resulted from a net loss of $0.8 million, an increase in accounts receivable of $3.5 million, a decrease in deferred revenue of $1.4 million, change in fair value of contingent consideration of $0.2 million, and a gain from change in fair value of common stock warrant liability of $0.4 million. Offsetting these amounts was a decrease in prepaid expenses and other current assets of $0.2 million, a decrease in other long term assets of $0.2 million, an increase in accrued compensation and related expenses of $0.1 million, an increase in other accrued liabilities of $0.2 million, amortization of intangible assets of $2.7 million, depreciation of $0.6 million, amortization of discount on notes payable of $0.2 million, interest added to long term debt principal of $0.3 million, and stock based compensation expense of $0.7 million. During the third quarter of fiscal year 2012, the Company revised the statements of cash flows for the nine months ended January 31, 2011. See a further a description of the reclassifications in Note 1 to the financial statements.

Investing Cash Flows. Cash flows used in investing activities was $0.9 million for the first nine months of fiscal 2012 and was primarily the result of cash used for the purchase of property and equipment. Net cash used in investing activities for the first nine months of fiscal 2011 was $22.0 million and was primarily the result of cash used in the acquisition of Daegis.

Financing Cash Flows. Net cash used in financing activities for the first nine months of fiscal 2012 was $2.9 million. Cash used in financing activities was the result of $24.4 million of principal payments on debt obligations, $0.3 million of principal payments on capital leases, $4.0 million of payments on the revolving line of credit, $0.6 million of payment of loan costs, and $0.4 million of prepayment penalty on extinguishment of debt. Offsetting this amount was borrowings on the term loan of $16.0 million, borrowings on the revolving line of credit of $6.5 million, proceeds from the issuance of common stock of $0.2 million, and proceeds from the issuance of preferred stock of $4.0 million. Net cash from financing activities for the first nine months of fiscal 2011 was $24.4 million. Cash from financing activities was the result of borrowings on the term loan and revolving line of credit of $24 million and $4.5 million, respectively. Offsetting this amount was $1.0 of principal payments on debt obligations, $0.3 million on principal payments on capital leases, and $1.9 million of payments on the revolving line of credit, and $1.0 million of payment of loan costs.

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A summary of certain contractual obligations as January 31, 2012 is as follows (in thousands):

Other liabilities primarily include mandatory employee 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 equivalents, and its long term debt, which contains notes with variable interest rates. Cash equivalents are highly liquid investments with original maturities of three months or less and are stated at cost. Cash equivalents are generally maintained in money market accounts which have as their objective preservation of principal. The Company does not believe its exposure to interest rate risk is material for cash and cash equivalents, which totaled $6.5 million as of January 31, 2012. The Company had no short-term investments at January 31, 2012.

In June 2011, the Company entered into the Wells Fargo Credit Agreement. The Wells Fargo Credit Agreement consists of a $12.0 million Term Note A, a $4.0 million Term Note B, and a revolving credit note agreement whereby Wells Fargo would provide up to $8.0 million. The Term Note A, Term Note B, and revolving line of credit have interest rate of LIBOR plus 5.00%, 10.00% and 5.00%, respectively. The minimum LIBOR used in the interest rate is 1.25%. LIBOR at January 31, 2012 is approximately 1.1%. Should the LIBOR interest rate increase above 1.25% during the life of the term loans and of the revolver, the Company would have exposure to interest rate risk. As of January 31, 2012, there was $15.7 million outstanding on the term notes and $5.5 million outstanding on the revolver.

The Company does not use derivative financial instruments in its short-term investment portfolio, and places its investments with high quality issuers only and, by policy, limits the amount of credit exposure to any one issuer. The Company is averse to principal loss and attempts to ensure the safety of its invested funds by limiting default, market and reinvestment risk.

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. Historically, the Company’s primary exposures have related to local currency denominated sales and expenses in Europe, Japan and Australia. For example, when the U.S. dollar strengthens against the major European currencies, it results in lower revenues and expenses recorded for those regions when translated into U.S. dollars.

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. Although the Company takes into account changes in exchange rates over time in its pricing strategy, it does so only on an annual basis, resulting in substantial pricing exposure as a result of foreign exchange volatility during the period between annual pricing reviews. The Company also has currency exchange rate exposures on cash and accounts receivable balances related to activities with the Company’s operations in France, Germany, UK, Australia and Canada. At January 31, 2012 the Company had cash held in foreign currencies of $1,757,000 in Euros, $32,000 in Canadian dollars, $371,000 in pounds sterling, and $364,000 in Australian dollars. At January 31, 2012 the Company had accounts receivable in foreign currencies of $1,777,000 in Euros, $434,000 in pounds sterling, $298,000 in Australian dollars, $42,000 in Japanese yen, $19,000 in Korean won, and $27,000 in Polish zloty. The Company engages in no hedging activities to reduce the risk of such fluctuations. A hypothetical ten percent change in foreign currency rates could have a significant impact on the Company’s business, operating results and financial position. The Company has not experienced material exchange losses in the past; however, due to the substantial volatility of currency exchange rates, among other factors, it cannot predict the effect of exchange rate fluctuations on its future business, operating results and financial position.

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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 January 31, 2012. The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls were effective as of the end of the period covered by this quarterly report. 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 controls over financial reporting that occurred during the first nine months of fiscal year 2012 that have materially affected, or are reasonably likely to materially affect, our internal controls 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 January 31, 2012, 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, 2011. There have been no material changes in our risks from such description.

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

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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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