TMCnet News
DAEGIS INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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. (the "Company", "we", "us" or "our") is a global provider of archive, eDiscovery, application development, data management and migration software solutions. In fiscal 2014, we completed the restructuring and realignment of our company to meet customer and market needs and to operate with a more effective cost structure. We combined our Archive and eDiscovery businesses to offer a complete, cohesive information governance and eDiscovery solution that provides end-to-end data preservation and litigation readiness for our customers and clients. Accordingly, today we sell our solutions through two segments: the Archive and eDiscovery segment and the Development, Database, and Migration Tools segment. Our Archive and eDiscovery solutions simplify and reduce the cost of information governance and eDiscovery while mitigating risk by improving data management. Our software includes Daegis AXS-One archiving for managing the preservation, collection, review and disposal of structured and unstructured data; Daegis Edge, our hosted, end-to-end eDiscovery software for processing, search, review and production of data; and Daegis Acumen technology-assisted review. Our services include managed document review, project management, search analytics consulting, collection and hosting of data. Our Development, Database, and Migration Tools business, Gupta Technologies ("Gupta"), includes mobile, Web and .NET application development, data management and application modernization software. Gupta Technologies delivers highly productive application development software for developers of all skill levels. Gupta's data management solutions are highly scalable and high performance. Gupta's Composer Technologies product line offers automated software and services for migrating Lotus Notes and Oracle Forms applications. Our products include TD Mobile, Team Developer, SQLBase, Report Builder, NXJ, DataServer, VISION, ACCELL, Composer Notes and Composer CipherSoft. Our customers and clients include corporate legal departments, law firms, information technology ("IT") departments, software value-added resellers ("VARs"), solutions integrators ("SIs") and independent software vendors ("ISVs") from a variety of industries. We are headquartered in Irving, Texas, with offices in Roseville, California and Rutherford, New Jersey and international offices in Australia, Canada, France, Germany, and the United Kingdom ("UK"). We market and sell our software directly in the United States, Europe, Canada, Japan, Singapore and Australia and indirectly through global distributors and resellers on a worldwide basis. Certain prior period balances in our consolidated statements of operations have been reclassified between direct costs of eDiscovery revenue and selling, general and administrative expenses to conform with current presentation. Critical Accounting Policies 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 We generate revenue from the sale of software license and related services, including maintenance and professional services. We also receive revenue from subscription and hosting fees for the use of our hosted software solutions. We license our products to end-user customers and clients, including corporate legal and IT departments, law firms, independent software vendors ("ISVs"), international distributors and value-added resellers ("VARs"). Our software is sold with a perpetual license. 19 -------------------------------------------------------------------------------- The basis for our revenue recognition is governed by the accounting guidance contained in ASC 985-605, Software-Revenue Recognition. We begin to recognize revenue for a customer or client when all of the following criteria are satisfied: º There is persuasive evidence of an arrangement; º The service has been or is being provided and software has been delivered º The collection of the fees is reasonably assured; and º The amount of fees to be paid by the customer or client is fixed or determinable. Determining whether and when these criteria have been met can require significant judgment and estimates. We consider all revenue-generating activity fees to be fixed or determinable unless the fees are subject to refund or adjustment or are not payable within our standard payment terms. In determining whether collection of these fees is reasonably assured, we consider financial and other information about customers and clients, such as the current credit-worthiness and payment history. Historically, our bad debt expenses have not been significant. In general, revenue recognition commences when our solutions are implemented and made available for use by the customer or client. Revenue from software licenses are recognized as the software licenses are delivered and are available for use in the customer or client's environment. The software licenses are delivered either electronically or by physical shipment. Certain of our software solutions are available for use in hosted application arrangements under hosting fee agreements. Hosting fees from these applications are recognized ratably over the customer or client's stated term. We also provide professional and consulting services to our customers and clients. When these services are not included as part of a software license arrangement, we recognize revenue as the services are performed. We enter into arrangements with multiple-elements that generally include software license, maintenance and professional services related to the software. For those software related multiple-element arrangements, we have applied the residual method to determine the amount of software license revenues to be recognized pursuant to ASC 985-605, Software-Revenue Recognition. Under the residual method, if fair value exists for undelivered elements in a multiple-element arrangement, such fair value of the undelivered elements is deferred with the remaining portion of the arrangement consideration recognized when the software license or services arrangement is delivered. We allocate the fair value of each element of a software related multiple-element arrangement based upon its fair value as determined by our vendor specific objective evidence ("VSOE") with any remaining amount allocated to the software license. 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. We defer revenue for any undelivered elements, and recognize revenue for delivered elements only when VSOE of fair value of undelivered elements is known, uncertainties regarding customer or client acceptance have been resolved, and there are no customer-negotiated refunds or return rights affecting the revenue recognized for delivered elements. Software licenses sold with maintenance, which entitles the customer to differing levels of technical support and updates to the software made available on a when-and-if-available basis, are accounted for under ASC 985-605, Software-Revenue Recognition. We recognize fees related to maintenance arrangements ratably over the maintenance period, typically one year, and record the associated costs in direct cost of revenues when incurred. Taxes collected from customers and clients and remitted to the government are presented on a gross basis on the consolidated balance sheet and are not included in revenue on the consolidated statement of operations. 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. Amortization of intangible assets related to our acquired technology is recorded as a direct cost of Archive and eDiscovery revenue. All other amortization of intangible assets is recorded in selling, general and administrative expenses. 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. No impairment charges were recorded in fiscal 2014 in connection with our annual impairment analysis. 20 --------------------------------------------------------------------------------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 the foreign subsidiary as they are considered to be permanently reinvested. As of April 30, 2014, the Company had $19.4 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 we 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. Accounts receivable includes unbilled accounts receivable representing amounts recognized as revenue for which invoices have not yet been sent to customers and clients. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers and clients to make required payments. We make these estimates based on an analysis of accounts receivable using available information on our customers' and clients' 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 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 warrant 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 statements of operations as "Gain (loss) from change in fair value of common stock warrant liability." 21 --------------------------------------------------------------------------------Results of Operations The following table sets forth our consolidated statements of operations expressed as a percentage of total revenues for the periods indicated: Years Ended April 30, 2014 2013 2012 Revenues: Archive and eDiscovery 62.4 % 65.0 % 63.3 % Development, Database, and Migration Tools 37.6 35.0 36.7 Total revenues 100.0 100.0 100.0Operating expenses: Direct costs of Archive and eDiscovery revenue 25.6 25.1 29.6 Direct costs of Development, Database, and Migration Tools revenue 6.1 7.5 5.9 Product development 19.1 18.6 17.6 Selling, general and administrative 48.7 45.5 42.3 Sale of intangible trade name - (2.5 ) - Impairments of goodwill and intangible assets - - 34.6 Total operating expenses 99.5 94.2 130.0 Income (loss) from operations 0.5 5.8 (30.0 )Other income (expense): Loss on extinguishment of debt - - (5.0 ) Gain from change in fair value of common stock warrant liability (0.2 ) 0.9 2.4 Interest expense (4.3 ) (4.1 ) (5.2 ) Other, net - (0.6 ) (0.2 ) Total other income (expense) (4.5 ) (3.8 ) (8.0 ) Income (loss) before income taxes (4.0 ) 2.0 (38.0 ) Provision for income taxes 1.1 0.7 0.3 Net income (loss) (5.1 ) 1.3 (38.3 ) Total Revenues The Company generates revenue from Archive and eDiscovery software and service sales as well as maintenance, support and consulting services. Our Archive and eDiscovery solutions are sold by our direct sales force in the United States and Europe. We also generate Development, Database, and Migration Tools revenue from software license sales and related services, including maintenance, support and consulting services. We sell our Development, Database, and Migration Tools solutions through our direct sales force in the United States and Europe, and through indirect channels comprised of distributors, ISVs, VARs, and other partners worldwide. Revenues from our distributor, ISV and VAR indirect channels accounted for approximately 31%, 42% and 54% of our software license revenues for fiscal 2014, 2013 and 2012, respectively. International revenues include all our software license and service revenues from customers and clients located outside the United States. International revenues accounted for 47%, 32% and 32% of total revenues in fiscal years 2014, 2013 and 2012, respectively. Revenues in fiscal 2014 were $31.0 million, a decrease of $9.2 million, or 23% from fiscal 2013. Total Archive and eDiscovery revenues were $19.3 million in fiscal 2014 compared to $26.1 million in fiscal 2013, a decrease of $6.8 million or 26%. The revenue from our Archive and eDiscovery solutions fluctuates depending on the activity of our clients' legal matters and the timing of software license sales. Accordingly, the decrease in revenue is primarily related to having fewer large legal matters in process in fiscal 2014 compared to fiscal 2013. Revenue related to our largest client declined from 21% of consolidated revenue in fiscal 2013 to 17% in fiscal 2014 as our work on the particular matter is nearing completion. In addition, there was a large software license sale in fiscal 2013 that did not recur in fiscal 2014. Development, Database, and Migration Tools revenues were $11.6 million in fiscal 2014 compared to $14.1 million in fiscal 2013, a decline of $2.4 million. This decline is primarily related to the sale of the Composer Mainframe product line in the first quarter of fiscal 2014 which had $1.0 million in revenue in fiscal 2013. In addition, maintenance revenue declined as a result of the expected non-renewal of a large maintenance contract which resulted in $0.8 million in fiscal 2013 revenue. 22 -------------------------------------------------------------------------------- Total revenues in fiscal 2013 were $40.2 million, a decrease of $3.3 million, or 8% from fiscal 2012 revenues of $43.5 million. Total Archive and eDiscovery revenues in fiscal 2013 were $26.1 million a decrease of $1.4 million or 5% from fiscal 2012. The decrease is primarily related to having fewer large legal matters in process in fiscal 2013 compared to fiscal 2012. This is somewhat offset by a large software license sale in fiscal 2013. Total Development, Database, and Migration Tools revenues in fiscal 2013 were $14.1 million, a decrease of $1.9 million or 12% from fiscal 2012. The decrease is primarily related to fewer software license sales in fiscal 2013. Operating Expenses Direct Costs of Archive and eDiscovery Revenue. Direct costs of Archive and eDiscovery revenue consist primarily of expenses related to employees, facilities, royalty payments, third party vendors and the amortization of purchased technology from third parties that were directly related to the generation of Archive and eDiscovery revenue. Direct costs of Archive and eDiscovery revenue were $7.9 million in fiscal 2014, $10.1 million for fiscal 2013, and $12.8 million for fiscal 2012. The $2.2 million decrease in direct costs of Archive and eDiscovery revenue in fiscal 2014 as compared to fiscal 2013 is primarily due to employee and facility related cost reductions of $1.9 million from the organizational alignment during the third quarter of fiscal 2014. The decrease in fiscal 2013 as compared to fiscal 2012 is primarily due to a reduction in force and facility consolidation that was completed during the second quarter of fiscal 2013. Direct Costs of Development, Database, and Migration Tools Revenue. Direct costs of Development, Database, and Migration Tools revenue consist primarily of expenses related to employees, facilities, third party assistance, and royalty payments. Direct costs of Development, Database, and Migration Tools revenue were $1.9 million for fiscal 2014, $3.0 million for fiscal 2013, and $2.6 million for fiscal 2012. In the first quarter of fiscal 2014, we sold the Mainframe Composer product line. Excluding the Composer Mainframe product line, direct costs of Development, Database, and Migration Tools revenue were $1.9 million for fiscal 2014, $2.0 million for fiscal 2013, and $2.2 million for fiscal 2012. Product Development. Product development efforts are focused on on-going enhancements and increased functionality for all of our core products: Daegis Edge, Daegis Acumen, Daegis AXS-One Archive, Team Developer, SQLBase, Report Builder, NXJ, VISION, Composer CipherSoft and Composer Notes. Within Gupta Technologies, we developed a new mobile enterprise application development product, TD Mobile. Product development expenses consist primarily of employee and facilities costs incurred in the development and testing of new products and in the porting of new and existing products to additional hardware platforms and operating systems. Product development costs in fiscal 2014 were $5.9 million compared to $7.5 million in fiscal 2013 and $7.7 million in fiscal 2012. The decline in product development costs during fiscal 2014 is the result of a reduction in employee and facility related costs of $1.2 million as part of the alignment activities in the third quarter of fiscal 2013. The decline in product development costs in fiscal 2013 was the result of a reduction in the use of outside consultants in our development efforts of $0.3 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, amortization of intangible assets, and bad debt expense. SG&A expenses were $15.1 million in fiscal 2014, $18.3 million in fiscal 2013, and $18.4 million in fiscal 2012. The decrease in SG&A costs in fiscal 2014 is primarily the result of reduction in employee and related costs of $4.2 million related to the overall restructuring and realignment of the Company. This was partially offset by severance and other restructuring charges of $0.8 million. Sale of Intangible Trade Name. We sold the Unify trade name for $1.0 million in the first quarter of fiscal 2013. Impairments of Goodwill and Intangible Assets. No impairment charges were recorded in fiscal 2014 and 2013 in connection with the Company's annual impairment analysis. In connection with our 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, we recorded impairment charges of $1.5 million for the intangible assets related to the 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 resulted in a loss of $0.1 million in fiscal 2014 and a gain of $0.4 million, and $1.1 million for fiscal 2013 and 2012, respectively. These gains are due primarily to changes in our common stock share price during the periods. Interest Expense. Interest expense is primarily the result of interest from outstanding debt and was $1.3 million, $1.6 million, and $2.3 million in fiscal 2014, 2013, and 2012, respectively. The decrease in interest expense in fiscal 2014 is due primarily to the amendment of our Revolving Credit and Term Loan Agreement with Wells Fargo which allowed us to move more of our debt to the lower interest bearing Term Note A as well as a decrease in the total outstanding debt as a result of the additional annual payment based on the Company's free cash flow. Similar to 2014, the decrease in the interest expense for fiscal 2013 is due primarily to the lower interest rates on debt that resulted from our refinancing that occurred in the first quarter of fiscal 2012 and a decrease in the total outstanding debt. 23 -------------------------------------------------------------------------------- Other, Net. Other, net consists primarily of foreign exchange rate gains and losses and other income. Other, net was a gain of $9,000 for fiscal 2014 and a loss of $0.2 million and $0.1 million for fiscal 2013 and 2012, respectively. Provision for Income Taxes. For both fiscal 2014 and 2013, we recorded $0.1 million in foreign tax expense and $0.2 million in state and federal tax expense. For fiscal 2012, we recorded $0.1 million in foreign tax benefit and $0.2 million in state and federal tax expense. Liquidity and Capital Resources At April 30, 2014, the Company had cash and cash equivalents of $7.2 million, compared to $5.5 million at April 30, 2013. The Company had net accounts receivable of $6.7 million as of April 30, 2014 and $10.6 million as of April 30, 2013. 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 our assets. In July 2013, the Company entered into an amendment to its Credit Agreement. Under the terms of the amendment, the Company is entitled to borrow up to $18.2 million. The total amount that can be borrowed under the Credit Agreement is based on a multiplier factor of the trailing twelve months of maintenance and Software-as-a-Service revenue. As of April 30, 2014, the Company had availability under the Wells Fargo Credit Agreement to borrow an additional $1.1 million. The Wells Fargo Credit Agreement consists of two term notes and a revolving credit note agreement. Term Note A is for $12.2 million with quarterly principal payments of $306,000 quarterly plus an additional annual payment based on the Company's free cash flow for the year with any remaining amount due at maturity, June 30, 2015. To the extent the Company makes annual principal payments based on free cash flow, the quarterly principal payments will be reduced. The additional annual payment based on the Company's free cash flow for fiscal year 2014 is $1.9 million and will be paid in the first quarter of fiscal 2015, which will reduce our quarterly principal payments to $252,000. We incur interest at the prevailing LIBOR rate plus 4.5-5.0% per annum with a minimum rate of 6.50% (6.50% at April 30, 2014). Term Note B is for $1.0 million payable in full at maturity on June 30, 2015. We incur interest at the prevailing LIBOR rate plus 9-10% per annum with a minimum rate of 12.0% (12.0% at April 30, 2014). As of April 30, 2014 there is $12.3 million outstanding on the term notes, of which $3.0 million is current. Under the terms of the revolver, we can borrow up to $5.0 million. The Company incurs interest expense on funds borrowed at the prevailing LIBOR rate plus 4.5-5.0% per annum with a minimum rate of 6.50% (6.50% at April 30, 2014). 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 April 30, 2014, the Company was eligible to borrow the entire amount of $5.0 million. As of April 30, 2014, $2.5 million was 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 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. We are obligated to maintain certain minimum consolidated adjusted EBITDA levels, certain minimum liquidity levels, certain total leverage ratios, and certain fixed charge coverage ratios, all as calculated in accordance with the terms and definitions determining such amounts as contained in the Wells Fargo Credit Agreement. The Wells Fargo Credit Agreement also contains various information and financial reporting requirements. The Company is in compliance with all such covenants and requirements at April 30, 2014. 24 -------------------------------------------------------------------------------- In June 2011, the Company issued, through a private placement, 1,666,667 shares of preferred stock to a group of related party institutional investors at a price of $2.40 per share for a total of $4.0 million. The preferred stock automatically converted on a 1-for-1 basis into shares of common stock of the Company on June 30, 2013. The preferred stock included an annual dividend of 10% payable in cash or stock at the Company's option. The preferred stock has no other provisions or preferences. During fiscal year 2014, the Company paid $66,000 in preferred stock dividends. As of April 30, 2014, the Company had no accrued preferred stock dividends. Except for the Wells Fargo Credit Agreement, as of April 30, 2014 the Company had no other notes payable outstanding. We believe our existing cash of $7.2 million as of April 30, 2014, along with forecasted operating cash flows and the credit facilities under the Wells Fargo Credit Agreement, will provide us with sufficient working capital for us to meet our operating plan for fiscal year 2015. Operating Cash Flows. In fiscal 2014, we had cash flows provided by operations of $4.4 million. This compares to cash provided by operations of $4.1 million and $5.4 million in fiscal 2013 and 2012, respectively. During fiscal 2014, cash flows from operating activities were principally achieved from the decrease in accounts receivable of $3.8 million. This decline in accounts receivable was the result of strong collection activities as well as lower revenue. This was offset by a decrease in accrued compensation of $1.5 million in fiscal 2014 as a result of our business alignment activities. Cash flows provided by operations for fiscal 2013 principally resulted from a decrease in operating assets and liabilities of $1.3 million, net income of $0.5 million, which included depreciation and amortization of $2.6 million. In fiscal 2012, we had cash flows provided by operations of $5.4 million. Cash flows provided by operations for fiscal 2012 principally resulted from a $4.7 million decrease in accounts receivable. Investing Cash Flows. Net Cash provided by investing activities was $0.1 million for fiscal 2014 and consisted of $0.4 million in proceeds from the sale of our Composer Mainframe product line, offset by capital expenditures of $0.3 million. Net cash provided by investing activities was $0.7 million for fiscal 2013 and was principally the result of proceeds from the sale of intangible trade name of $1.0 million, offset by capital expenditures of $0.3 million. Cash used in investing activities was $1.1 million for fiscal 2012. The cash used consisted of $1.1 million related to capital expenditure. Financing Cash Flows. Cash used in financing activities was $2.8 million in fiscal 2014 and included $2.7 million in principal payments under our debt obligation and capital leases and $66,000 in preferred stock dividend payments. The principal payments under our debt obligation during fiscal 2014 included an additional annual payment based on our free cash flow for fiscal year 2013 of $1.2 million. We anticipate paying an additional annual payment based on our fiscal 2014 free cash flow of approximately $1.9 million in the first quarter of fiscal 2015. Cash used in financing activities in fiscal 2013 was $4.0 million. In fiscal 2013 uses of cash included $3.6 million of principal payments under debt obligations and capital leases, and $0.4 million of preferred stock dividend payments. Cash used in financing activities in fiscal 2012 was $4.0 million. In fiscal 2012 uses of cash included $7.4 million of net payments related to the refinancing of the Hercules Term Loan and Credit Facility on June 30, 2011, and $0.3 million in preferred stock dividends. Offsetting these amounts were proceeds from the issuance of common stock and preferred stock of $4.2 million. 25 -------------------------------------------------------------------------------- A summary of certain contractual obligations as April 30, 2014 is as follows (in thousands): Payments Due by Period 1 year After Contractual Obligations Total or less 2-3 years 4-5 years 5 years Debt financing $ 14,824 $ 3,008 $ 11,816 $ - $ - Estimated interest expense 1,021 885 136 - - Other liabilities 250 96 - - 154 Capital lease obligations 147 115 32 - - Operating leases 4,404 1,518 2,577 206 103Total contractual cash obligations $ 20,646 $ 5,622 $ 14,561 $ 206 $ 257 Other liabilities primarily include $0.1 million of severance costs associated with the alignment and $0.2 million of mandatory retirement costs associated with a French statutory government regulated plan covering all France employees. Recently Issued Accounting Pronouncements In July 2013, the FASB issued authoritative guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under the new guidance, an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. The new guidance will be effective for us beginning May 1, 2014. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements. In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU No, 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We are currently evaluating the impact of adopting the guidance on our financial statements. 26 -------------------------------------------------------------------------------- |