The following discussion of the financial condition and results of operations of the Company contains forward-looking statements that involve risks and uncertainties and should be read in conjunction with the cautionary language applicable to such forward-looking statements described above in "A Caution About Forward-Looking Statements" found before Item 1 of this Form 10-K. You should not place undue reliance on these forward-looking statements which speak only as of the date of this Annual Report on Form 10-K. The following discussion should also be read in conjunction with the Consolidated Financial Statements and Notes thereto in Item 8. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, the Risk Factors discussed in this Annual Report and in the Company's other filings 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 migration segment.

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 lower costs in all phases of the eDiscovery lifecycle from information management through search and analysis to review and production.

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. The Company's enterprise archiving software enables corporations to preserve, manage, and dispose of their ESI for regulatory compliance and information governance.

On June 29, 2010, the Company purchased 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 which were subsequently converted into equity on September 1, 2010.

On June 30, 2009, the Company purchased AXS-One Inc. for approximately 3.1 million shares of common stock.

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 fair value of all undelivered elements is determinable.

We defer revenue for any undelivered elements, and recognize revenue for delivered elements only when the VSOE of fair value 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.

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.

Taxes collected from customers and remitted to the government are presented on a gross basis on the consolidated balance sheet. At April 30, 2012 and 2011 the Company had $48,000 and $14,000 of sales taxes payable.

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 $15.0 million for the impairment of goodwill and intangible assets of the eDiscovery business unit. The Unify and AXS-One business units were not at risk of failing step one of the impairment test. Refer to Item 15, Note 5 for additional discussion of the goodwill and intangible asset 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, 2012, the Company had $19.2 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 term and forfeiture rates. 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 Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 815, "Derivatives and Hedging - Contracts in Entity's Own Equity" ("ASC 815"). 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."

Results of Operations

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

                                                                                        Years Ended April 30,
                                                                                   2012           2011          2010
Revenues:
    eDiscovery                                                                      46.0   %       49.2   %        -   %
    Database, archive, and migration                                                54.0           50.8        100.0
        Total revenues                                                             100.0          100.0        100.0
Operating expenses:
    Direct costs of eDiscovery revenue                                              21.6           14.5            -
    Direct costs of database, archive, and migration revenue                        12.4           12.0         21.3
    Product development                                                             17.6           16.5         22.6
    Selling, general and administrative                                             43.8           52.6         61.8
    Impairments of goodwill and intangible assets                                   34.6           34.0            -
    Change in fair value of contingent consideration                                   -           (0.4 )       (7.3 )
        Total operating expenses                                                   130.0          129.2         98.4
           Income (loss) from operations                                           (30.0 )        (29.2 )        1.6
Other income (expense):
    Loss on extinguishment of debt                                                  (5.0 )            -            -
    Gain (loss) from change in fair value of common stock warrant liability          2.4            1.1         (0.7 )
    Interest expense                                                                (5.2 )         (7.3 )       (0.9 )
    Other, net                                                                      (0.2 )            -         (0.1 )
        Total other income (expense)                                                (8.0 )         (6.2 )       (1.7 )
    Loss before income taxes                                                       (38.0 )        (35.4 )       (0.1 )
Provision (benefit) for income taxes                                                 0.3            0.1         (0.5 )
    Net income (loss)                                                              (38.3 )        (35.5 )        0.4

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 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. Revenues from our distributor, ISV and VAR indirect channels accounted for approximately 54%, 55%, and 45% of our software license revenues for fiscal 2012, 2011 and 2010, respectively. International revenues include all our software license and service revenues from customers located outside North America. International revenues accounted for 32%, 28%, and 50% of total revenues in fiscal years 2012, 2011 and 2010, respectively.

Total revenues in fiscal 2012 were $43.5 million, a decrease of $3.5 million, or 7% from fiscal 2011 revenues of $47.0 million. Total eDiscovery revenues in fiscal 2012 were $20.0 million a decrease of $3.1 million or 14% from fiscal 2011 eDiscovery revenues of $23.1 million. The decrease is primarily related to having fewer large legal matters in process in fiscal 2012 compared to fiscal 2011. The decrease is partially offset by having twelve months of eDiscovery revenue in the fiscal 2012 and only ten months of eDiscovery revenue in fiscal 2011. Total database, archive, and migration revenues in fiscal 2012 were $23.5 million, a decrease of $0.4 million or 2% from fiscal 2011 database, archive, and migration revenues of $23.9 million.

Total revenues in fiscal 2011 were $47.0 million, an increase of $18.4 million, or 64% from fiscal 2010 revenues of $28.6 million. Total eDiscovery revenues in fiscal 2011 were $23.1 million. As the acquisition of Daegis occurred in June, 2010, there was no eDiscovery revenue in fiscal 2010. Total database, archive, and migrations revenues in fiscal 2011 were $23.9 million, a decrease of $4.7 million or 16% from fiscal 2010 database, archive, and migration revenues of $28.6 million. The decrease is primarily due to a large archive license sale that occurred in 2010 that did not occur in 2011 as well as current year delays in large government migration projects.

For fiscal 2012, 2011, and 2010, total revenues derived from the United States were 68%, 72%, and 50% of total revenues, respectively. Total revenue from the United States in absolute dollars was $29.4 million for fiscal 2012, $34.0 million for fiscal 2011, and $14.3 million for fiscal 2010. Total revenue derived from all other countries was $14.1 million for fiscal 2012, $13.0 million for fiscal 2011, and $14.3 million for fiscal 2010. On a percentage basis, revenue from other countries was 32% for fiscal 2012, 28% for fiscal 2011, and 50% for fiscal 2010.

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 $9.4 million for fiscal 2012, $6.8 million for fiscal 2011, and $0 for fiscal 2010. The increase in fiscal 2012 is primarily related to the acquisition of Daegis that occurred in June, 2010, resulting in eDiscovery having twelve months of costs included in fiscal 2012, ten months of costs included in fiscal 2011, and no costs in fiscal 2010.

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 assistance, 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 $5.4 million for fiscal 2012, $5.6 million for fiscal 2011, and $6.1 million for fiscal 2010.

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 fiscal 2012 were $7.7 million compared to $7.7 million in fiscal 2011 and $6.5 million in fiscal 2010. The increase in product development costs in fiscal 2011 compared to fiscal 2010 was primarily the result of expenses related to additional headcount resulting from our acquisition of Daegis in June 2010.

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 $19.0 million in fiscal 2012, $24.7 million for 2011 and $17.7 million for 2010. The decrease in SG&A costs in fiscal 2012 was primarily the result of expenses related to our acquisition of Daegis in June 2010. During fiscal 2011, the Company incurred approximately $1.4 million related to the transaction costs for the Daegis acquisition that were not repeated in fiscal 2012. Additionally, due to the write-off of intangible assets in fiscal 2011, amortization of intangible assets decreased approximately $1.4 million in fiscal 2012. Additionally, the Company made various cost cutting measures to reduce SG&A costs on an entity wide level. As a percentage of total revenue, SG&A expenses were 44% in fiscal 2012, 53% in fiscal 2011 and 62% in fiscal 2010. The major components of SG&A for fiscal 2012 were sales expenses of $7.8 million, marketing expenses of $2.3 million and general and administrative expenses of $8.9 million. The major components of SG&A for fiscal 2011 were sales expenses of $7.9 million, marketing expenses of $2.6 million and general and administrative expenses of $14.2 million. The major components of SG&A for fiscal 2010 were sales expenses of $8.2 million, marketing expenses of $1.5 million and general and administrative expenses of $8.0 million.

Impairments of Goodwill and Intangible Assets. In connection with the Company's annual impairment analysis, in fiscal 2012 the Company recorded impairment charges of $13.5 million for the goodwill related to the acquisition of Daegis, representing 69% of its carrying value. Additionally, the Company recorded impairment charges of $1.5 million for the intangible assets related to the acquisition of Daegis.

During the fourth quarter of the fiscal year we identified certain indicators that the goodwill and intangibles assets in our eDiscovery Division could potentially be impaired. While eDiscovery revenues had declined some in previous quarters, a new version of our eDiscovery software was released late in the third quarter which we expected would result in an increase in revenue in the fourth quarter. However, these expected revenue improvements did not materialize during the fourth quarter. Also in the fourth quarter we experienced a decrease in the number of new matters being received from existing customers and we had limited success adding new customers. Further, our stock price dropped significantly in the fourth quarter which we anticipated would negatively impact the market capitalization reconciliation analysis which is a part of the impairment testing process. Because of these factors the Company determined it necessary to perform a comprehensive review of the eDiscovery segment. As a result of this review, our estimates of future projected revenue and cash flows for the eDiscovery segment were reduced. The decision to reduce our future estimates of projected revenue and cash flows, coupled with a significant drop in our stock price were the primary factors that led to our recording of the impairment charge in the fourth quarter of fiscal 2012.

In connection with the Company's annual impairment analysis, in fiscal 2011 the Company recorded impairment charges of $1.1 million for the goodwill related to the acquisition of CipherSoft, representing 100% of its carrying value, and $11.2 million for the goodwill related to the acquisition of AXS-One, representing 100% of its carrying value. Additionally, the Company recorded impairment charges of $0.4 million for the intangible assets related to the acquisition of CipherSoft and $3.3 million for the intangible assets related to the acquisition of AXS-One. The primary reason for these impairment charges is the Company's fourth quarter of fiscal 2011 decision to redirect its business focus and allocate more resources into the eDiscovery business which caused us to reduce our estimates of projected revenue and cash flows for CipherSoft and AXS-One.

Change in Fair Value of Contingent Consideration. In applying ASC 805, "Business Combinations," 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.

Gain (Loss) from Change in Fair Value of Common Stock Warrant Liability. The change in the fair value of common stock warrant liability for the year ended April 30, 2012 resulted in a gain of $1,054,000, due primarily to a decrease in the Company's common stock share price during the period. The change in the fair value of common stock warrant liability for the year ended April 30, 2011 resulted in a gain of $519,000, due primarily to a decrease in the Company's common stock share price during the period. The change in the fair value of common stock warrant liability for the year ended April 30, 2010 resulted in a loss of $192,000, due primarily to an increase in the Company's common stock share price during the period.

Interest Expense. Interest expense is primarily the result of interest from outstanding debt and was $2.3 million, $3.4 million and $0.3 million in fiscal 2012, 2011 and 2010, respectively. Fiscal 2012 interest expense consists primarily of interest on the Wells Fargo Credit Agreement that was incurred from the refinancing of the Hercules Loan Agreement plus the amortization of related debt issuance costs. Fiscal 2011 interest expense consists primarily of interest incurred on the Hercules Loan Agreement resulting from the debt financing in conjunction with the June 2010 acquisition of Daegis, plus the amortization of related debt issuance costs and the amortization of the discount on notes payable.

Other, Net. Other, net consists primarily of foreign exchange rate gains and losses and other income. Other, net was ($68,000), $8,000 and ($14,000) in fiscal 2012, 2011 and 2010, respectively.

Provision (Benefit) for Income Taxes. For fiscal 2012, the Company recorded $74,000 in foreign tax benefit and $227,000 for state and federal tax expense. For fiscal 2011, the Company recorded $39,000 in foreign tax benefit and $94,000 . . .