Exhibit 99.2
Avatech Solutions, Inc.
Unaudited Pro Forma Financial Information
The following Unaudited Pro Forma Combined Balance Sheet as of March 31, 2006 and the Unaudited Pro Forma Combined Statements of Operations for the nine months ended March 31, 2006 and for the year ended June 30, 2005 are presented in connection with the May 30, 2006 acquisition by Avatech Solutions, Inc. (the “Company”) of all the outstanding stock and membership interests of Sterling Systems & Consulting, Inc. (“Sterling”) for $6.5 million in cash and $1.5 million of common stock of the Company. These unaudited pro forma financial statements have been prepared as if the acquisition had occurred at the beginning of each such period.
The unaudited pro forma financial statements are based in part upon (i) the audited financial statements of the Company for the year ended June 30, 2005 included in the Company’s Annual report on Form 10-K for the year ended June 30, 2005; (ii) the unaudited financial statements of the Company for the nine months ended March 31, 2006 included in the Company’s Quarterly Report on Form 10-Q for the nine months ended March 31, 2006; (iii) the audited financial statements of Sterling for the year ended December 31, 2005 included in Exhibit 99.1 hereto; and (iv) the unaudited financial statements of Sterling for the period ended May 30, 2006 included in Exhibit 99.1 hereto.
The unaudited pro forma financial statements are presented for information purposes only and are not necessarily indicative of the results of operations of the Company that would have occurred, or the financial condition of the Company that would have existed, if the acquisition of Sterling had not been completed on the dates indicated, nor does it purport to be indicative of future results of operations or financial condition. In the opinion of Company’s management, all material adjustments necessary to reflect the effect of this transaction have been made.
Avatech Solutions and Sterling Systems
Unaudited Pro Forma Combined Balance Sheet
As of March 31, 2006
Sterling Historical | Avatech Historical | Proforma Adjustments | Proforma Combined Balance Sheet | ||||||||||
Assets | |||||||||||||
Current assets: | |||||||||||||
Cash and cash equivalents | $ | 2,588,000 | $ | 172,000 | $ | (1,552,000 | )(a) | $ | 1,208,000 | ||||
Accounts receivable, net | 1,796,000 | 5,916,000 | — | 7,712,000 | |||||||||
Other receivables | 159,000 | 108,000 | — | 267,000 | |||||||||
Inventory | 310,000 | 1,195,000 | — | 1,505,000 | |||||||||
Prepaid expenses and other | 26,000 | 175,000 | — | 201,000 | |||||||||
Total current assets | 4,879,000 | 7,566,000 | (1,552,000 | ) | 10,893,000 | ||||||||
Property and equipment: | |||||||||||||
Computer software and equipment | 205,000 | 2,495,000 | — | 2,700,000 | |||||||||
Office furniture, equipment and other | 527,000 | 861,000 | — | 1,388,000 | |||||||||
Leasehold improvements | — | 129,000 | — | 129,000 | |||||||||
732,000 | 3,485,000 | — | 4,217,000 | ||||||||||
Less accumulated depreciation and amortization | 520,000 | 2,871,000 | — | 3,391,000 | |||||||||
Property and equipment, net: | 212,000 | 614,000 | — | 826,000 | |||||||||
Customer list, net | — | 210,000 | 1,419,000 | (b),(c) | 1,629,000 | ||||||||
Goodwill | 64,000 | 52,000 | 5,748,000 | (d),(e) | 5,864,000 | ||||||||
Other assets | — | 114,000 | — | 114,000 | |||||||||
Total assets | $ | 5,155,000 | $ | 8,556,000 | $ | 5,615,000 | $ | 19,326,000 | |||||
Proforma Adjustments:
(a) | Cash adjusted to eliminate balances distributed to former Sterling owners. |
(b) | Customer list increased by $1,720,000 to record estimated fair value of customer list acquired from Sterling. |
(c) | Customer list decreased by $301,000 to record amortization for the period 7/1/2005 through 3/31/2006. |
(d) | Goodwill reduced by $64,000 to eliminate Sterling’s existing goodwill balance. |
(e) | Goodwill increased by $5,812,000 to record goodwill related to the Sterling acquisition. |
2
Avatech Solutions and Sterling Systems
Unaudited Pro Forma Combined Balance Sheet (continued)
As of March 31, 2006
Sterling Historical | Avatech Historical | Proforma Adjustments | Proforma Combined Balance Sheet | ||||||||||||
Liabilities and stockholders’ equity | |||||||||||||||
Current liabilities: | |||||||||||||||
Accounts payable and accrued expenses | $ | 1,544,000 | $ | 3,179,000 | $ | — | $ | 4,723,000 | |||||||
Accrued compensation and related benefits | 191,000 | 750,000 | — | 941,000 | |||||||||||
Borrowings under lines-of-credit | 1,260,000 | (1,260,000 | )(f) | — | |||||||||||
Current portion of long-term debt | 48,000 | — | 48,000 | ||||||||||||
Note payable to related party | 902,000 | 902,000 | |||||||||||||
Deferred revenue | 226,000 | 827,000 | — | 1,053,000 | |||||||||||
Other current liabilities | 295,000 | — | 295,000 | ||||||||||||
Total current liabilities | 1,961,000 | 7,261,000 | (1,260,000 | ) | 7,962,000 | ||||||||||
Long-term debt | 21,000 | 40,000 | — | 61,000 | |||||||||||
Other long-term liabilities | 119,000 | — | 119,000 | ||||||||||||
Series F Convertible Preferred Stock | — | 3,629,000 | (g) | 3,629,000 | |||||||||||
Stockholders’ equity: | |||||||||||||||
Series D Convertible Preferred Stock | 12,000 | — | 12,000 | ||||||||||||
Series E Convertible Preferred Stock | — | — | — | ||||||||||||
Common stock | 16,000 | 117,000 | 17,000 | (h) | 150,000 | ||||||||||
Additional paid-in capital | — | 7,020,000 | 2,783,000 | (h),(i) | 9,803,000 | ||||||||||
Accumulated deficit | 3,157,000 | (6,013,000 | ) | 446,000 | (j) | (2,410,000 | ) | ||||||||
Total stockholders’ equity | 3,173,000 | 1,136,000 | 3,246,000 | 7,555,000 | |||||||||||
Total liabilities and stockholders’ equity | $ | 5,155,000 | $ | 8,556,000 | $ | 5,615,000 | $ | 19,326,000 | |||||||
Proforma Adjustments:
(f) | Assumed eliminated due to cash generated from operations and capital transactions |
(g) | Series F increased by $3,629,000 to record net proceeds of issuance to find the Sterling acquisition |
(h) | Common stock increased $17,000 and additional paid-in capital increased $3,433,000 to record issuance of stock to fund the Sterling acquisition |
(i) | Additional paid-in capital decreased by $700,000 to record Series F dividends for the period 7/1/2004 through 3/31/2006 |
(j) | Accumulated deficit increased by the net of the proforma adjustments |
3
Avatech Solutions and Sterling Systems
Unaudited Pro Forma Combined Statements of Operations
For the nine months ended March 31, 2006
Sterling Historical | Avatech Historical | Proforma Adjustments | Proforma Combined | ||||||||||||
Revenues: | |||||||||||||||
Product sales | $ | 5,298,000 | $ | 18,871,000 | $ | — | $ | 24,169,000 | |||||||
Service revenue | 834,000 | 5,563,000 | 6,397,000 | ||||||||||||
Commission revenue | 1,432,000 | 5,258,000 | 6,690,000 | ||||||||||||
7,564,000 | 29,692,000 | — | 37,256,000 | ||||||||||||
Cost of revenues: | |||||||||||||||
Cost of product sales | 3,262,000 | 11,029,000 | 14,291,000 | ||||||||||||
Cost of service revenue | 666,000 | 3,706,000 | 4,372,000 | ||||||||||||
3,928,000 | 14,735,000 | — | 18,663,000 | ||||||||||||
Gross margin | 3,636,000 | 14,957,000 | — | 18,593,000 | |||||||||||
Other operating expenses | 2,553,000 | 12,510,000 | (457,000 | )(a),(b) | 14,606,000 | ||||||||||
Operating income | 1,083,000 | 2,447,000 | 457,000 | 3,987,000 | |||||||||||
Interest and other expense | 36,000 | (108,000 | ) | — | (72,000 | ) | |||||||||
Income before income tax expense | 1,119,000 | 2,339,000 | 457,000 | 3,915,000 | |||||||||||
Income tax expense | — | (52,000 | ) | — | (52,000 | ) | |||||||||
Net income | 1,119,000 | 2,287,000 | 457,000 | 3,863,000 | |||||||||||
Preferred stock dividends | (137,000 | ) | (300,000 | )(c) | (437,000 | ) | |||||||||
Net income available to common stockholders | $ | 1,119,000 | $ | 2,150,000 | $ | 157,000 | $ | 3,426,000 | |||||||
Pro Forma earnings per share - basic | $ | 0.25 | |||||||||||||
Pro Forma earnings per share - diluted | $ | 0.18 | |||||||||||||
Shares used in computaion - basic | 13,926,221 | ||||||||||||||
Shares used in computaion - diluted | 18,810,646 | ||||||||||||||
Proforma Adjustments:
(a) | Acquired customer list amortized $129,000 on a straight line basis over its 10-year estimated life. |
(b) | Other operating expense reduced by $586,000 in bonuses paid to Sterling owners. |
(c) | Preferred dividends on Series F Convertible Preferred Stock recorded at 10% per annum on a $4 milllion balance. |
4
Avatech Solutions and Sterling Systems
Unaudited Pro Forma Combined Statements of Operations
For the year ended June 30, 2005
Sterling Historical | Avatech Historical | Proforma Adjustments | Proforma Combined | |||||||||||||
Revenues: | ||||||||||||||||
Product sales | $ | 6,358,000 | $ | 20,703,000 | $ | — | $ | 27,061,000 | ||||||||
Service revenue | 1,297,000 | 6,066,000 | 7,363,000 | |||||||||||||
Commission revenue | 1,328,000 | 5,475,000 | 6,803,000 | |||||||||||||
Sale of developed software | — | 1,900,000 | 1,900,000 | |||||||||||||
8,983,000 | 34,144,000 | — | 43,127,000 | |||||||||||||
Cost of revenues: | ||||||||||||||||
Cost of product sales | 3,968,000 | 13,211,000 | 17,179,000 | |||||||||||||
Cost of service revenue | 776,000 | 4,606,000 | 5,382,000 | |||||||||||||
Cost of developed software | 77,000 | 77,000 | ||||||||||||||
4,744,000 | 17,894,000 | — | 22,638,000 | |||||||||||||
Gross margin | 4,239,000 | 16,250,000 | — | 20,489,000 | ||||||||||||
Other operating expenses | 2,911,000 | 13,758,000 | (278,000 | )(a),(b) | 16,391,000 | |||||||||||
Operating income | 1,328,000 | 2,492,000 | 278,000 | 4,098,000 | ||||||||||||
Interest and other expense | 25,000 | (476,000 | ) | (451,000 | ) | |||||||||||
Income before income tax expense | 1,353,000 | 2,016,000 | 278,000 | 3,647,000 | ||||||||||||
Income tax expense | (211,000 | ) | (82,000 | ) | — | (293,000 | ) | |||||||||
Net income | 1,142,000 | 1,934,000 | 278,000 | 3,354,000 | ||||||||||||
Preferred stock dividends | (78,000 | ) | (400,000 | )(c) | (478,000 | ) | ||||||||||
Net income available to common stockholders | $ | 1,142,000 | $ | 1,856,000 | $ | (122,000 | ) | $ | 2,876,000 | |||||||
Pro Forma earnings per share - basic | $ | 0.22 | ||||||||||||||
Pro Forma earnings per share - diluted | $ | 0.18 | ||||||||||||||
Shares used in computaion - basic | 13,049,595 | |||||||||||||||
Shares used in computaion - diluted | 15,947,055 | |||||||||||||||
Proforma Adjustments:
(a) | Acquired customer list amortized $172,000 on a straight line basis over its 10-year estimated life. |
(b) | Other operating expense reduced by $450,000 in bonuses paid to owners. |
(c) | Preferred dividends on Series F Convertible Preferred Stock recorded at 10% per annum on a $4 milllion balance. |
5