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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-31265
Rand Worldwide, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 84-1035353 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | |
10715 Red Run Blvd., Suite 101, Owings Mills, MD | 21117 | |
(Address of Principal Executive Offices) | (Zip Code) |
(410) 581 - - 8080
(Registrant’s telephone number, including area code)
Avatech Solutions, Inc.
(Former name, former address and former fiscal year, if changed since last report)
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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨ (Not Applicable)
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. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: as of February 10, 2011, there were 51,882,678 shares of common stock, par value $.01 per share, outstanding.
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RAND WORLDWIDE, INC. AND SUBSIDIARIES
INDEX
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PART I. FINANCIAL INFORMATION
Rand Worldwide, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
December 31, 2010 | June 30, 2010 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 3,460,000 | $ | 1,198,000 | ||||
Accounts receivable, less allowance of $517,000 as of December 31, 2010 and $390,000 as of June 30, 2010 | 20,518,000 | 8,203,000 | ||||||
Other receivables | 545,000 | 433,000 | ||||||
Inventory | 208,000 | 152,000 | ||||||
Prepaid expenses and other current assets | 1,453,000 | 1,030,000 | ||||||
Total current assets | 26,184,000 | 11,016,000 | ||||||
Property and equipment: | ||||||||
Computer software and equipment | 6,456,000 | 3,623,000 | ||||||
Office furniture and equipment | 2,155,000 | 430,000 | ||||||
Leasehold improvements | 732,000 | 380,000 | ||||||
9,343,000 | 4,433,000 | |||||||
Less accumulated depreciation and amortization | 7,304,000 | 2,610,000 | ||||||
2,039,000 | 1,823,000 | |||||||
Customer list, net of accumulated amortization of $2,727,000 as of December 31, 2010 and $2,334,000 as of June 30, 2010 | 4,188,000 | 1,638,000 | ||||||
Goodwill | 15,277,000 | 7,232,000 | ||||||
Trade name | 2,649,000 | — | ||||||
Other assets | 377,000 | 406,000 | ||||||
Total assets | $ | 50,714,000 | $ | 22,115,000 | ||||
See accompanying notes.
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Rand Worldwide, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
(unaudited)
December 31, 2010 | June 30, 2010 | |||||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Borrowings under line of credit | $ | 4,498,000 | $ | 3,325,000 | ||||
Accounts payable and accrued expenses | 15,874,000 | 9,017,000 | ||||||
Accrued compensation and related benefits | 1,226,000 | 974,000 | ||||||
Deferred revenue | 7,028,000 | 2,582,000 | ||||||
Income taxes payable | 196,000 | 34,000 | ||||||
Obligations under capital leases | 160,000 | 55,000 | ||||||
Related party term notes | — | 6,576,000 | ||||||
Total current liabilities | 28,982,000 | 22,563,000 | ||||||
Long term liabilities: | ||||||||
Deferred tax liability | 1,830,000 | — | ||||||
Other long term liabilities | 11,000 | 114,000 | ||||||
Obligations under capital leases | 6,000 | 35,000 | ||||||
Related party term notes | — | 6,061,000 | ||||||
Total liabilities | 30,829,000 | 28,773,000 | ||||||
Series A redeemable preferred stock, $0.001 par value; 31,858,922 shares authorized; 31,000,000 shares issued and outstanding; liquidation preference of $38,086 at June 30, 2010 (note 10) | — | 38,086,000 | ||||||
Stockholders’ equity: | ||||||||
Convertible Preferred Stock, $0.01 par value; 1,300,537 shares authorized, 1,298,728 shares issued; 1,090,150 shares outstanding with an aggregate liquidation preference of $1,591,000 at December 31, 2010 (note 10) | 11,000 | — | ||||||
Common stock, $0.01 par value; 80,000,000 shares authorized; issued and outstanding shares 51,882,678 at December 31, 2010 | 519,000 | — | ||||||
Common stock, $0.001 par value; 11,010,000 shares authorized; issued and outstanding shares 9,500,000 at June 30, 2010 | — | 10,000 | ||||||
Additional paid-in capital | 64,903,000 | — | ||||||
Accumulated deficit | (46,797,000 | ) | (45,528,000 | ) | ||||
Accumulated other comprehensive income | 1,249,000 | 774,000 | ||||||
Total stockholders’ equity (deficit) | 19,885,000 | (44,744,000 | ) | |||||
Total liabilities and stockholders’ equity (deficit) | $ | 50,714,000 | $ | 22,115,000 | ||||
See accompanying notes.
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Rand Worldwide, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Three Months Ended December 31, | ||||||||
2010 | 2009 | |||||||
Revenues: | ||||||||
Product sales | $ | 10,838,000 | $ | 5,229,000 | ||||
Service revenue | 5,397,000 | 4,252,000 | ||||||
Commission revenue | 5,433,000 | 1,897,000 | ||||||
21,668,000 | 11,378,000 | |||||||
Cost of revenue: | ||||||||
Cost of product sales | 6,986,000 | 3,789,000 | ||||||
Cost of service revenue | 3,748,000 | 3,374,000 | ||||||
10,734,000 | 7,163,000 | |||||||
Gross margin | 10,934,000 | 4,215,000 | ||||||
Other operating expenses: | ||||||||
Selling, general and administrative | 8,986,000 | 5,700,000 | ||||||
Depreciation and amortization | 455,000 | 228,000 | ||||||
9,441,000 | 5,928,000 | |||||||
Operating income (loss) | 1,493,000 | (1,713,000 | ) | |||||
Other expense, net | (186,000 | ) | (994,000 | ) | ||||
Income (loss) from continuing operations before income taxes | 1,307,000 | (2,707,000 | ) | |||||
Income tax expense (benefit) | 35,000 | (7,000 | ) | |||||
Income (loss) from continuing operations | 1,272,000 | (2,700,000 | ) | |||||
Loss on disposition of discontinued operations, net of tax | — | 20,000 | ||||||
Net income (loss) | $ | 1,272,000 | $ | (2,720,000 | ) | |||
Net income (loss) from continuing operations | $ | 1,272,000 | $ | (2,700,000 | ) | |||
Preferred stock dividends | (40,000 | ) | (705,000 | ) | ||||
Net income (loss) from continuing operations available to common stockholders | $ | 1,232,000 | $ | (3,405,000 | ) | |||
Income (loss) per common share from continuing operations, basic | $ | 0.02 | $ | (0.10 | ) | |||
Income per common share from discontinued operations, basic | — | 0.00 | ||||||
Income (loss) per common share, basic | $ | 0.02 | $ | (0.10 | ) | |||
Income (loss) per common share from continuing operations, diluted | $ | 0.02 | $ | (0.10 | ) | |||
Income per common share from discontinued operations, diluted | — | 0.00 | ||||||
Income (loss) per common share, diluted | $ | 0.02 | $ | (0.10 | ) | |||
Shares used in computing income (loss) per common share: | ||||||||
Weighted average shares used in computation - basic | 51,875,739 | 34,232,672 | (1) | |||||
Weighted average shares used in computation - diluted | 55,599,032 | 34,232,672 | (1) |
See accompanying notes.
(1) | The weighted average shares for the three months ended December 31, 2009 have been restated to reflect the shares issued as part of the Merger. |
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Rand Worldwide, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Six Months Ended December 31, | ||||||||
2010 | 2009 | |||||||
Revenues: | ||||||||
Product sales | $ | 20,166,000 | $ | 12,776,000 | ||||
Service revenue | 9,892,000 | 8,354,000 | ||||||
Commission revenue | 8,432,000 | 3,913,000 | ||||||
38,490,000 | 25,043,000 | |||||||
Cost of revenue: | ||||||||
Cost of product sales | 13,349,000 | 8,318,000 | ||||||
Cost of service revenue | 7,004,000 | 6,411,000 | ||||||
20,353,000 | 14,729,000 | |||||||
Gross margin | 18,137,000 | 10,314,000 | ||||||
Other operating expenses: | ||||||||
Selling, general and administrative | 17,601,000 | 11,806,000 | ||||||
Depreciation and amortization | 837,000 | 541,000 | ||||||
18,438,000 | 12,347,000 | |||||||
Operating loss | (301,000 | ) | (2,033,000 | ) | ||||
Other expense, net | (501,000 | ) | (1,192,000 | ) | ||||
Loss from continuing operations before income taxes | (802,000 | ) | (3,225,000 | ) | ||||
Income tax expense | 97,000 | 5,000 | ||||||
Loss from continuing operations | (899,000 | ) | (3,230,000 | ) | ||||
Loss from discontinued operations, net of tax | — | (380,000 | ) | |||||
Gain on sale of discontinued operations, net of tax | — | 3,274,000 | ||||||
Net loss | $ | (899,000 | ) | $ | (336,000 | ) | ||
Net loss from continuing operations | $ | (899,000 | ) | $ | (3,230,000 | ) | ||
Preferred stock dividends | (437,000 | ) | (1,376,000 | ) | ||||
Net loss from continuing operations available to common stockholders | $ | (1,336,000 | ) | $ | (4,606,000 | ) | ||
Loss per common share from continuing operations, basic | $ | (0.03 | ) | $ | (0.13 | ) | ||
Income (loss) per common share from discontinued operations, basic | — | 0.09 | ||||||
Income (loss) per common share, basic | $ | (0.03 | ) | $ | (0.04 | ) | ||
Loss per common share from continuing operations, diluted | $ | (0.03 | ) | $ | (0.13 | ) | ||
Income per common share from discontinued operations, diluted | — | 0.09 | ||||||
Loss per common share, diluted | $ | (0.03 | ) | $ | (0.04 | ) | ||
Shares used in computing income (loss) per common share: | ||||||||
Weighted average shares used in computation - basic | 47,288,544 | 34,232,672 | (1) | |||||
Weighted average shares used in computation - diluted | 47,288,544 | 34,232,672 | (1) |
See accompanying notes.
(1) | The weighted average shares for the six months ended December 31, 2009 have been restated to reflect the shares issued as part of the Merger |
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Rand Worldwide, Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity (Unaudited)
Convertible Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||
Number of Shares | Par Value | Number of Shares | Par Value | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total | |||||||||||||||||||||||||
Balance at July 1, 2010 | — | $ | — | 9,500,000 | $ | 10,000 | $ | — | $ | (45,528,000 | ) | $ | 774,000 | $ | (44,744,000 | ) | ||||||||||||||||
Accretion of dividends on Series A preferred stock | (370,000 | ) | (370,000 | ) | ||||||||||||||||||||||||||||
Exchange of common stock, preferred stock and retirement of related-party debt | (9,499,990 | ) | (10,000 | ) | 51,266,000 | 51,256,000 | ||||||||||||||||||||||||||
Restatement of securities to reflect equity structure of Avatech | 34,232,672 | 342,000 | (342,000 | ) | — | |||||||||||||||||||||||||||
Merger consideration – Avatech | 1,090,150 | 11,000 | 17,643,057 | 177,000 | 14,038,000 | 14,226,000 | ||||||||||||||||||||||||||
Vesting of stock options granted to employees | 5,000 | 5,000 | ||||||||||||||||||||||||||||||
Issuance of common stock under employee stock purchase plan | 6,939 | — | 3,000 | 3,000 | ||||||||||||||||||||||||||||
Preferred stock dividends | (67,000 | ) | (67,000 | ) | ||||||||||||||||||||||||||||
Foreign currency translation adjustment | 475,000 | 475,000 | ||||||||||||||||||||||||||||||
Net loss for the six months ended December 31, 2010 | (899,000 | ) | (899,000 | ) | ||||||||||||||||||||||||||||
Balance at December 31, 2010 | 1,090,150 | $ | 11,000 | 51,882,678 | $ | 519,000 | $ | 64,903,000 | $ | (46,797,000 | ) | $ | 1,249,000 | $ | 19,885,000 | |||||||||||||||||
See accompanying notes.
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Rand Worldwide, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended December 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities | ||||||||
Net loss from continuing operations | $ | (899,000 | ) | $ | (3,230,000 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Provision for bad debts | 45,000 | — | ||||||
Depreciation and amortization | 982,000 | 651,000 | ||||||
Stock-based compensation | 5,000 | 11,000 | ||||||
Changes in operating assets and liabilities net of those acquired: | ||||||||
Accounts and other receivables | (7,177,000 | ) | (78,000 | ) | ||||
Inventory | 77,000 | 453,000 | ||||||
Prepaid expenses and other current assets | (70,000 | ) | (69,000 | ) | ||||
Deferred income taxes, current | 89,000 | — | ||||||
Other assets | 132,000 | — | ||||||
Accounts payable and accrued expenses | 2,468,000 | (2,199,000 | ) | |||||
Accrued compensation and related benefits | (144,000 | ) | — | |||||
Deferred tax liability | (90,000 | ) | — | |||||
Deferred revenue | 3,422,000 | 1,101,000 | ||||||
Income taxes payable | 162,000 | 197,000 | ||||||
Other long term liabilities | (103,000 | ) | — | |||||
Net effect of recapitalization of Term Notes | 115,000 | — | ||||||
Net cash used in operating activities of continuing operations | (986,000 | ) | (3,163,000 | ) | ||||
Net cash used in operating activities of discontinued operations | — | (816,000 | ) | |||||
Net cash used in operating activities | (986,000 | ) | (3,979,000 | ) | ||||
Cash flows from investing activities | ||||||||
Cash acquired through reverse acquisition | 2,123,000 | — | ||||||
Purchases of property and equipment | (232,000 | ) | (188,000 | ) | ||||
Net cash provided by (used in) investing activities of continuing operations | 1,891,000 | (188,000 | ) | |||||
Net cash provided by investing activities of discontinued operations | — | 3,908,000 | ||||||
Net cash provided by investing activities | 1,891,000 | 3,720,000 | ||||||
Cash flows from financing activities | ||||||||
Proceeds from borrowings under line of credit | 28,206,000 | 24,040,000 | ||||||
Payment of borrowings under line of credit | (27,118,000 | ) | (20,565,000 | ) | ||||
Repayment of related party term notes | — | (5,969,000 | ) | |||||
Proceeds from issuance of common stock to employees | 3,000 | — | ||||||
Payment of preferred stock dividends | (67,000 | ) | — | |||||
Net cash provided by (used in) financing activities of continuing operations | 1,024,000 | (2,494,000 | ) | |||||
Net cash used in financing activities of discontinued operations | — | (543,000 | ) | |||||
Net cash provided by (used in) financing activities | 1,024,000 | (3,037,000 | ) | |||||
Effect of exchange rate changes on cash from continuing operations | 333,000 | 104,000 | ||||||
Effect of exchange rate changes on cash from discontinued operations | — | (118,000 | ) | |||||
Net change in cash and cash equivalents | 2,262,000 | (3,310,000 | ) | |||||
Cash - beginning of period | 1,198,000 | 4,529,000 | ||||||
Cash - end of period | $ | 3,460,000 | $ | 1,219,000 | ||||
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Rand Worldwide, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
December 31, 2010
1. Basis of Presentation
Rand Worldwide Inc. (“Rand Worldwide”) is a leading supplier in the design automation, facilities and data management software marketplace. Rand Worldwide also provides value-added services, such as training, technical support and other consulting and professional services to corporations, government agencies and educational institutions worldwide.
On August 17, 2010, Avatech Solutions Inc. (“Avatech”) acquired all the outstanding common stock of Rand Worldwide, Inc. in a reverse merger transaction (the “Merger”). As a result of the Merger and in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), the consolidated financial statements represent a continuation of Rand Worldwide and thus include the results of Rand Worldwide for the full six months ended December 31, 2010 and the results of Avatech from the date of acquisition through December 31, 2010. Balances reported for prior periods reflect the accounts of pre-Merger Rand Worldwide only. All intercompany accounts and transactions between Avatech, Rand and its consolidated affiliated companies have been eliminated in consolidation. See Note 2 for further information regarding this transaction and basis of presentation. All references to the consolidated entity of both Avatech and Rand Worldwide are identified herein as the “Company.”
Effective January 1, 2011, the Company officially changed its name to Rand Worldwide Inc. and changed its official stock ticker symbol from AVSO.OB to RWWI.OB.
The Company is organized into three divisions: IMAGINiT Technologies (“IMAGINiT”), Enterprise Applications and ASCENT – Center for Technical Knowledge (“ASCENT”). The IMAGINiT division is one of the largest, value-added resellers of Autodesk, Inc. (“Autodesk”) products in the world, providing Autodesk solutions and value-added services to customers in the manufacturing, infrastructure, building, and media and entertainment industries and also sells its own proprietary software products and related services, enhancing its total client solution offerings. IMAGINiT operates from locations across North America, Australia, Singapore and Malaysia.
The Enterprise Applications division is the non-Autodesk component of the business and offers various products and services including data archiving solutions, facilities management solutions, as well as training for customers using that use products other than those from Autodesk. ASCENT is the courseware division of Rand Worldwide and is a leading developer of professional training materials and knowledge products for engineering software tools. Executive management performs their primary analyses based upon geographic location and operations by geographic segment are disclosed within Note 12.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and in accordance with the instructions to Article 8 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules or regulations. The interim financial statements are unaudited, and reflect all adjustments (consisting of normal recurring accruals) which are, in management’s opinion, necessary to present a fair statement of results of the interim periods presented. These financial statements should be read in conjunction with the audited financial statements and the notes thereto in Avatech’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010 and Rand Worldwide’s Form 10-KT for the transition period of November 1, 2009 to June 30, 2010. Operating results for the six months ended December 31, 2010 are not necessarily indicative of results for the full fiscal year or any future interim period.
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2. Reverse Merger Transaction
On August 17, 2010, Avatech acquired all the outstanding common stock of Rand Worldwide as a result of the Merger. Rand Worldwide is also a software reseller in the design automation marketplace. The Company believes the Merger will expand its overall geographic presence and increase market share.
In consideration for the Merger, Rand Worldwide’s stockholders received shares of Avatech common stock representing approximately 66% of the outstanding shares of Avatech common stock and Avatech’s stockholders retained approximately 34% of the outstanding shares of Avatech common stock. When calculated based on the number of shares of Avatech common stock outstanding on a fully diluted basis, the common stock issued to the Rand Worldwide stockholders was equal to approximately 59% of the total common equivalent shares as of the date of the Merger. As the Rand Worldwide stockholders acquired more than 50% of the outstanding shares of Avatech common stock, Rand Worldwide was deemed, for accounting and SEC reporting purposes to be the continuing reporting entity. As such, the consolidated financial statements include the accounts of Avatech from the date of acquisition through December 31, 2010 and pre-Merger Rand Worldwide for the full six months ended December 31, 2010. Balances reported for prior periods reflect the accounts of pre-Merger Rand Worldwide only. Additionally, the equity structure of Rand Worldwide has been restated using the exchange ratio established in the acquisition agreement to reflect the number of shares of Avatech common stock issued in the Merger.
RWWI Holdings, LLC (“RWWI Holdings”) was formed in the recapitalization by the stockholders of Rand Worldwide prior to the Merger to hold their interests in Avatech. Accordingly, RWWI Holdings holds 66% of the outstanding shares of Rand Worldwide. RWWI Holdings is not part of the Company’s consolidated group.
Recognized amounts of identifiable intangible assets acquired and liabilities assumed
The Company accounted for the transaction using the acquisition method in accordance with ASC 805, “Business Combinations”.Accordingly, the consideration has been allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair values on the acquisition date. The Company’s allocation of the total consideration transferred of $14,226,000 is summarized below:
Net tangible assets acquired | $ | 2,449,000 | ||
Deferred income tax assets | 392,000 | |||
Trade name | 2,649,000 | |||
Customer list | 3,010,000 | |||
Goodwill | 8,151,000 | |||
Deferred tax liability | (2,425,000 | ) | ||
Total consideration transferred | $ | 14,226,000 | ||
Identifiable intangible assets
Fair values for the trade name and customer list were determined based on the income approach. The following table presents certain information on the acquired identifiable intangible assets:
Intangible asset | Discount rate used | Estimated useful life | ||||||
Trade name | 19.0 | % | 15 years | |||||
Customer list | 21.0 | % | 15 years |
Goodwill
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. These benefits include expansion opportunities and increased presence in the design automation marketplace.
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Pro Forma — Financial Information
The following reflects the unaudited pro forma combined results of operations for the six months ended December 31, 2010 of Avatech and Rand Worldwide as if the acquisition had taken place as of July 1, 2010:
Total revenue | $ | 42,499,000 | ||
Net loss | (1,264,000 | ) | ||
Loss per common share, basic | (0.03 | ) | ||
Loss per common share, diluted | (0.02 | ) |
In connection with the Merger, during the six months ended December 31, 2010, Avatech and Rand Worldwide incurred combined non-recurring costs of $2,251,000, including $932,000 in professional fees, $873,000 in severance costs, $233,000 in accrued lease costs for office closings, $151,000 due to accelerated vesting of stock options, $30,000 for the corporate name change and $32,000 in additional board fees. The $2,251,000 of non-recurring costs are included in the proforma results shown above, however only $1,893,000 of such costs are included in the consolidated statement of operations for the six months ended December 31, 2010, because $358,000 of these costs were incurred by Avatech prior to the Merger.
3. Recent Accounting Pronouncements
In October 2009, the FASB issued an update regarding multi-deliverable revenue arrangements under ASC 605. ASC 605 provides standards for the accounting for product and services sales individually and not as a whole. In addition, it requires disclosures of the arrangement, including a description, deliverables, timing of such deliverables, and methodologies to estimate the selling price. Compliance is effective for all financial statements issued on or after June 15, 2010. The Company’s adoption of ASC 605 did not have a material effect on the Company’s consolidated financial statements.
4. Supplemental Disclosure of Cash Flow Information
The Company paid interest of approximately $86,000 and $74,000 during the three months ended December 31, 2010 and 2009, respectively, and approximately $122,000 and $106,000 during the six months ended December 31, 2010 and 2009, respectively. The Company also paid federal and state income taxes of approximately $47,000 and $433,000 during the three months ended December 31, 2010 and 2009, respectively and approximately $322,000 and $555,000 during the six months ended December 31, 2010 and 2009, respectively.
See Note 2 for non-cash balances acquired as the result of the Merger and Note 13 for the non-cash settlement of Term Notes.
5. Employee Stock Compensation Plans
The Board of Directors may grant options under the Avatech Solutions, Inc. 2002 Stock Option Plan (the “Plan”) to purchase shares of the Company’s common stock at an exercise price of not less than the fair market value of the common stock on the date of grant. The Plan provides for the granting of either incentive or non-qualified stock options to purchase an aggregate of up to 3,100,000 shares of common stock to eligible employees, officers, and directors of the Company. Stock options generally expire after 10 years. Options generally vest ratably over three or four years, depending on the specific grant award. There were no stock option awards granted during the six months ended December 31, 2010 or 2009. As of the date of the Merger with Rand Worldwide, all of Avatech’s outstanding stock options became fully vested in accordance with their respective option agreements.
For the six months ended December 31, 2010, the Company recorded $5,000 of stock compensation expense for the vesting of common stock options previously granted by Rand Worldwide. Prior to the Merger, all common stock options outstanding for Rand Worldwide were converted into options to purchase membership interests in RWWI Holdings.
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A summary of stock option activity during the six months ended December 31, 2010 and related information is included in the table below:
Options | Weighted- Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
Outstanding at July 1, 2010 | 983,609 | $ | 0.30 | |||||||||
Conversion of Rand Worldwide options into RWWI Holdings, LLC options | (983,609 | ) | 0.30 | |||||||||
Avatech options assumed in Merger | 1,605,177 | 0.93 | ||||||||||
Forfeited | (83,010 | ) | 0.78 | |||||||||
Expired | (755 | ) | 7.07 | |||||||||
Outstanding at December 31, 2010 | 1,521,412 | $ | 0.94 | $ | 46,000 | |||||||
Exercisable at December 31, 2010 | 1,521,412 | $ | 0.94 | $ | 46,000 | |||||||
Weighted-average remaining contractual life | 5.5 Years | |||||||||||
All options granted have an exercise price equal to the fair market value of the Company’s common stock on the date of grant. Exercise prices for options outstanding as of December 31, 2010 ranged from $0.17 to $3.81 as follows:
Range of Exercise Prices | Options Outstanding | Weighted Average Exercise Prices of Options Outstanding | Weighted Average Remaining Contractual Life of Options Outstanding | Options Exercisable | Weighted Average Exercise Prices of Options Exercisable | Weighted Average Remaining Contractual Life of Options Exercisable | ||||||||||||||||||
$ 0.17 – 0.34 | 94,547 | $ | 0.30 | 3.0 years | 94,547 | $ | 0.30 | 3.0 years | ||||||||||||||||
0.35 – 0.75 | 318,600 | 0.58 | 5.6 years | 318,600 | 0.58 | 5.6 years | ||||||||||||||||||
0.76 – 0.91 | 663,000 | 0.86 | 5.9 years | 663,000 | 0.86 | 5.9 years | ||||||||||||||||||
1.05 – 3.81 | 445,265 | 1.45 | 5.3 years | 445,265 | 1.45 | 5.3 years | ||||||||||||||||||
1,521,412 | 1,521,412 | |||||||||||||||||||||||
Assuming that no additional share-based payments are granted after December 31, 2010, no further stock compensation expense will be recognized in the consolidated statement of operations.
6. Borrowings Under Line of Credit
On December 31, 2010, certain subsidiaries of the Company entered into a new line of credit facility which permits up to $9 million of borrowings limited to 85% of aggregate eligible accounts receivable with PNC Bank, National Association. The interest rate is, at the Company’s option, either (i) the “Eurodollar Rate”, which is calculated by using the LIBOR rate plus an applicable margin ranging from 2.5% to [3.25]?% or (ii) the bank’s “Alternate Base Rate”, which is calculated by using the base rate of the bank, the federal funds open rate, or the daily LIBOR rate plus an applicable margin ranging from 1.75% to 2.75%. The interest rate as of December 31, 2010 was 6%. The Company had outstanding borrowings from the bank under its credit line of approximately $4.5 million as of December 31, 2010 and had $3.3 million outstanding as of June 30, 2010. The line expires on December 31, 2012 and is secured by 65% of the stock in one of its subsidiaries and 100% of the stock of a separate subsidiary.
7. Obligations Under Capital Leases
The Company has incurred various capital lease obligations for computer equipment purchased in prior years. This capital lease obligation totaled $166,000 and $111,000 as of December 31, 2010 and 2009, respectively.
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8. Income Taxes
Income taxes are accounted for under the liability method, under which deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance against the net deferred tax assets is recorded if based upon the weight of available evidence it is more likely than not that some or all of the deferred tax assets will not be realized. The Company records liabilities for income tax contingencies if it is probable that the Company has incurred a tax liability and the liability or range of loss can be reasonably estimated.
As of December 31, 2010 the Company had established a valuation allowance of its net deferred tax assets of approximately $15 million in all jurisdictions including the United States, because it believes that it is more likely than not that the tax assets in those jurisdictions will not be realized prior to their expiration.
The Canadian Subsidiary of Rand Worldwide, Rand A Technology Corporation, is currently being audited by the Canada Revenue Agency for tax years 2005 through 2009. Management believes that it has properly recorded the tax expense for the periods under review and expects no material adjustments to the respective returns or to its financial statements.
9. Earnings Per Share
Basic earnings per common share is computed by dividing net earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share include the potential dilution that would occur from common shares issuable upon the exercise of outstanding stock options and warrants and the conversion of preferred stock. As of December 31, 2010, 5,871,307 shares of common stock were issuable upon the conversion or exercise of options, warrants and preferred stock. For the three months ended December 31, 2010 and 2009, there were 3,963,140 and 2,499,882, shares of common stock equivalents, respectively, excluded from the computation of diluted earnings per share because their effect would have been antidilutive. For the six months ended December 31, 2010 and 2009, there were 5,871,307 and 2,499,882, shares of common stock equivalents, respectively, excluded from the computation of diluted earnings per share because their effect would have been antidilutive.
The following summarizes the computations of basic and diluted earnings per common share for the three and six months ended December 31, 2010 and 2009:
Three Months Ended December 31, | ||||||||
2010 | 2009 | |||||||
Numerator for basic and diluted earnings per share: | ||||||||
Net income (loss) from continuing operations | $ | 1,272,000 | $ | (2,700,000 | ) | |||
Loss from discontinued operations, net of tax | — | 20,000 | ||||||
Net income (loss) | $ | 1,272,000 | $ | (2,720,000 | ) | |||
Net income (loss) from continuing operations | $ | 1,272,000 | $ | (2,700,000 | ) | |||
Payment and/or accretion of preferred stock dividends | (40,000 | ) | (705,000 | ) | ||||
Net income (loss) from continuing operations available to common stockholders | $ | 1,232,000 | $ | (3,405,000 | ) | |||
Weighted average shares used in computing basic net income (loss) per share: | 51,875,739 | 34,232,672 | (1) | |||||
Assumed conversion of preferred stock | 3,621,783 | — | ||||||
Effect of outstanding stock options | 101,510 | — | ||||||
Weighted average shares used in computing diluted net income (loss) per share: | 55,599,032 | 34,232,672 | (1) | |||||
Income (loss) per common share from continuing operations, basic | $ | 0.02 | $ | (0.10 | ) | |||
Loss per common share from discontinued operations, basic | — | (0.00 | ) | |||||
Income (loss) per common share, basic | $ | 0.02 | $ | (0.10 | ) | |||
Income (loss) per common share from continuing operations, diluted | $ | 0.02 | $ | (0.10 | ) | |||
Loss per common share from discontinued operations, diluted | 0.00 | (0.00 | ) | |||||
Income (loss) per common share, diluted | $ | 0.02 | $ | (0.10 | ) | |||
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Six Months Ended December 31, | ||||||||
2010 | 2009 | |||||||
Numerator for basic and diluted earnings per share: | ||||||||
Net loss from continuing operations | $ | (899,000 | ) | $ | (3,230,000 | ) | ||
Loss from discontinued operations, net of tax | — | (380,000 | ) | |||||
Gain on disposition of discontinued operations, net of tax | — | 3,274,000 | ||||||
Net loss | (899,000 | ) | (336,000 | ) | ||||
Net loss from continuing operations | (899,000 | ) | (3,230,000 | ) | ||||
Payment and/or accretion of preferred stock dividends | (437,000 | ) | (1,376,000 | ) | ||||
Net loss from continuing operations available to common stockholders | $ | (1,336,000 | ) | $ | (4,606,000 | ) | ||
Weighted average shares used in computing basic net loss per share: | 47,288,544 | 34,232,672 | (1) | |||||
Weighted average shares used in computing diluted net loss per share: | 47,288,544 | 34,232,672 | (1) | |||||
Loss per common share from continuing operations, basic | $ | (0.03 | ) | $ | (0.13 | ) | ||
Income per common share from discontinued operations, basic | — | 0.09 | ||||||
Loss per common share, basic | $ | (0.03 | ) | $ | (0.04 | ) | ||
Loss per common share from continuing operations, diluted | $ | (0.03 | ) | $ | (0.13 | ) | ||
Income (loss) per common share from discontinued operations diluted | — | 0.09 | ||||||
Loss per common share, diluted | $ | (0.03 | ) | $ | (0.04 | ) | ||
(1) | The weighted average shares for the three and six months ended December 31, 2009 have been restated to reflect the shares issued as part of the Merger. |
10. Preferred stock
Series A Redeemable Preferred Stock
On November 1, 2007, Rand Worldwide issued 31,000,000 shares of Series A redeemable preferred stock (“Series A”) for $1.00 per share. At June 30, 2010, 31,858,922 shares of Series A were authorized and designated, of which 31,000,000 shares were issued and outstanding. The net proceeds from the issuance of the Series A Convertible Preferred Stock were classified as temporary equity in the accompanying consolidated balance sheets as the terms of the issuance do not warrant classification as a liability nor as equity.
Immediately prior to and on the date of the Merger with Avatech, Rand Worldwide completed a recapitalization which had the effect of exchanging its preferred stock for common stock. Prior to the merger with Avatech, Rand Worldwide had outstanding term notes totaling approximately $12.6 million to its majority shareholder. Rand Worldwide completed a recapitalization which had the effect of converting its Series A Redeemable Preferred Stock, related-party notes payable, and accrued interest on the related-party notes payable into common stock. As a result of the recapitalization, Rand Worldwide no longer has outstanding term notes and no longer has any outstanding Series A Preferred Stock.
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Convertible Preferred Stock
At December 31, 2010, 1,089,213 shares of Series D Convertible Preferred Stock (the “Series D shares”) were outstanding with the following terms:
Redemption Feature- The Series D shares are redeemable in the event that the Company is engaged in a business combination that is approved by the Board of Directors and subsequently submitted and approved by a vote of the Company’s stockholders. The terms of the Merger with Rand Worldwide did not trigger any redemption provisions of the Series D shares. Any director who holds shares of Series D is not eligible to vote on the proposed business combination. The redemption price is $0.30 (upon conversion) per share plus an amount equal to all declared and unpaid dividends accrued on such shares since the original issue date.
Voting Rights- Each holder of the Series D shares shall vote together with all other classes and series of stock of the Company as a single class on all actions. Each share shall entitle the holder to one vote per share of common stock into which the preferred stock is then convertible on each such action. In addition, these holders have special voting rights in connection with certain matters, including the issuance of senior stock or debentures, certain mergers, the dissolution of the Company and any amendment to the charter or the terms of the securities that would impair their rights.
Dividend Rate- The holders of the Series D shares are entitled to receive cumulative dividends at a rate of 10.0% per annum when and as declared by the Board of Directors. Dividends are paid quarterly to preferred stockholders.
Conversion Feature- The Series D shares are convertible at any time beginning 120 days after the original issuance date at the option of the holder and automatically converts into common stock if the common stock trades for more than $2.25 per share for 60 consecutive trading days. Each Series D share is convertible into shares of common stock by multiplying the appropriate conversion rate in effect by the number of shares of preferred stock being converted. As of December 31, 2010, the conversion rate would yield two shares of common stock for each share of Series D share; however, this rate may be adjusted due to stock splits, dividends, and other events defined in the stock purchase agreement between the Company and the holders of the Series D shares.
Liquidation Preference- In the event of a liquidation, dissolution or winding up of the Company, the holders of Series D shares are entitled to receive for each share, prior and in preference to any distribution of any of the assets or surplus funds to the holders of common stock, an amount equal to $0.60 per share plus all accumulated but unpaid dividends. If upon the occurrence of such event, the assets and funds thus distributed among the holders are insufficient to permit the payment of the preferential amount, then the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the preferred stockholders.
At December 31, 2010, 937 shares of Series E Convertible Preferred Stock (the “Series E shares”) were outstanding with the following terms:
Redemption Feature- The Series E shares are redeemable in the event that the Company is engaged in a business combination that is approved by the Board of Directors and subsequently submitted and approved by a vote of the Company’s stockholders. The terms of the Merger with Rand Worldwide did not trigger any redemption provisions of the Series E shares. Any director who holds shares of Series E is not eligible to vote on the proposed business combination. The redemption price is $0.65 per share (upon conversion) plus an amount equal to all declared and unpaid dividends accrued on such shares since the original issue date.
Voting Rights- Each holder of the Series E shares shall vote together with all other classes and series of stock of the Company as a single class on all actions. Each share shall entitle the holder to one vote per share of common stock into which the preferred stock is then convertible on each such action. In addition, these holders have special voting rights in connection with certain matters, including the issuance of senior stock or debentures, certain mergers, the dissolution of the Company and any amendment to the charter or the terms of the securities that would impair their rights.
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Dividend Rate- The holders of the Series E shares are entitled to receive cumulative dividends at a rate of 10.0% per annum when and as declared by the Board of Directors. Dividends are paid quarterly to preferred stockholders.
Conversion Feature- The Series E shares are convertible at any time beginning 120 days after the original issuance date at the option of the holder and automatically converts into common stock if the common stock trades for more than $2.25 per share for 60 consecutive trading days. Each Series E share is convertible into shares of common stock by multiplying the appropriate conversion rate in effect by the number of shares of preferred stock being converted. As of December 31, 2010 the conversion rate would yield 1,538.5 shares of common stock for each share of Series E; however, this rate may be adjusted due to stock splits, dividends, and other events defined in the stock purchase agreements between the Company and the holders of the Series E shares.
Liquidation Preference- In the event of a liquidation, dissolution or winding up of the Company, the holders of Series E shares are entitled to receive for each share, prior and in preference to any distribution of any of the assets or surplus funds to the holders of common stock, an amount equal to $0.65 per share (upon conversion) plus all accumulated but unpaid dividends. If upon the occurrence of such event, the
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assets and funds thus distributed among the holders are insufficient to permit the payment of the preferential amount, then the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the preferred stockholders.
11. Liquidity and Capital Resources
The Company had a working capital deficit of $2,798,000 as of December 31, 2010, however management believes that its near-term needs can be met from its available cash resources and its line of credit.
12. Segment Information
The Company’s continuing operations include business in North America, Singapore/Malaysia and Australia. Revenue for any particular geographic region is determined by sales made by the Company to the customers in that particular region. The Company’s chief operating decision maker and CEO evaluates business results based primarily on these geographic regions. The following table illustrates certain financial information about these geographies in the corresponding fiscal periods:
Three Months Ended December 31, 2010
North America | Singapore/Malaysia | Australia | Total | |||||||||||||
Revenue- | ||||||||||||||||
Product sales | $ | 9,741,000 | $ | 585,000 | $ | 512,000 | $ | 10,838,000 | ||||||||
Service revenue | 5,012,000 | 162,000 | 223,000 | 5,397,000 | ||||||||||||
Commission revenue | 5,313,000 | 16,000 | 104,000 | 5,433,000 | ||||||||||||
Total revenue | 20,066,000 | 763,000 | 839,000 | 21,668,000 | ||||||||||||
Cost of revenue- | ||||||||||||||||
Cost of product sales | 6,186,000 | 462,000 | 338,000 | 6,986,000 | ||||||||||||
Cost of service revenue | 3,531,000 | 113,000 | 104,000 | 3,748,000 | ||||||||||||
Total cost of revenue | 9,717,000 | 575,000 | 442,000 | 10,734,000 | ||||||||||||
Gross margin | 10,349,000 | 188,000 | 397,000 | 10,934,000 | ||||||||||||
Total operating expenses | 8,885,000 | 221,000 | 335,000 | 9,441,000 | ||||||||||||
Income (loss) from operations | $ | 1,464,000 | $ | (33,000 | ) | $ | 62,000 | $ | 1,493,000 | |||||||
Three Months Ended December 31, 2009
North America | Singapore/Malaysia | Australia | Total | |||||||||||||
Revenue- | ||||||||||||||||
Product sales | $ | 4,503,000 | $ | 587,000 | $ | 139,000 | $ | 5,229,000 | ||||||||
Service revenue | 3,991,000 | 156,000 | 105,000 | 4,252,000 | ||||||||||||
Commission revenue | 1,820,000 | 19,000 | 58,000 | 1,897,000 | ||||||||||||
Total revenue | 10,314,000 | 762,000 | 302,000 | 11,378,000 | ||||||||||||
Cost of revenue- | ||||||||||||||||
Cost of product sales | 3,204,000 | 522,000 | 63,000 | 3,789,000 | ||||||||||||
Cost of service revenue | 3,196,000 | 86,000 | 92,000 | 3,374,000 | ||||||||||||
Total cost of revenue | 6,400,000 | 608,000 | 155,000 | 7,163,000 | ||||||||||||
Gross margin | 3,914,000 | 154,000 | 147,000 | 4,215,000 | ||||||||||||
Total operating expenses | 5,658,000 | 138,000 | 132,000 | 5,928,000 | ||||||||||||
Income (loss) from operations | $ | (1,744,000 | ) | $ | 16,000 | $ | 15,000 | $ | (1,713,000 | ) | ||||||
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Six Months Ended December 31, 2010
North America | Singapore/Malaysia | Australia | Total | |||||||||||||
Revenue- | ||||||||||||||||
Product sales | $ | 18,111,000 | $ | 1,113,000 | $ | 942,000 | $ | 20,166,000 | ||||||||
Service revenue | 9,148,000 | 282,000 | 462,000 | 9,892,000 | ||||||||||||
Commission revenue | 8,150,000 | 66,000 | 216,000 | 8,432,000 | ||||||||||||
Total revenue | 35,409,000 | 1,461,000 | 1,620,000 | 38,490,000 | ||||||||||||
Cost of revenue- | ||||||||||||||||
Cost of product sales | 11,866,000 | 826,000 | 657,000 | 13,349,000 | ||||||||||||
Cost of service revenue | 6,576,000 | 202,000 | 226,000 | 7,004,000 | ||||||||||||
Total cost of revenue | 18,442,000 | 1,028,000 | 883,000 | 20,353,000 | ||||||||||||
Gross margin | 16,967,000 | 433,000 | 737,000 | 18,137,000 | ||||||||||||
Total operating expenses | 17,466,000 | 359,000 | 613,000 | 18,438,000 | ||||||||||||
Income (loss) from operations | $ | (499,000 | ) | $ | 74,000 | $ | 124,000 | $ | (301,000 | ) | ||||||
Six Months Ended December 31, 2009
North America | Singapore/Malaysia | Australia | Total | |||||||||||||
Revenue- | ||||||||||||||||
Product sales | $ | 10,843,000 | $ | 1,381,000 | $ | 552,000 | $ | 12,776,000 | ||||||||
Service revenue | 7,794,000 | 210,000 | 350,000 | 8,354,000 | ||||||||||||
Commission revenue | 3,698,000 | 45,000 | 170,000 | 3,913,000 | ||||||||||||
Total revenue | 22,335,000 | 1,636,000 | 1,072,000 | 25,043,000 | ||||||||||||
Cost of revenue- | ||||||||||||||||
Cost of product sales | 6,838,000 | 1,112,000 | 368,000 | 8,318,000 | ||||||||||||
Cost of service revenue | 6,050,000 | 125,000 | 236,000 | 6,411,000 | ||||||||||||
Total cost of revenue | 12,888,000 | 1,237,000 | 604,000 | 14,729,000 | ||||||||||||
Gross margin | 9,447,000 | 399,000 | 468,000 | 10,314,000 | ||||||||||||
Total operating expenses | 11,702,000 | 271,000 | 374,000 | 12,347,000 | ||||||||||||
Income (loss) from operations | $ | (2,255,000 | ) | $ | 128,000 | $ | 94,000 | $ | (2,033,000 | ) | ||||||
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13. Related Party Term Notes
On October 31, 2007, Rand Worldwide entered into a term loan agreement (the “Term Notes”) with Ampersand Ventures (“Ampersand”), which owned 100% of the outstanding preferred stock and 89% of the outstanding common stock of Rand Worldwide as of October 31, 2009. The Term Notes consisted of two promissory notes: one for $10.0 million bearing interest of 10% or 12% per year based upon the timing of repayments, and another for $3.5 million bearing interest of 10% or 14% per year based upon the timing of repayments. Per the original terms of the promissory notes, all principal and interest were to be fully repaid by November 1, 2012, with scheduled principal and interest payments beginning in December 2007. As of June 30, 2010, these notes had an outstanding balance of $12,637,000.
As a result of a recapitalization prior to the Merger, Rand Worldwide’s Term Notes are no longer outstanding and the Company has no remaining financial obligations relative to its Term Notes or the related formerly-accruing interest. The Term Notes were subsequently transferred into equity and the net affects of the forgiveness of these Notes of $115,000 are disclosed within the Consolidated Statements of Cash Flows.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.
This report contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this report should be aware of the speculative nature of “forward-looking statements.” Statements that are not historical in nature, including those that include the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” and similar expressions, are based on current expectations, estimates and projections about, among other things, the industry and the markets in which Rand Worldwide, Inc. operates and the performance of the combined company following the Merger, and they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this report; general economic, market, or business conditions; changes in interest rates, the cost of funds, and demand for the Company’s products and services; changes in the Company’s competitive position or competitive actions by other companies; the Company’s ability to manage growth; changes in laws or regulations or policies of federal and state regulators and agencies; ability to integrate the Rand Worldwide and Avatech businesses; and other circumstances beyond the Company’s control.
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Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized or, if substantially realized, will have the expected consequences on the Company’s business or operations. Except as required by applicable laws, the Company does not intend to publish updates or revisions of any forward-looking statements to reflect new information, future events or otherwise.
Overview
Rand Worldwide, Inc. merged with Avatech on August 17, 2010. The merger brings new products and services to the existing customer base of each former entity and expands the Company’s sales, support and services reach into 47 cities throughout the US, Canada, Singapore, Malaysia and Australia. The Company is a leading provider of design engineering, data archiving, facilities and data management solutions for the manufacturing, building design, engineering, and total infrastructure markets. The Company also specializes in technical support, training, and consulting services aimed at improving design and documentation efficiencies and the seamless integration of workflow processes. This combination of technology solutions and services enables customers to enhance productivity, profitability, and competitive position.
The Company’s business strategy is built on three core principles designed to leverage its existing strengths with expected market opportunities:
• | Maintain and profitably grow its strong position in the Autodesk software marketplace. |
• | Profitably grow its consulting and services business by leveraging its expertise in design engineering. |
• | Acquire and integrate diverse, yet complementary, software and services businesses to extend its product offerings to its large customer base and expand its market potential. |
This strategy was designed to match the Company’s product and service offerings more precisely with the needs of its customers, while providing avenues of growth and diversification.
Product Sales- Product sales consist primarily of the resale of packaged design software, including:
• | Autodesk 2D and 3D computer aided design software for customers in the mechanical, architectural and civil engineering sectors, as well as visualization and animation technology to companies in the media and entertainment industry; |
• | Autodesk data management software; |
• | Archibus facilities management software for space planning, strategic planning, and lease/property administration; |
• | Leica 3D laser scanning equipment for the Architectural, Engineering and Construction sector; |
• | ASCENT internally developed courseware for a variety of engineering applications; and |
• | Autonomy data archiving solutions |
Service Revenue- The Company provides services in the form of training, implementation, consulting services, software development, custom courseware development and technical support to its customers. The Company employs a technical staff of approximately 91 personnel associated with these types of services. The Company also offers support and implementation services to complement the data archive solutions provided and sold through its RAND Secure Archive Division.
Commission Revenue- The Company offers Autodesk’s subscription programs, which entitle subscribers to receive software upgrades and web support directly from Autodesk. Because the Company does not participate in the delivery of these subscription products or the web support, the Company records the gross profit from the sale of Autodesk software subscriptions as commission revenue. In addition, the Company sells technology upgrades to existing Autodesk customers through the Autodesk Subscription program where the customers receive the latest releases of Autodesk software, incremental product enhancements, and personalized web support direct from Autodesk. Based on its analysis of the Autodesk Subscription program, the Company records the net proceeds that it receives from Autodesk for subscription sales in accordance with the provisions of FASB ASC 605.
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The Company also generates commission revenue from the resale of Autodesk software to various customers, a number of which Autodesk considers “major accounts.” Autodesk designates these customers as major accounts based on specific criteria, primarily sales volume, and typically gives these customers volume discounts. The Company is responsible for managing and reselling Autodesk products to a number of these major account customers; however, software products are shipped directly from Autodesk to the customers. The Company receives commissions upon shipment of the products from Autodesk to the customer based on the product sales price.
Cost of Product Sales-The cost of product sales consists of the cost of purchasing products from software suppliers or hardware manufacturers as well as the associated shipping and handling costs.
Cost of Service Revenue-Cost of service revenue includes the direct costs associated with the implementation of software and hardware solutions as well as training, support services, and professional services. These costs consist primarily of compensation, employee benefits, travel, printed materials and the costs of third-party contractors engaged by the Company. The cost of service revenue does not include an allocation of overhead costs.
Selling, General and Administrative Expense- Selling, general and administrative expense consist primarily of compensation and other expenses associated with the Company’s sales force, management, finance, human resources, and information systems. Advertising and public relations expenses and expenses for facilities, such as rent and utilities, are also included in selling, general and administrative expense.
Depreciation and Amortization Expense- Depreciation expense represents the period costs associated with our investment in property and equipment, consisting principally of computer equipment, software, furniture and fixtures, and leasehold improvements. Amortization expense represents the period costs of the acquired customer list and trade name intangible assets. The Company computes depreciation and amortization expenses using the straight-line method. The Company leases all of its facilities and depreciates leasehold improvements over the lesser of the lease term or the estimated useful life of the asset.
Interest Expense- Interest expense consists of interest on capital lease obligations and borrowings from lines of credit. Prior to the Merger on August 17, 2010, interest expense also included interest on related-party term loans.
Three Months Ended December 31, 2010 Compared to the Three Months Ended December 31, 2009
The following tables set forth a comparison of the Company’s results of operations for the three month period ended December 31, 2010 to the three month period ended December 31, 2009. The amounts are derived from selected items reflected in the Company’s unaudited Consolidated Statements of Operations included elsewhere in this report. The three month financial results are not necessarily indicative of future results.
Due to the Merger on August 17, 2010 between Avatech Solutions, Inc. and Rand Worldwide, the reported financial results represent a continuation of Rand Worldwide’s operations and include Avatech’s results from the date of the merger. As such, the results for the three months ended December 31, 2009 are that of the pre-merger Rand Worldwide while the results for the three months ended December 31, 2010 include Rand Worldwide and Avatech Solutions.
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Revenues
Three Months Ended December 31, | ||||||||||||
2010 | 2009 | % change | ||||||||||
Revenues: | ||||||||||||
Product sales | $ | 10,838,000 | $ | 5,229,000 | 107.3 | % | ||||||
Service revenue | 5,397,000 | 4,252,000 | 26.9 | % | ||||||||
Commission revenue | 5,433,000 | 1,897,000 | 186.4 | % | ||||||||
Total revenues | $ | 21,668,000 | $ | 11,378,000 | 90.4 | % | ||||||
Revenues. Total revenues for the three months ended December 31, 2010 increased by $10,290,000, or 90.4%, when compared to the same period in the prior fiscal year.
Product sales increased $5,609,000 or 107.3% for the three months ended December 31, 2010 when compared to the same period in the prior fiscal year. This increase resulted from the addition of Avatech’s results for the quarter, which contributed $3,876,000 to product revenue, while Rand Worldwide’s existing business increased by $1,733,000 from the same period in the prior fiscal year due to stronger performance in the US market and economic stability in the foreign markets served by the Company.
Service revenues increased $1,145,000 or 26.9% for the three months ended December 31, 2010 when compared with the same period in the prior fiscal year. The addition of Avatech’s results for the quarter contributed over $1,735,000 in services revenue. Without the addition of Avatech’s results, service revenues for Rand Worldwide would have decreased $590,000 due to a $1,036,000 decline in e-mail archiving and data storage services, offset by increases of $480,000 in services related to the sale of Autodesk products.
Commission revenues increased $3,536,000 or 186.4% for the three months ended December 31, 2010 when compared with the same period in the prior fiscal year.The addition of Avatech’s results for the quarter contributed $2,205,000 of commission revenue, while Rand Worldwide’s existing business increased $1,331,000 from the same period in the prior fiscal year due to high subscription renewals and a large sale in the Education channel.
Cost of Revenues and Gross Margin
Three Months Ended December 31, | ||||||||||||
2010 | 2009 | % change | ||||||||||
Cost of revenue: | ||||||||||||
Cost of product sales | $ | 6,986,000 | $ | 3,790,000 | 84.4 | % | ||||||
Cost of service revenue | 3,748,000 | 3,373,000 | 11.1 | % | ||||||||
Total cost of revenue | $ | 10,734,000 | $ | 7,163,000 | 49.9 | % | ||||||
Gross margin | $ | 10,934,000 | $ | 4,215,000 | ||||||||
Cost of revenue. The total cost of revenue increased $3,571,000 or 49.9%, for the three months ended December 31, 2010 when compared to the same period in the prior fiscal year.
Cost of product sales increased 84.4% during the three months ended December 31, 2010 when compared with the same period in the prior fiscal year, while product revenue increased 107.3%. Product costs increased at a lower rate than product revenues due to pricing improvements in the Company’s internal archiving software and the Company earning higher sales rebates based on targets established by the Company’s principal supplier, Autodesk. These sales rebates were applied to the cost of product sales.
Cost of service revenue increased $375,000 or 11.1% for the three months ended December 31, 2010 when compared to the same period in the prior fiscal year, while service revenues increased 26.9%. The addition of Avatech’s results for the quarter contributed $1,395,000 of additional service costs not incurred in the prior year; however the Rand Worldwide portion of the business had offsetting cost decreases of $1,021,000 as a result of reductions in force relating to the Company’s exit from the PLM Consulting market totaling $585,000 and also from targeted workforce reductions which were part of the Company’s efforts to reduce its cost and improve margins. Cost of service revenue as a percentage of related revenue decreased to 69.4% during the three months ended December 31, 2010 from 79.4% during the same period in the prior fiscal year for the reasons explained above.
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Gross margin. The Company’s overall gross margin percentage of 50.5 % for the three months ended December 31, 2010 was higher than the 37.0% gross margin in the same period in the prior fiscal year due to changes in revenue mix as the Company exited the underperforming PLM Consulting business and saw larger gains in product and commission revenues than in services.
Other Operating Expenses
Three Months Ended December 31, | ||||||||||||
2010 | 2009 | % change | ||||||||||
Other operating expenses: | ||||||||||||
Selling, general and administrative | $ | 8,986,000 | $ | 5,700,000 | 57.6 | % | ||||||
Depreciation and amortization | 455,000 | 228,000 | 99.6 | % | ||||||||
Total other operating expenses | $ | 9,441,000 | $ | 5,928,000 | 59.3 | % | ||||||
Selling, General and Administrative Expense. Selling, general and administrative expenses increased $3,286,000, or 57.6%, for the three months ended December 31, 2010 when compared to the same period in the prior fiscal year. Selling, general and administrative expense as a percent of total revenues was 41.5% for the three months ended December 31, 2010, a decrease from 50.1% for the same period in the prior fiscal year. The increase in selling, general and administrative expenses includes $3,159,000 from the additional operations of Avatech. If Rand Worldwide had not merged with Avatech, its selling, general and administrative expenses would have increased by approximately $127,000, primarily as a result of additional sales commissions of $300,000 due to increased revenues, partially offset by targeted workforce reductions in management and other administrative functions.
Depreciation and Amortization. Depreciation and amortization expenses increased $227,000, or 99.6%, for the three months ended December 31, 2010 when compared to the same period in the prior fiscal year. Rand Worldwide’s depreciation and amortization increased $58,000 from the prior year due to the build out of new corporate headquarters, the construction of a new company website and investment into infrastructure for the Rand Secure Archive Division Avatech’s depreciation and amortization for the quarter ended December 31, 2010 was $169,000, which included $75,000 of depreciation of property and equipment and $94,000 in amortization of acquired intangible assets.
Other (Expense) Income, net
Three Months Ended December 31, | ||||||||||||
2010 | 2009 | % change | ||||||||||
Other expense, net | $ | (186,000 | ) | $ | (994,000 | ) | (81.3 | )% | ||||
Other (Expense) Income, net. The Company incurred $186,000 in other expense, net, during the three months ended December 31, 2010, compared to $994,000 during the same period in the prior fiscal year. The operations of Avatech added only $4,000 in other expense, net. The remaining decreases in other expense were due to foreign currency exchange losses as well as additional interest incurred as a result of establishing a line of credit during the three months ended December 31, 2010.
Prior to the Merger with Avatech, Rand Worldwide had outstanding term notes totaling approximately $12.6 million held by its majority shareholder. Immediately prior to its merger with Avatech, Rand Worldwide completed a recapitalization which had the effect of exchanging common stock for its Series A Redeemable Preferred Stock and accrued dividends thereon, as well as its related-party notes payable, and accrued interest thereon. As a result of the recapitalization, Rand Worldwide no longer has outstanding term Series A Redeemable Preferred Stock or term notes. Rand Worldwide incurred $0 and $963,000 of interest expense on these term notes for the three months ended December 31, 2010 and 2009, respectively. Due to the retirement of the term notes, the Company expects its interest expense to decline during the remainder of the 2011 fiscal year.
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Income Tax Expense
Three Months Ended December 31, | ||||||||||||
2010 | 2009 | % change | ||||||||||
Income tax expense (benefit) | $ | 35,000 | $ | (7,000 | ) | (600.0 | )% | |||||
Income Tax Expense. The Company recorded $35,000 of income tax expense from continuing operations during the three months ended December 31, 2010, compared to $7,000 in income tax benefit from continuing operations recorded for the same period in the prior fiscal year.
As of December 31, 2010, the Company had U.S. federal net operating loss carryforwards available to reduce future taxable income of approximately $28.7 million a portion of which may be limited as to annual utilization under Internal Revenue Code Section 382. These carryforwards expire between 2011 and 2029. As of December 31, 2010, the Company also had foreign net operating loss carryforwards of approximately $18.2 million available to reduce future taxable income. These carryforwards expire between 2011 and 2029 for some jurisdictions and for other jurisdictions the losses may be carried forward indefinitely.
As of December 31, 2010 the Company had established a valuation allowance of its net deferred tax assets of approximately $15 million in all jurisdictions including the United States, because it believes that it is more likely than not that the tax assets in those jurisdictions will not be realized prior to their expiration.
Six Months Ended December 31, 2010 Compared to the Six Months Ended December 31, 2009
The following tables set forth a comparison of the Company’s results of continuing operations for the six month period ended December 31, 2010 to the six month period ended December 31, 2009. The amounts are derived from selected items reflected in the Company’s unaudited Consolidated Statements of Operations included elsewhere in this report. The six month financial results are not necessarily indicative of future results.
Due to the Merger on August 17, 2010 between Avatech Solutions, Inc. and Rand Worldwide, the reported financial results represent a continuation of Rand Worldwide’s operations and include Avatech’s results from the date of the merger. As such, the Fiscal Year 2010 results are that of Rand Worldwide, while the Fiscal Year 2011 results include Rand Worldwide for the full six months and Avatech for the period of August 18, 2010 through December 31, 2010.
Revenues
Six Months Ended December 31, | ||||||||||||
2010 | 2009 | % change | ||||||||||
Revenues: | ||||||||||||
Product sales | $ | 20,166,000 | $ | 12,776,000 | 57.8 | % | ||||||
Service revenue | 9,892,000 | 8,354,000 | 18.4 | % | ||||||||
Commission revenue | 8,432,000 | 3,913,000 | 115.5 | % | ||||||||
Total revenues | $ | 38,490,000 | $ | 25,043,000 | 53.7 | % | ||||||
Revenues. Total revenues for the six months ended December 31, 2010 increased by $13,447,000, or 53.7%, when compared to the same period in the prior fiscal year.
Product sales increased $7,390,000, or 57.8% for the six months ended December 31, 2010 when compared to the same period in the prior fiscal year. This increase resulted from the addition of Avatech’s results for the six months, which contributed $5,691,000 to product revenue, while Rand Worldwide’s existing business increased $1,699,000 from the same period in the prior fiscal year due to stronger performance in the US market and economic stability in the foreign markets served by the Company.
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Service revenues increased $1,538,000 or 18.4% for the six months ended December 31, 2010 when compared with the same period in the prior fiscal year. The addition of Avatech’s results for the six months contributed $2,886,000 in services revenue. Without the addition of Avatech’s results, service revenues for Rand Worldwide would have decreased $1,348,000 due to a $228,000 decrease resulting from exiting the PLM consulting market, and $1,360,000 due to declines in e-mail archiving and data storage services offset slightly by increases of $430,000 in services related to the sale of Autodesk products.
Commission revenues increased $4,519,000 or 115.5% for the six months ended December 31, 2010 when compared with the same period in the prior fiscal year. The addition of Avatech’s results for the six months contributed $ 3,170,000 of commission revenue, while Rand Worldwide’s existing business increased $1,349,000 from the same period in the prior fiscal year due to high subscription renewals and a large sale in the Education channel.
Cost of Revenues and Gross Margin
Six Months Ended December 30, | ||||||||||||
2010 | 2009 | % change | ||||||||||
Cost of revenue: | ||||||||||||
Cost of product sales | $ | 13,349,000 | $ | 8,318,000 | 60.5 | % | ||||||
Cost of service revenue | 7,004,000 | 6,411,000 | 9.2 | % | ||||||||
Total cost of revenue | $ | 20,353,000 | $ | 14,729,000 | 38.2 | % | ||||||
Gross margin | $ | 18,137,000 | $ | 10,314,000 | ||||||||
Cost of revenue. The total cost of revenue increased $5,624,000 or 38.2%, for the six months ended December 31, 2010 when compared to the same period in the prior fiscal year.
Cost of product sales increased 60.5% during the six months ended December 31, 2010 when compared with the same period in the prior fiscal year, while product revenue increased 57.8%. Product costs increased at a higher rate than product revenues due to the competitive pricing environment in the Company’s primary North American markets.
Cost of service revenue increased $593,000 or 9.2% for the six months ended December 31, 2010 when compared to the same period in the prior fiscal year, while service revenues increased 18.4%. The addition of Avatech’s results for the six months contributed $2,112,000 of additional service costs not incurred in the prior year; however the Rand Worldwide portion of the business had offsetting cost decreases of $1,519,000 as a result of reductions in force relating to the Company’s exit from the PLM Consulting market totaling $1,285,000 and also from targeted workforce reductions which were part of the Company’s efforts to reduce its costs and improve margins. Cost of service revenue as a percentage of related revenue decreased to 70.8% during the six months ended December 31, 2010 from 76.7% during the same period in the prior fiscal year for the reasons explained above.
Gross margin. The Company’s overall gross margin percentage of 47.1% for the six months ended December 31, 2010 was higher than the 41.2% gross margin in the same period in the prior fiscal year due to changes in revenue mix as the Company exited the underperforming PLM Consulting business and saw larger gains in product and commission revenues than in services.
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Other Operating Expenses
Six Months Ended December 31, | ||||||||||||
2010 | 2009 | % change | ||||||||||
Other operating expenses: | ||||||||||||
Selling, general and administrative | $ | 17,601,000 | $ | 11,806,000 | 49.1 | % | ||||||
Depreciation and amortization | 837,000 | 541,000 | 54.7 | % | ||||||||
Total other operating expenses | $ | 18,438,000 | $ | 12,347,000 | 49.3 | % | ||||||
Selling, General and Administrative Expense. Selling, general and administrative expenses increased $5,795,000, or 49.1%, for the six months ended December 31, 2010 when compared to the same period in the prior fiscal year. Selling, general and administrative expense as a percent of total revenues was 45.7% for the six months ended December, 2010, a decrease from 47.1% for the same period in the prior fiscal year. The increase in selling, general and administrative expenses is the result of $1.6 million in one-time costs associated with the merger and another $4.7 million resulting from the additional operations of Avatech. If Rand Worldwide had not merged with Avatech, its selling, general and administrative expenses would have decreased by approximately $900,000, primarily as a result of non-recurring expenses incurred in 2009 in connection with the relocation of Rand Worldwide’s former headquarters from Toronto to Boston and the transition of some office spaces to lower cost sites.
Depreciation and Amortization. Depreciation and amortization expenses increased $296,000, or 54.7%, for the six months ended December 31, 2010 when compared to the same period in the prior fiscal year. Rand Worldwide’s depreciation and amortization increased $45,000 from the prior year due to the build out of new corporate headquarters, the construction of a new company website and investment into infrastructure for the Rand Secure Archive Division. Avatech’s depreciation and amortization for the period of August 17, 2010 to December 31, 2010 was $251,000, which included $111,000 of depreciation of property and equipment and $140,000 in amortization of acquired intangible assets.
Other (Expense) Income, net
Six Months Ended December 31, | ||||||||||||
2010 | 2009 | % change | ||||||||||
Other expense, net | $ | (501,000 | ) | $ | (1,192,000 | ) | (58.0 | %) | ||||
Other (Expense) Income, net. The Company incurred $501,000 in other expense, net, during the six months ended December 31, 2010, compared to $1,192,000 during the same period in the prior fiscal year. The operations of Avatech added only $10,000 in other expense, net. The remaining decreases in other expense were due to the retirement of Rand Worldwide’s term notes.
Prior to the Merger with Avatech, Rand Worldwide had outstanding term notes totaling approximately $12.6 million held by its majority shareholder. Immediately prior to its merger with Avatech, Rand Worldwide completed a recapitalization which had the effect of exchanging common stock for its Series A Redeemable Preferred Stock and accrued dividends thereon, as well as its related-party notes payable, and accrued interest thereon. As a result of the recapitalization, Rand Worldwide no longer has outstanding term Series A Redeemable Preferred Stock or term notes. Rand Worldwide incurred $165,000 and $1,088,000 of interest expense on these term notes for the six months ended December 31, 2010 and 2009, respectively. Due to the retirement of the term notes, the Company expects its interest expense to decline during the remainder of the 2011 fiscal year.
Income Tax Expense
Six Months Ended December 31, | ||||||||||||
2010 | 2009 | % change | ||||||||||
Income tax expense | $ | 97,000 | $ | 5,000 | 1840 | % | ||||||
Income Tax Expense. The Company recorded $97,000 of income tax expense from continuing operations during the six months ended December 31, 2010, compared to $5,000 in income tax expense from continuing operations recorded for the same period in the prior fiscal year.
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As of December 31, 2010, the Company had U.S. federal net operating loss carryforwards available to reduce future taxable income of approximately $28.7 million a portion of which may be limited as to annual utilization under Internal Revenue Code Section 382. These carryforwards expire between 2011 and 2029. As of December 31, 2010, the Company also had foreign net operating loss carryforwards of approximately $18.2 million available to reduce future taxable income. These carryforwards expire between 2011 and 2029 for some jurisdictions and for other jurisdictions the losses may be carried forward indefinitely.
As of December 31, 2010 the Company had established a valuation allowance of its net deferred tax assets of approximately $15 million in all jurisdictions including the United States, because it believes that it is more likely than not that the tax assets in those jurisdictions will not be realized prior to their expiration.
Liquidity and Capital Resources
The Company has financed its operations and met its capital expenditure requirements primarily through cash flows provided by operations and borrowings under short-term lines of credit.
On December 31, 2010, certain subsidiaries of the Company entered into a combined line of credit with PNC Bank, National Association by amending the existing line of credit held by Rand Worldwide. The Company’s new line of credit permits up to $9 million of borrowing limited to 85% of aggregate eligible accounts receivable. The interest rate is, at the Company’s option, either (i) the “Eurodollar Rate”, which is calculated by using the LIBOR rate plus an applicable margin ranging from 2.5% to 3.25% or (ii) the bank’s “Alternate Base Rate”, which is calculated by using the base rate of the bank, the federal funds open rate, or the daily LIBOR rate plus an applicable margin ranging from 1.75% to 2.75%. The interest rate as of December 31, 2010 was 6%. The Company had outstanding borrowings from the bank under its credit line of approximately $4.5 million as of December 31, 2010 and had $3.3 million outstanding as of June 30, 2010. The line expires on December 31, 2012 and is secured by 65% of the stock in one of its subsidiaries and 100% of the stock of a separate subsidiary.
The Company’s operating assets and liabilities consist primarily of accounts receivable, cash, borrowings under line of credit, accounts payable, and deferred revenue. Changes in these balances are affected principally by the timing of sales, collections and vendor payments. The Company purchases approximately 97% of its product from one principal supplier that provides it with credit to finance those purchases.
The Company’s investing activities consist principally of investments in computer and office equipment. Cash purchases of equipment for the six months ended December 31, 2010 increased to $232,000 from $188,000 for the same period in fiscal year 2009. The Company also acquired $2,123,000 cash as a result of the Merger.
For the six months ended December 31, 2010, net cash used in operating activities was $986,000, compared with cash used in operating activities of $3,163,000 during the same period in fiscal year 2009. The decrease in cash used in operating activities was due mainly to an increase of $8.5 million in accounts receivable balances due to a high volume of purchases made by customers for their calendar year ends in addition to a $5.6 million sale made at the end of the quarter. This increase was offset by an increase of accounts payables, accrued expenses, and deferred revenue totaling $7.3 million. The high volume of sales, in addition to the $5.6 million sale referenced above, increased the amount of purchases made to our vendors and deferred revenue. A significant portion of the $5.6 million sale was reflected in deferred revenue as of quarter end since much of the customer’s order did not ship and therefore the related revenues could not be recognized.
For the six months ended December 31, 2010, the Company generated cash of $1,024,000 from its financing activities, compared with a $2,494,000 use of cash for the same period in fiscal year 2009. The primary difference between periods is due to the repayment of the Term Notes of $5,969,000 that occurred in the prior period.
Immediately prior to its Merger with Avatech, Rand Worldwide completed a recapitalization which had the effect of exchanging common stock for its Series A Redeemable Preferred Stock and accrued dividends thereon, as well as its related-party term notes, and accrued interest thereon. As a result of the
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recapitalization, Rand Worldwide no longer has outstanding any related-party term notes or Series A Redeemable Preferred Stock. The terms of the Series A Redeemable Preferred Stock are detailed in Note 10.
The terms of the Series D and E Preferred Stock are detailed in Note 10.
The Company had a working capital deficit of $2,798,000 at December 31, 2010, however management believes the Company’s near-term needs will be met from its available cash resources and its line of credit.
Because the Company is one of the largest resellers of Autodesk software and because Autodesk has continued to state its intention to continue to strengthen its relationships with its resellers, the Company expects to continue to be a leading seller of Autodesk software. The Company entered into Value Added Reseller Agreements with Autodesk effective February 1, 2010 for an initial term of twelve months that will automatically renew on an annual basis for two additional twelve month periods. The agreement designates Avatech Solutions and Rand Worldwide as authorized resellers of Autodesk software and prescribes the authorized sales territories, authorized products and services, rebate and incentive program details and marketing support.
Operating Leases
The Company leases certain office space and equipment under noncancellable operating lease agreements that expire in various years through 2019 and that, generally, do not contain significant renewal options. Future minimum payments under all noncancellable operating leases with initial terms of one year or more consisted of the following at December 31, 2010:
Twelve months ending December 31: | ||||
2011 | $ | 2,834,000 | ||
2012 | 1,941,000 | |||
2013 | 1,583,000 | |||
2014 | 1,190,000 | |||
2015 | 762,000 | |||
Thereafter | 798,000 | |||
Total minimum lease payments | $ | 9,108,000 | ||
Capital Leases
The Company has various computer equipment used in training facilities and by employees throughout its office locations. These capital lease obligations totaled $166,000 as of December 31, 2010 with approximately $160,000 representing the short-term balance of the lease and shown as Obligations under capital leases in the accompanying balance sheets. Payments for the leases are made either monthly or quarterly through April 2015 and depreciation expense on this equipment was approximately $91,000 as of December 31, 2010. Future minimum payments consisted of the following at December 31, 2010:
Twelve months ending December 31: | ||||
2011 | $ | 167,000 | ||
2012 | 2,000 | |||
2013 | 2,000 | |||
2014 | 2,000 | |||
2015 | 1,000 | |||
Total minimum lease payments | 174,000 | |||
Less: | ||||
Taxes | 3,000 | |||
Imputed interest | 5,000 | |||
Present value of future minimum lease payments | $ | 166,000 | ||
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed under the Securities Exchange Act of 1934 with the Securities and Exchange Commission, such as this Quarterly Report, is recorded, processed, summarized and reported within the periods specified in those rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. An evaluation of the effectiveness of these disclosure controls as of December 31, 2010 was carried out under the supervision and with the participation of management, including the CEO and the CFO. Based on that evaluation, management, including the CEO and the CFO, has concluded that as of that date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
Before the Merger, Rand Worldwide was a privately-held company with internal control over financial reporting that was not designed or maintained to comply in all respects with SEC Rule 13a-15, which specifies the internal control over financial reporting that public companies which have filed or been required to file a Form 10-K are required to maintain. Avatech is currently in the process of integrating Rand Worldwide’s business operations into the Company’s internal control over financial reporting. In many cases, this involves designing and documenting new internal controls and procedures appropriate to the combined company.
Since the Merger occurred during the first fiscal quarter, there has not been time to properly document and test any new controls. Accordingly, we have excluded all the controls and procedures of the former Rand Worldwide business from our evaluation of changes in internal controls required by SEC Rule 13a-15(d) as of the end of the quarter. At this time, we anticipate that the fiscal 2011 management report under Section 404 of the Sarbanes-Oxley Act of 2002 will include controls relating to the period-end financial close process but will exclude the other controls for the business operations of the former Rand Worldwide.
Other than as described above, there have been no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
The exhibits filed or furnished with this report are listed in the Exhibit Index that immediately follows the Signatures to this report, which list is incorporated herein by reference.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RAND WORLDWIDE, INC. | ||||
Date: February 14, 2011 | By: | /s/ Marc L. Dulude | ||
Marc L. Dulude | ||||
Chief Executive Officer | ||||
Date: February 14, 2011 | By: | /s/ Lawrence Rychlak | ||
Lawrence Rychlak | ||||
President and Chief Financial Officer |
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Exhibit | Description | |
10.1 | Sixth Modification Agreement among Avatech Solutions, Inc., Avatech Solutions Subsidiary, Inc and PNC Bank, National Association, dated December 16, 2010.* | |
10.2 | Fourth Amendment to Revolving Credit and Security Agreement, dated December 31, 2010, by and among PNC Bank, National Association, Rand A Technology Corporation and Rand Worldwide Subsidiary, Inc.** | |
31.1 | Rule 15d-14(a) Certification of Chief Executive Officer† | |
31.2 | Rule 15d-14(a) Certification of Chief Financial Officer† | |
32.1 | Section 1350 Certifications†† |
* | Incorporated herein by reference to the filing of such exhibit with the Company’s Current Report on Form 8-K, filed on December 20, 2010. |
** | Incorporated herein by reference to the filing of such exhibit with the Company’s Current Report on Form 8-K, filed on January 5, 2011. |
† | Filed herewith. |
†† | Furnished herewith. |
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