Table of Contents
Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-173162
PROSPECTUS SUPPLEMENT NO. 7
(to Prospectus dated October 23, 2012)
RAND WORLDWIDE, INC.
34,558,287 Shares of Common Stock
This Prospectus Supplement No. 7 supplements and amends our Prospectus dated October 23, 2012, as previously amended and supplemented to date, and includes our attached Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 that was filed with the Securities and Exchange Commission on November 14, 2013.
The Prospectus and this Prospectus Supplement No. 7 relate to the disposition from time to time by the selling stockholders identified in the Prospectus, including their donees, pledgees, assignees, transferees and other successors-in-interest, of up to 34,558,287 shares of our common stock. We are not selling any common stock under the Prospectus, as amended and supplemented by this Prospectus Supplement No. 7, and we will not receive any of the proceeds from the sale of the shares by the selling stockholders.
Our common stock is quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “RWWI.” On November 8, 2013, the last quoted sale price for our common stock as reported on the OTCBB was $0.98 per share.
This Prospectus Supplement No. 7 should be read in conjunction with the Prospectus and any amendments and prospectus supplements filed before the date hereof. Any statement contained in the Prospectus and any amendments and prospectus supplements filed before the date hereof shall be deemed to be modified or superseded to the extent that information in this Prospectus Supplement No. 7 modifies or supersedes such statement. Any statement that is modified or superseded shall not be deemed to constitute a part of the Prospectus except as modified or superseded by this Prospectus Supplement No. 7.
Investing in our common stock involves certain risks. You should review carefully the risks described under “Risk Factors” beginning on page 3 of the Prospectus and under similar headings in any amendments or supplements to the Prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if the Prospectus or this Prospectus Supplement No. 7 is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this Prospectus Supplement No. 7 is November 14, 2013.
* * * * *
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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 March 31, 2013
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.) |
161 Worcester Road, Suite 401, Framingham, MA | 01701 | |
(Address of Principal Executive Offices) | (Zip Code) |
(508) 663-1400
(Registrant’s telephone number, including area code)
Not applicable
(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 x No ¨
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 May 9, 2013, there were 53,991,259 shares of common stock, par value $.01 per share, outstanding.
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RAND WORLDWIDE, INC. AND SUBSIDIARIES
INDEX
2
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Rand Worldwide, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
March 31, | June 30, | |||||||
2013 | 2012 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 1,916,000 | $ | 1,680,000 | ||||
Accounts receivable, less allowance of $285,000 as of March 31, 2013 and $405,000 as of June 30, 2012 | 19,999,000 | 18,099,000 | ||||||
Income tax receivable | 656,000 | 281,000 | ||||||
Other receivables | 1,256,000 | 994,000 | ||||||
Inventory | 140,000 | 107,000 | ||||||
Prepaid expenses and other current assets | 2,385,000 | 2,084,000 | ||||||
Deferred tax assets | 64,000 | 78,000 | ||||||
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Total current assets | 26,416,000 | 23,323,000 | ||||||
Property and equipment: | ||||||||
Computer software and equipment | 8,686,000 | 8,231,000 | ||||||
Office furniture and equipment | 1,991,000 | 1,974,000 | ||||||
Leasehold improvements | 714,000 | 699,000 | ||||||
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11,391,000 | 10,904,000 | |||||||
Less accumulated depreciation and amortization | (8,614,000 | ) | (8,193,000 | ) | ||||
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| |||||
2,777,000 | 2,711,000 | |||||||
Customer list, net of accumulated amortization of $6,509,000 as of March 31, 2013 and $6,105,000 as of June 30, 2012 | 3,726,000 | 3,290,000 | ||||||
Goodwill | 17,780,000 | 15,954,000 | ||||||
Trade name, net of accumulated amortization of $1,171,000 as of March 31, 2013 and $945,000 as of June 30, 2012 | 2,760,000 | 2,986,000 | ||||||
Deferred income taxes | 1,122,000 | 2,576,000 | ||||||
Other assets | 266,000 | 370,000 | ||||||
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Total assets | $ | 54,847,000 | $ | 51,210,000 | ||||
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See accompanying notes.
3
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Rand Worldwide, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
(unaudited)
March 31, | June 30, | |||||||
2013 | 2012 | |||||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Borrowings under line of credit | $ | 2,416,000 | $ | 3,140,000 | ||||
Accounts payable and accrued expenses | 9,733,000 | 9,850,000 | ||||||
Accrued compensation and related benefits | 1,897,000 | 1,804,000 | ||||||
Deferred revenue | 4,595,000 | 4,666,000 | ||||||
Obligations under capital leases – current | 294,000 | 290,000 | ||||||
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| |||||
Total current liabilities | 18,935,000 | 19,750,000 | ||||||
Long-term liabilities: | ||||||||
Obligations under capital leases | 395,000 | 614,000 | ||||||
Other long-term liabilities | 1,146,000 | — | ||||||
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| |||||
Total liabilities | 20,476,000 | 20,364,000 | ||||||
Stockholders’ equity: | ||||||||
Convertible Preferred Stock, $0.01 par value; 1,300,537 shares authorized, 1,298,728 shares issued; 385,357 shares outstanding with an aggregate liquidation preference of $1,093,000 at March 31, 2013 and June 30, 2012, respectively (note 8) | 4,000 | 4,000 | ||||||
Common stock, $0.01 par value; 80,000,000 shares authorized; issued and outstanding shares of 53,990,589 and 53,493,077 at March 31, 2013 and June 30, 2012, respectively | 540,000 | 535,000 | ||||||
Additional paid-in capital | 65,449,000 | 64,947,000 | ||||||
Accumulated deficit | (32,853,000 | ) | (35,700,000 | ) | ||||
Accumulated other comprehensive income | 1,231,000 | 1,060,000 | ||||||
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| |||||
Total stockholders’ equity | 34,371,000 | 30,846,000 | ||||||
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Total liabilities and stockholders’ equity | $ | 54,847,000 | $ | 51,210,000 | ||||
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See accompanying notes.
4
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Rand Worldwide, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Revenues: | ||||||||
Product sales | $ | 13,353,000 | $ | 11,324,000 | ||||
Service revenue | 6,255,000 | 5,206,000 | ||||||
Commission revenue | 6,537,000 | 5,821,000 | ||||||
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26,145,000 | 22,351,000 | |||||||
Cost of revenue: | ||||||||
Cost of product sales | 8,531,000 | 7,596,000 | ||||||
Cost of service revenue | 3,996,000 | 3,444,000 | ||||||
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12,527,000 | 11,040,000 | |||||||
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Gross margin | 13,618,000 | 11,311,000 | ||||||
Other operating expenses: | ||||||||
Selling, general and administrative | 10,221,000 | 9,091,000 | ||||||
Depreciation and amortization | 490,000 | 432,000 | ||||||
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10,711,000 | 9,523,000 | |||||||
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Operating income | 2,907,000 | 1,788,000 | ||||||
Other expense, net | 242,000 | 79,000 | ||||||
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Income before income taxes | 2,665,000 | 1,709,000 | ||||||
Income tax expense | 890,000 | 70,000 | ||||||
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Net income | $ | 1,775,000 | $ | 1,639,000 | ||||
Preferred stock dividends | (26,000 | ) | (32,000 | ) | ||||
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Net income available to common stockholders | $ | 1,749,000 | $ | 1,607,000 | ||||
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Income per common share, basic | $ | 0.03 | $ | 0.03 | ||||
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Income per common share, diluted | $ | 0.03 | $ | 0.03 | ||||
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Shares used in computing income per common share: | ||||||||
Weighted average shares used in computation - basic | 53,990,589 | 52,546,391 | ||||||
Weighted average shares used in computation - diluted | 56,489,059 | 54,710,936 |
See accompanying notes.
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Rand Worldwide, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Net income | $ | 1,775,000 | $ | 1,639,000 | ||||
Other comprehensive income, net of tax: | ||||||||
Net change in cumulative foreign currency translation gain | 18,000 | 161,000 | ||||||
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Comprehensive income | $ | 1,793,000 | $ | 1,800,000 | ||||
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See accompanying notes.
6
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Rand Worldwide, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Nine Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Revenues: | ||||||||
Product sales | $ | 35,408,000 | $ | 37,370,000 | ||||
Service revenue | 17,134,000 | 15,265,000 | ||||||
Commission revenue | 16,786,000 | 14,132,000 | ||||||
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69,328,000 | 66,767,000 | |||||||
Cost of revenue: | ||||||||
Cost of product sales | 22,721,000 | 25,599,000 | ||||||
Cost of service revenue | 11,506,000 | 9,776,000 | ||||||
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34,227,000 | 35,375,000 | |||||||
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Gross margin | 35,101,000 | 31,392,000 | ||||||
Other operating expenses: | ||||||||
Selling, general and administrative | 28,669,000 | 26,439,000 | ||||||
Depreciation and amortization | 1,445,000 | 1,227,000 | ||||||
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30,114,000 | 27,666,000 | |||||||
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Operating income | 4,987,000 | 3,726,000 | ||||||
Other expense, net | 347,000 | 417,000 | ||||||
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Income before income taxes | 4,640,000 | 3,309,000 | ||||||
Income tax expense | 1,793,000 | 229,000 | ||||||
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Net income | $ | 2,847,000 | $ | 3,080,000 | ||||
Preferred stock dividends | (82,000 | ) | (110,000 | ) | ||||
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Net income available to common stockholders | $ | 2,765,000 | $ | 2,970,000 | ||||
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Income per common share, basic | $ | 0.05 | $ | 0.06 | ||||
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Income per common share, diluted | $ | 0.05 | $ | 0.05 | ||||
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Shares used in computing income per common share: | ||||||||
Weighted average shares used in computation - basic | 53,935,863 | 52,331,996 | ||||||
Weighted average shares used in computation - diluted | 56,349,932 | 54,545,939 |
See accompanying notes.
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Rand Worldwide, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
Nine Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Net income | $ | 2,847,000 | $ | 3,080,000 | ||||
Other comprehensive income, net of tax: | ||||||||
Net change in cumulative foreign currency translation gain (loss) | 171,000 | (139,000 | ) | |||||
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Comprehensive income | $ | 3,018,000 | $ | 2,941,000 | ||||
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See accompanying notes.
8
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Rand Worldwide, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 2,847,000 | $ | 3,080,000 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Bad debt expense (recoveries) | 38,000 | (77,000 | ) | |||||
Depreciation and amortization | 1,445,000 | 1,227,000 | ||||||
Stock-based compensation | 189,000 | 125,000 | ||||||
Deferred income taxes | 1,468,000 | (1,000 | ) | |||||
Changes in operating assets and liabilities, net of those acquired: | ||||||||
Accounts receivable and other receivables | (2,200,000 | ) | 3,217,000 | |||||
Income tax receivable | (375,000 | ) | (271,000 | ) | ||||
Inventory | (33,000 | ) | 23,000 | |||||
Prepaid expenses and other current assets | (301,000 | ) | (792,000 | ) | ||||
Other assets | 104,000 | 59,000 | ||||||
Accounts payable and accrued expenses | (755,000 | ) | (2,723,000 | ) | ||||
Accrued compensation and related benefits | 93,000 | (958,000 | ) | |||||
Deferred revenue | (71,000 | ) | 502,000 | |||||
Other long-term liabilities | 101,000 | — | ||||||
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Net cash provided by operating activities | 2,550,000 | 3,411,000 | ||||||
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Cash flows from investing activities | ||||||||
Purchase of Informative Design Partners, Inc. | (600,000 | ) | — | |||||
Net purchases of property and equipment | (829,000 | ) | (679,000 | ) | ||||
Purchase of Inlet Technology | — | (1,552,000 | ) | |||||
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Net cash used in investing activities | (1,429,000 | ) | (2,231,000 | ) | ||||
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Cash flows from financing activities | ||||||||
Proceeds from borrowings under line of credit | 55,775,000 | 84,489,000 | ||||||
Repayment of borrowings under line of credit | (56,499,000 | ) | (86,640,000 | ) | ||||
Principal payment on capital lease obligations | (215,000 | ) | (182,000 | ) | ||||
Payment of preferred stock dividends | (82,000 | ) | (110,000 | ) | ||||
Proceeds from the issuance of common stock to employees | — | 39,000 | ||||||
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Net cash used in financing activities | (1,021,000 | ) | (2,404,000 | ) | ||||
Effect of exchange rate changes on cash | 136,000 | (62,000 | ) | |||||
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Net change in cash | 236,000 | (1,286,000 | ) | |||||
Cash - beginning of period | 1,680,000 | 2,631,000 | ||||||
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Cash - end of period | $ | 1,916,000 | $ | 1,345,000 | ||||
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See accompanying notes.
9
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Rand Worldwide, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Organization and 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.
References in these Notes to “Rand Worldwide”, “the Company”, “us”, “we”, and “our” are references to Rand Worldwide, Inc. and, unless the context clearly contemplated otherwise, its consolidated subsidiaries.
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. IMAGINiT also specializes in computational fluid dynamics analysis consulting and thermal simulation services and sells its own proprietary software products and related services, enhancing its total client solution offerings. IMAGINiT operates from locations across North America, Australia, and Singapore. In January 2013, the Company closed its office in Malaysia and consolidated those operations to Singapore. The closure of the Malaysian office is not expected to have a material impact on the Company’s consolidated operations.
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 Dassault Systèmes and PTC (Parametric Technology Corporation) products including CATIA, ENOVIA and Pro/ENGINEER.
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 its primary analyses based upon geographic location and operations by geographic segment are disclosed within Note 9.
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 Rand Worldwide Inc.’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012. Operating results for the three and nine months ended March 31, 2013 are not necessarily indicative of results for the full fiscal year or any future interim period.
The books of the Company are maintained in United States dollars and this is the Company’s functional reporting currency. Transactions denominated in other than the United States dollar are translated as follows with the related transaction gains and losses being recorded in the Statement of Operations:
• | Monetary items are recorded at the rate of exchange prevailing as of the balance sheet date; |
• | Non-monetary items including equity are recorded at the historical rate of exchange; and |
• | Revenues and expenses are recorded at the period average in which the transaction occurred. |
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2. Supplemental Disclosure of Cash Flow Information
The Company paid interest of approximately $21,000 and $53,000 during the three months ended March 31, 2013 and 2012, respectively, and approximately $67,000 and $214,000 during the nine months ended March 31, 2013 and 2012, respectively. The Company also paid federal and state income taxes of approximately $40,000 and $84,000 during the three months ended March 31, 2013 and 2012, respectively, and approximately $99,000 and $468,000 during the nine months ended March 31, 2013 and 2012, respectively. Total purchases of property and equipment included non-cash purchases of $0 and $1,051,000 for the nine months ended March 31, 2013 and March 31, 2012, respectively.
In connection with the acquisition of Informative Design Partners on July 31, 2012, the Company paid cash in the amount of $600,000 and issued 497,512 shares of its common stock valued at $400,000.
3. Employee Stock Compensation Plans
On November 7, 2012, the Company’s stockholders approved the Omnibus Equity Compensation Plan (the “Omnibus Plan”). The Compensation Committee of the Company’s Board of Directors administers the Omnibus Plan and, in that capacity, has the exclusive authority to grant various incentive awards under the Omnibus Plan in the form of stock options, stock awards, stock units, performance units, and other stock-based awards. Up to 2,000,000 shares of the Company’s common stock are available for issuance to participants under the Omnibus Plan. The Omnibus Plan is available to all employees of the Company and its subsidiaries, including employees who are officers or members of the Board, and all non-employee directors and consultants of the Company and its subsidiaries. Prior to the adoption of the Omnibus Plan, the Board of Directors granted options 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, under the Avatech Solutions, Inc. 2002 Stock Option Plan (the “2002 Option Plan”). The 2002 Option Plan, which expired in August 2012, provided for the granting of either incentive or non-qualified stock options to purchase an aggregate of up to 7,800,000 shares of common stock to eligible employees, officers, and directors of the Company and its subsidiaries. For the nine months ended March 31, 2013, total stock compensation expense charged against income for the 2002 Option Plan was $189,000. There were no awards granted during the nine months ended March 31, 2013.
Expected volatilities are based on historical volatility of the Company’s common stock. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
A summary of stock option activity during the nine months ended March 31, 2013 and related information is included in the table below:
Options | Weighted- Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
Outstanding at July 1, 2012 | 3,481,900 | $ | 0.76 | |||||||||
Granted | — | — | ||||||||||
Exercised | — | — | ||||||||||
Forfeited | (1,674 | ) | — | |||||||||
Expired | — | — | ||||||||||
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Outstanding at March 31, 2013 | 3,480,226 | $ | 0.76 | $ | 410,000 | |||||||
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Exercisable at March 31, 2013 | 1,215,826 | $ | 0.81 | $ | 161,000 | |||||||
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Weighted-average remaining contractual life | 5.2 Years | |||||||||||
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11
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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 March 31, 2013 ranged from $0.30 to $1.71 as follows:
Range of Exercise Prices | Options Outstanding | Weighted Average Exercise Prices of Options Outstanding | Weighted | Options Exercisable | Weighted Average Exercise Prices of Options Exercisable | Weighted | ||||||||||||||
$0.30 – 0.50 | 168,446 | $ | 0.42 | 1.7 years | 168,446 | $ | 0.42 | 1.7 years | ||||||||||||
0.51 – 0.75 | 1,883,920 | 0.70 | 8.2 years | 540,880 | 0.69 | 7.8 years | ||||||||||||||
0.76 – 1.00 | 1,189,360 | 0.81 | 8.2 years | 268,000 | 0.86 | 4.2 years | ||||||||||||||
1.01 – 1.71 | 238,500 | 1.29 | 3.1 years | 238,500 | 1.29 | 3.1 years | ||||||||||||||
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3,480,226 | 0.76 | 7.6 years | 1,215,826 | 0.81 | 5.2 years | |||||||||||||||
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Assuming that no additional share-based payments are granted after March 31, 2013, $597,000 of compensation expense will be recognized in the consolidated statement of operations over a weighted-average period of 2.5 years.
4. Borrowings Under Line of Credit
On February 29, 2012, the Company entered into an $8 million line of credit facility, including a $1,000,000 sublimit for the issuance of standby or trade letters of credit, with PNC Bank, National Association. The interest rate is the “Eurodollar Rate”, which is calculated by using the LIBOR rate, plus a margin of 2.0%. The interest rate as of March 31, 2013 was 2.2%. The Company had outstanding borrowings from the bank under its credit line of approximately $2.4 million as of March 31, 2013 and had $3.1 million outstanding as of June 30, 2012. The credit facility expires on November 30, 2014.
5. Obligations Under Capital Leases
The Company has incurred various capital lease obligations for computer equipment. This capital lease obligation totaled $689,000 and $904,000 as of March 31, 2013 and June 30, 2012, respectively.
6. 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.
During the fourth quarter of fiscal year 2012, the Company recognized the realizable portion of the Company’s U.S. net operating loss carryforwards as a deferred tax asset. The Company previously had created a valuation allowance against the entire amount of net operating loss carryforwards, recognizing no deferred tax asset because it did not have a sufficient history of profitable operations to support the recognition of the asset. Since the Company established a sufficient history of consecutive profitable quarters, and projects continuing profits, the valuation allowance against the U.S. net operating loss carryforwards was reduced in the fourth quarter of fiscal year 2012 by $4.3 million to recognize the portion of the net operating loss carryforwards projected to be utilized prior to expiration. The Company continues to maintain a valuation allowance on the entirety of its U.S. capital loss carryforwards and state net operating loss carryforwards due to uncertainty about its ability to utilize such carryforwards.
The Company believes that its income tax filing positions taken or expected to be taken in its tax returns will more likely than not be sustained if such returns were to be audited by the taxing authorities and,
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accordingly, does not anticipate that any adjustments to these positions in the event such returns were to be audited would have a material adverse impact on the Company’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded. The Company’s income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination.
The Company records interest related to taxes in other expense and records penalties in operating expenses.
7. 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 March 31, 2013, 5,576,010 shares of common stock were issuable upon the conversion or exercise of options, warrants and preferred stock. For the three months ended March 31, 2013 and 2012, there were 506,497 and 2,317,420 shares of common stock equivalents, respectively, excluded from the computation of diluted earnings per share because their effect would have been antidilutive. For the nine months ended March 31, 2013 and 2012, there were 1,397,857 and 488,500 shares of common stock equivalents, respectively, excluded from the computation of diluted earnings per share because their effect would have been antidilutive.
The following tables summarize the computations of basic and diluted earnings per common share for the three and nine months ended March 31, 2013 and 2012:
Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Numerator for basic and diluted earnings per share: | ||||||||
Net income | $ | 1,775,000 | $ | 1,639,000 | ||||
Preferred stock dividends | (26,000 | ) | (32,000 | ) | ||||
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|
|
| |||||
Net income available to common stockholders | $ | 1,749,000 | $ | 1,607,000 | ||||
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|
| |||||
Weighted average shares used in computing basic net earnings per share: | 53,990,589 | 52,546,391 | ||||||
Assumed conversion of preferred stock | 2,095,784 | 2,095,784 | ||||||
Effect of outstanding stock options | 402,686 | 68,761 | ||||||
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| |||||
Weighted average shares used in computing diluted net earnings per share: | 56,489,059 | 54,710,936 | ||||||
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|
| |||||
Earnings per share, basic | $ | 0.03 | $ | 0.03 | ||||
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| |||||
Earnings per share, diluted | $ | 0.03 | $ | 0.03 | ||||
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|
Nine Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Numerator for basic and diluted earnings per share: | ||||||||
Net income | $ | 2,847,000 | $ | 3,080,000 | ||||
Preferred stock dividends | (82,000 | ) | (110,000 | ) | ||||
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|
|
| |||||
Net income available to common stockholders | $ | 2,765,000 | $ | 2,970,000 | ||||
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|
| |||||
Weighted average shares used in computing basic net earnings per share: | 53,935,863 | 52,331,996 | ||||||
Assumed conversion of preferred stock | 2,095,784 | 2,095,784 | ||||||
Effect of outstanding stock options | 318,285 | 118,159 | ||||||
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| |||||
Weighted average shares used in computing diluted net earnings per share: | 56,349,932 | 54,545,939 | ||||||
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| |||||
Earnings per share, basic | $ | 0.05 | $ | 0.06 | ||||
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| |||||
Earnings per share, diluted | $ | 0.05 | $ | 0.05 | ||||
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8. Preferred Stock
Convertible Preferred Stock
At March 31, 2013, 384,495 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 certain business combinations that are approved by the Board of Directors and subsequently submitted and approved by a vote of the Company’s stockholders. 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% 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 March 31, 2013, 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 March 31, 2013, 862 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 certain business combinations that are approved by the Board of Directors and subsequently submitted and approved by a vote of the Company’s stockholders. Any director who holds shares of Series E is not
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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.
Dividend Rate- The holders of the Series E shares are entitled to receive cumulative dividends at a rate of 10% 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 March 31, 2013 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 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.
9. Segment Information
The Company’s operations for the three and nine months ended March 31, 2013 included business in North America, Singapore, Malaysia and Australia. The Company closed its Malaysia office in January 2013. 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 March 31, 2013
North America | Singapore/Malaysia | Australia | Total | |||||||||||||
Revenue- | ||||||||||||||||
Product sales | $ | 12,042,000 | $ | 884,000 | $ | 427,000 | $ | 13,353,000 | ||||||||
Service revenue | 5,967,000 | 84,000 | 204,000 | 6,255,000 | ||||||||||||
Commission revenue | 6,099,000 | 211,000 | 227,000 | 6,537,000 | ||||||||||||
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| |||||||||
Total revenue | 24,108,000 | 1,179,000 | 858,000 | 26,145,000 | ||||||||||||
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| |||||||||
Cost of revenue- | ||||||||||||||||
Cost of product sales | 7,471,000 | 739,000 | 321,000 | 8,531,000 | ||||||||||||
Cost of service revenue | 3,731,000 | 84,000 | 181,000 | 3,996,000 | ||||||||||||
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| |||||||||
Total cost of revenue | 11,202,000 | 823,000 | 502,000 | 12,527,000 | ||||||||||||
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Gross margin | 12,906,000 | 356,000 | 356,000 | 13,618,000 | ||||||||||||
Total operating expenses | 9,745,000 | 478,000 | 488,000 | 10,711,000 | ||||||||||||
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| |||||||||
Operating income(loss) | 3,161,000 | (122,000 | ) | (132,000 | ) | 2,907,000 | ||||||||||
Other expense, net | (196,000 | ) | (52,000 | ) | 6,000 | (242,000 | ) | |||||||||
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Income (loss) before income taxes | $ | 2,965,000 | $ | (174,000 | ) | $ | (126,000 | ) | $ | 2,665,000 | ||||||
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Three Months Ended March 31, 2012
North America | Singapore/Malaysia | Australia | Total | |||||||||||||
Revenue- | ||||||||||||||||
Product sales | $ | 10,212,000 | $ | 639,000 | $ | 473,000 | $ | 11,324,000 | ||||||||
Service revenue | 4,786,000 | 122,000 | 298,000 | 5,206,000 | ||||||||||||
Commission revenue | 5,550,000 | 66,000 | 205,000 | 5,821,000 | ||||||||||||
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| |||||||||
Total revenue | 20,548,000 | 827,000 | 976,000 | 22,351,000 | ||||||||||||
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| |||||||||
Cost of revenue- | ||||||||||||||||
Cost of product sales | 6,733,000 | 514,000 | 349,000 | 7,596,000 | ||||||||||||
Cost of service revenue | 3,209,000 | 71,000 | 164,000 | 3,444,000 | ||||||||||||
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| |||||||||
Total cost of revenue | 9,942,000 | 585,000 | 513,000 | 11,040,000 | ||||||||||||
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| |||||||||
Gross margin | 10,606,000 | 242,000 | 463,000 | 11,311,000 | ||||||||||||
Total operating expenses | 8,753,000 | 294,000 | 476,000 | 9,523,000 | ||||||||||||
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|
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| |||||||||
Operating income(loss) | 1,853,000 | (52,000 | ) | (13,000 | ) | 1,788,000 | ||||||||||
Other expense, net | (80,000 | ) | (6,000 | ) | 7,000 | (79,000 | ) | |||||||||
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| |||||||||
Income (loss) before income taxes | $ | 1,733,000 | $ | (58,000 | ) | $ | (6,000 | ) | $ | 1,709,000 | ||||||
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Nine Months Ended March 31, 2013
North America | Singapore/Malaysia | Australia | Total | |||||||||||||
Revenue- | ||||||||||||||||
Product sales | $ | 31,661,000 | $ | 2,458,000 | $ | 1,289,000 | $ | 35,408,000 | ||||||||
Service revenue | 16,118,000 | 261,000 | 755,000 | 17,134,000 | ||||||||||||
Commission revenue | 15,797,000 | 313,000 | 676,000 | 16,786,000 | ||||||||||||
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| |||||||||
Total revenue | 63,576,000 | 3,032,000 | 2,720,000 | 69,328,000 | ||||||||||||
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| |||||||||
Cost of revenue- | ||||||||||||||||
Cost of product sales | 19,778,000 | 2,018,000 | 925,000 | 22,721,000 | ||||||||||||
Cost of service revenue | 10,689,000 | 266,000 | 551,000 | 11,506,000 | ||||||||||||
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| |||||||||
Total cost of revenue | 30,467,000 | 2,284,000 | 1,476,000 | 34,227,000 | ||||||||||||
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Gross margin | 33,109,000 | 748,000 | 1,244,000 | 35,101,000 | ||||||||||||
Total operating expenses | 27,522,000 | 1,053,000 | 1,539,000 | 30,114,000 | ||||||||||||
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| |||||||||
Operating income(loss) | 5,587,000 | (305,000 | ) | (295,000 | ) | 4,987,000 | ||||||||||
Other expense, net | (319,000 | ) | (47,000 | ) | 19,000 | (347,000 | ) | |||||||||
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Income (loss) before income taxes | $ | 5,268,000 | $ | (352,000 | ) | $ | (276,000 | ) | $ | 4,640,000 | ||||||
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Nine Months Ended March 31, 2012
North America | Singapore/Malaysia | Australia | Total | |||||||||||||
Revenue- | ||||||||||||||||
Product sales | $ | 33,038,000 | $ | 2,308,000 | $ | 2,024,000 | $ | 37,370,000 | ||||||||
Service revenue | 13,979,000 | 461,000 | 825,000 | 15,265,000 | ||||||||||||
Commission revenue | 13,440,000 | 167,000 | 525,000 | 14,132,000 | ||||||||||||
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| |||||||||
Total revenue | 60,457,000 | 2,936,000 | 3,374,000 | 66,767,000 | ||||||||||||
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| |||||||||
Cost of revenue- | ||||||||||||||||
Cost of product sales | 22,520,000 | 1,671,000 | 1,408,000 | 25,599,000 | ||||||||||||
Cost of service revenue | 8,996,000 | 349,000 | 431,000 | 9,776,000 | ||||||||||||
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| |||||||||
Total cost of revenue | 31,516,000 | 2,020,000 | 1,839,000 | 35,375,000 | ||||||||||||
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| |||||||||
Gross margin | 28,941,000 | 916,000 | 1,535,000 | 31,392,000 | ||||||||||||
Total operating expenses | 25,369,000 | 864,000 | 1,433,000 | 27,666,000 | ||||||||||||
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| |||||||||
Operating income | 3,572,000 | 52,000 | 102,000 | 3,726,000 | ||||||||||||
Other expense, net | (405,000 | ) | (29,000 | ) | 17,000 | (417,000 | ) | |||||||||
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Income (loss) before income taxes | $ | 3,167,000 | $ | 23,000 | $ | 119,000 | $ | 3,309,000 | ||||||||
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March 31, 2013 | June 30, 2012 | |||||||
Long-lived assets | ||||||||
North America | $ | 2,720,000 | $ | 2,633,000 | ||||
Singapore/Malaysia | 2,000 | 10,000 | ||||||
Australia | 54,000 | 68,000 | ||||||
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| |||||
Total | $ | 2,776,000 | $ | 2,711,000 | ||||
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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 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 successfully integrate acquired businesses; and other circumstances beyond the Company’s control. 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.
When used throughout this report, the terms “Rand Worldwide”, “the Company”, “we”, “us” and “our” refer to Rand Worldwide, Inc. and, unless the context clearly indicates otherwise, its consolidated subsidiaries.
Overview
Rand Worldwide is a leader in design, engineering, data archiving solutions, and facilities management technology solutions with expertise in computer aided design (“CAD”) software, computational fluid dynamics (“CFD”), data management, facilities management, and process optimization for the manufacturing, engineering, and building design industries. The Company specializes in software resale, technology consulting, implementation, integration, training, data archiving, CFD analysis consulting and thermal simulation services and technical support solutions that enable clients to more effectively design, develop, and manage projects, products, and facilities. The Company has operations in offices in the United States, Canada, Australia, and Singapore. Rand Worldwide has over 25 years of industry experience and expertise, an extensive list of training and implementation services and longstanding relationships with design technology leaders including Autodesk, Archibus and Autonomy. The Company’s clients include businesses, government agencies, and educational institutions.
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 market; |
• | Profitably grow its consulting and services business by leveraging its experts in design engineering; and |
• | Acquire or license 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; |
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• | 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 project-focused software implementations, training, consulting services, software development, software customization, data migration, supplemental design staffing, drawing digitization, symbol library development, custom courseware development, technical support and hosted data archiving solutions to its customers. The Company employs a technical staff of over 100 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, web support and eLearning lessons directly from Autodesk. Because Rand Worldwide does not participate in the delivery of these subscription products or the web support and eLearning lesson benefits, 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, Rand Worldwide records the net proceeds that it receives from Autodesk for subscription sales in accordance with the provisions of FASB Accounting Standards Codification (“ASC”) 605 (previously EITF 99-19,Reporting Revenue Gross as a Principal versus Net as an Agent).
The Company also generates commission revenue from the resale of Autodesk software to various customers, a number of which Autodesk considers major and government accounts. Autodesk designates 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 and government 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 a percentage of the 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. The Company earns a volume incentive rebate from its primary supplier, Autodesk, paid monthly as a percentage of qualifying purchases. The rebate percentage is established based on quarterly purchasing volume. These rebates serve to reduce the cost of product sales. The Company accrues its rebates the month the underlying sales are posted, in accordance with ASC 605-50,Customer Payments and Incentives. The Company has generally been able to focus its sales efforts in a manner to achieve margins on its product sales that are within a relatively narrow range period to period.
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, travel, curriculum, 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 expenses consist primarily of compensation and other expenses associated with the Company’s sales force, management,
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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 expenses.
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.
Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012
The following tables set forth a comparison of the Company’s results of operations for the three-month period ended March 31, 2013 to the three-month period ended March 31, 2012. 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.
Revenues
Three Months Ended March 31, | ||||||||||||
2013 | 2012 | % change | ||||||||||
Revenues: | ||||||||||||
Product sales | $ | 13,353,000 | $ | 11,324,000 | 17.9 | % | ||||||
Service revenue | 6,255,000 | 5,206,000 | 20.1 | % | ||||||||
Commission revenue | 6,537,000 | 5,821,000 | 12.3 | % | ||||||||
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|
|
| |||||||||
Total revenues | $ | 26,145,000 | $ | 22,351,000 | 17.0 | % | ||||||
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|
|
|
Revenues. Total revenues for the three months ended March 31, 2013 increased by $3,794,000, or 17.0%, when compared to the same period in the prior fiscal year.
Product sales increased $2,029,000, or 17.9%, for the three months ended March 31, 2013 when compared to the same period in the prior fiscal year. Product revenues were driven primarily by strong growth in the architectural market, while revenues in the manufacturing market weakened. Sales of the Company’s proprietary products, including Revit Clarity, Scan to BIM and ASCENT courseware, grew significantly over the prior year.
Service revenues increased $1,049,000, or 20.1%, for the three months ended March 31, 2013 when compared with the same period in the prior fiscal year. The increased service revenues included an increase of $545,000 in software development projects, $313,000 in increased service revenues from Rand Secure Archive services, and $183,000 from its CFD consulting business which the Company acquired in August 2012.
Commission revenues increased $716,000, or 12.3%, for the three months ended March 31, 2013 when compared with the same period in the prior fiscal year, the result of increased commission revenues from government sales combined with an increased margin rate earned on Autodesk subscription sales, which are reported net of cost.
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Cost of Revenues and Gross Margin
Three Months Ended March 31, | ||||||||||||
2013 | 2012 | % change | ||||||||||
Cost of revenue: | ||||||||||||
Cost of product sales | $ | 8,531,000 | $ | 7,596,000 | 12.3 | % | ||||||
Cost of service revenue | 3,996,000 | 3,444,000 | 16.0 | % | ||||||||
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Total cost of revenue | $ | 12,527,000 | $ | 11,040,000 | 13.5 | % | ||||||
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Gross margin | $ | 13,618,000 | $ | 11,311,000 | ||||||||
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Cost of revenue. The total cost of revenue increased $1,487,000, or 13.5%, for the three months ended March 31, 2013 when compared to the same period in the prior fiscal year.
Cost of product sales increased 12.3% during the three months ended March 31, 2013 when compared with the same period in the prior fiscal year, while product revenues increased 17.9%. Cost of product sales increased to a lesser extent than product revenues primarily due to increased sales rebates from the Company’s principal supplier, Autodesk. These rebates are recorded as a reduction of cost of product sales. Beginning February 1, 2012, Autodesk ended most of its target-based rebates and began a new volume-based rebate which has resulted in larger rebates for the Company. In addition, sales of the Company’s proprietary products such as Revit Clarity and licenses for ASCENT courseware titles increased significantly over last year, resulting in decreased product cost relative to product revenue as the development costs for such proprietary products were expensed in prior quarters when they were incurred.
Cost of service revenue increased 16.0% for the three months ended March 31, 2013 when compared to the same period in the prior fiscal year, due to the fact that the Company hired additional technical staff, mainly those related to the Company’s recent acquisitions of Informative Design Partners (“IDP”) in July 2012 and Inlet Technology, LLC (“Inlet”) in February 2012 as well as the expansion of the Rand Secure Archive division. Cost of service revenue as a percentage of related revenue decreased to 63.9% during the three months ended March 31, 2013 from 66.2% during the same period in the prior fiscal year as the Company’s overall services productivity increased.
Gross margin. The Company’s overall gross margin percentage of 52.1% for the three months ended March 31, 2013 was higher than the 50.6% gross margin for the same period in the prior fiscal year due primarily to increased vendor rebates in the current quarter combined with higher gross margins in the Company’s services division.
Other Operating Expenses
Three Months Ended March 31, | ||||||||||||
2013 | 2012 | % change | ||||||||||
Other operating expenses: | ||||||||||||
Selling, general and administrative | $ | 10,221,000 | $ | 9,091,000 | 12.4 | % | ||||||
Depreciation and amortization | 490,000 | 432,000 | 13.4 | % | ||||||||
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Total other operating expenses | $ | 10,711,000 | $ | 9,523,000 | 12.5 | % | ||||||
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Selling, General and Administrative Expense. Selling, general and administrative expenses increased $1,130,000, or 12.4%, for the three months ended March 31, 2013 when compared to the same period in the prior fiscal year. Selling, general and administrative expense as a percent of total revenues was 39.1% for the three months ended March 31, 2013, a decrease from 40.7% for the same period in the prior fiscal year. The increase in these expenses was primarily the result of employees related to the Company’s recent acquisitions as well as additional hiring in the Rand Secure Archive division. The increased revenues also resulted in increased sales commissions and performance-based bonuses.
Depreciation and Amortization. Depreciation and amortization expenses increased $58,000, or 13.4%, for the three months ended March 31, 2013 when compared to the same period in the prior fiscal year. The increase was due primarily to the additional depreciation expense associated with hardware and software acquired for the Company’s data archiving division.
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Other Expense, Net
Three Months Ended March 31, | ||||||||||||
2013 | 2012 | % change | ||||||||||
Other expense, net | $ | (242,000 | ) | $ | (79,000 | ) | 206.3 | % | ||||
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Other Expense, Net. The Company incurred $242,000 in other expense, net, during the three months ended March 31, 2013, compared to $79,000 during the same period in the prior fiscal year. The majority of the increase was due to foreign currency exchange losses of $104,000 during the current fiscal quarter compared to foreign currency exchange gains of $16,000 recorded in the same period in the prior fiscal year.
Income Tax Expense
Three Months Ended March 31, | ||||||||||||
2013 | 2012 | % change | ||||||||||
Income tax expense | $ | 890,000 | $ | 70,000 | 1,171.4 | % | ||||||
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Income Tax Expense. The Company recorded $890,000 of income tax expense during the three months ended March 31, 2013, compared to $70,000 in income tax expense recorded for the same period in the prior fiscal year. The Company’s effective tax rate was 33.4% during the three months ended March 31, 2013, compared to 4.1% during the same period in the prior fiscal year.
In the prior fiscal year, the Company had a valuation allowance against its net operating loss carryforwards and was able to offset most of its income tax expense against its net operating loss carryforwards. During the quarter ended June 30, 2012, the Company recognized as an asset its U.S. net operating loss carryforwards that it expects will be realizable and, as a result, the Company’s income tax expense is no longer offset against large unrecognized U.S. net operating loss carryforwards. Consequently, income tax expense is significantly higher.
As of March 31, 2013, the Company had U.S. federal net operating loss carryforwards available to reduce future taxable income of approximately $38.0 million; however, $25.3 million of these carryforwards were not recognized because they are subject to annual limitations under Internal Revenue Code Section 382 and are expected to expire before being utilized. These carryforwards expire between 2013 and 2029. In addition, as of March 31, 2013, the Company had foreign net operating loss carryforwards of approximately $19.6 million available to reduce future taxable income, and net deferred tax assets of $6.8 million. The carryforwards expire between 2013 and 2029 for some jurisdictions and may be carried forward indefinitely for other jurisdictions. The Company maintains a valuation allowance on the entire amount of its foreign deferred tax assets due to insufficient history of profitable operations.
The Company’s Canadian subsidiary, 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.
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Nine Months Ended March 31, 2013 Compared to the Nine Months Ended March 31, 2012
The following tables set forth a comparison of the Company’s results of operations for the nine-month period ended March 31, 2013 to the nine-month period ended March 31, 2012. The amounts are derived from selected items reflected in the Company’s unaudited Consolidated Statements of Operations included elsewhere in this report. The nine-month financial results are not necessarily indicative of future results.
Revenues
Nine Months Ended March 31, | ||||||||||||
2013 | 2012 | % change | ||||||||||
Revenues: | ||||||||||||
Product sales | $ | 35,408,000 | $ | 37,370,000 | (5.3 | )% | ||||||
Service revenue | 17,134,000 | 15,265,000 | 12.2 | % | ||||||||
Commission revenue | 16,786,000 | 14,132,000 | 18.8 | % | ||||||||
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Total revenues | $ | 69,328,000 | $ | 66,767,000 | 3.8 | % | ||||||
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Revenues. Total revenues for the nine months ended March 31, 2013 increased by $2,561,000, or 3.8%, when compared to the same period in the prior fiscal year.
Product sales decreased $1,962,000, or 5.3%, for the nine months ended March 31, 2013 when compared to the same period in the prior fiscal year. During the prior fiscal year, product sales included a single $700,000 sale in the Company’s Australian operations, while during the current fiscal year the Company’s product sales were lower for the first two quarters, but have improved during the third quarter.
Service revenues increased $1,869,000, or 12.2%, for the nine months ended March 31, 2013 when compared with the same period in the prior fiscal year. The increased service revenue included $703,000 in increased software development projects, $521,000 from its CFD consulting business, and $622,000 in increased data archiving services.
Commission revenues increased $2,654,000, or 18.8%, for the nine months ended March 31, 2013 when compared with the same period in the prior fiscal year. Commission revenues increased due to increased commission on government sales, increased volume of Autodesk subscriptions and improved margin rates on Autodesk subscriptions.
Cost of Revenues and Gross Margin
Nine Months Ended March 31, | ||||||||||||
2013 | 2012 | % change | ||||||||||
Cost of revenue: | ||||||||||||
Cost of product sales | $ | 22,721,000 | $ | 25,599,000 | (11.2 | )% | ||||||
Cost of service revenue | 11,506,000 | 9,776,000 | 17.7 | % | ||||||||
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Total cost of revenue | $ | 34,227,000 | $ | 35,375,000 | (3.2 | )% | ||||||
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Gross margin | $ | 35,101,000 | $ | 31,392,000 | ||||||||
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Cost of revenue. The total cost of revenue decreased $1,148,000, or 3.2%, for the nine months ended March 31, 2013 when compared to the same period in the prior fiscal year.
Cost of product sales decreased 11.2% during the nine months ended March 31, 2013 when compared with the same period in the prior fiscal year, while product revenue decreased 5.3%. Cost of product sales decreased to a larger extent than did product revenues primarily due to increased sales rebates from the Company’s principal supplier, Autodesk. Beginning February 1, 2012, Autodesk ended most of its target-based rebates and began a new volume-based rebate which resulted in larger rebates for the Company. Furthermore, sales of proprietary products such as Revit Clarity and licenses for ASCENT courseware titles increased significantly over the prior year, resulting in decreased product cost relative to product revenue as the development costs for such proprietary products were expensed in prior quarters when they were incurred.
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Cost of service revenue increased 17.7% for the nine months ended March 31, 2013 when compared to the same period in the prior fiscal year, while service revenues increased 12.2%, as the Company hired additional technical staff, mainly those related to the Company’s recent acquisitions as well as the expansion of the Rand Secure Archive division. Cost of service revenue as a percentage of related revenue increased to 67.2% during the nine months ended March 31, 2012 from 64.0% during the same period in the prior fiscal year for the reasons explained above.
Gross margin. The Company’s overall gross margin percentage of 50.6% for the nine months ended March 31, 2013 was higher than the 47.0% gross margin for the same period in the prior fiscal year due to increased vendor rebates in the current quarter combined with a positive sales mix and higher service revenues.
Other Operating Expenses
Nine Months Ended March 31, | ||||||||||||
2013 | 2012 | % change | ||||||||||
Other operating expenses: | ||||||||||||
Selling, general and administrative | $ | 28,669,000 | $ | 26,439,000 | 8.4 | % | ||||||
Depreciation and amortization | 1,445,000 | 1,227,000 | 17.8 | % | ||||||||
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Total other operating expenses | $ | 30,114,000 | $ | 27,666,000 | 8.8 | % | ||||||
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Selling, General and Administrative Expense. Selling, general and administrative expenses increased $2,230,000, or 8.4%, for the nine months ended March 31, 2013 when compared to the same period in the prior fiscal year. Selling, general and administrative expense as a percent of total revenues was 41.4% for the nine months ended March 31, 2013, an increase from 39.6% for the same period in the prior fiscal year. The increase in these expenses was primarily the result of new employees including those related to the Company’s recent acquisitions as well as the expansion of the Rand Secure Archive.
Depreciation and Amortization. Depreciation and amortization expenses increased $218,000, or 17.8%, for the nine months ended March 31, 2013 when compared to the same period in the prior fiscal year. The increase was due primarily to the additional depreciation expense associated with hardware and software acquired for its data archiving division.
Other Expense, Net
Nine Months Ended March 31, | ||||||||||||
2013 | 2012 | % change | ||||||||||
Other expense, net | $ | (347,000 | ) | $ | (417,000 | ) | (16.8 | )% | ||||
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Other Expense, Net. The Company incurred $347,000 in other expense, net, during the nine months ended March 31, 2013, compared to $417,000 during the same period in the prior fiscal year. The majority of the decrease was due to decreased interest expense as a result of lower average borrowing levels and lower interest rates as well as lower foreign currency exchange losses.
Income Tax Expense
Nine Months Ended March 31, | ||||||||||||
2013 | 2012 | % change | ||||||||||
Income tax expense | $ | 1,793,000 | $ | 229,000 | 683.0 | % | ||||||
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Income Tax Expense. The Company recorded $1,793,000 of income tax expense during the nine months ended March 31, 2013, compared to $229,000 in income tax expense recorded for the same period in the prior fiscal year. The Company’s effective tax rate was 38.6% during the nine months ended March 31, 2013, compared to 6.9% during the same period in the prior fiscal year.
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In the prior fiscal year, the Company had a valuation allowance against its net operating loss carryforwards and was able to offset most of its income tax expense against its net operating loss carryforwards. During the quarter ended June 30, 2012, the Company recognized as an asset its U.S. net operating loss carryforwards that it expects will be realizable and, as a result, the Company’s income tax expense is no longer offset against large unrecognized U.S. net operating loss carryforwards. Consequently, income tax expense is significantly higher.
As of March 31, 2013, the Company had U.S. federal net operating loss carryforwards available to reduce future taxable income of approximately $38.0 million; however, $25.3 million of these carryforwards were not recognized because they are subject to annual limitations under Internal Revenue Code Section 382 and are expected to expire before being utilized. These carryforwards expire between 2013 and 2029. In addition, as of March 31, 2013, the Company had foreign net operating loss carryforwards of approximately $19.6 million available to reduce future taxable income, and net deferred tax assets of $6.8 million. The carryforwards expire between 2013 and 2029 for some jurisdictions and may be carried forward indefinitely for other jurisdictions. The Company maintains a valuation allowance on the entire amount of its foreign deferred tax assets due to insufficient history of profitable operations.
As discussed above, the Company’s Canadian subsidiary, 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.
Liquidity and Capital Resources
Historically, 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 February 29, 2012, the Company entered into an $8 million line of credit facility, including a $1,000,000 sublimit for the issuance of standby or trade letters of credit, with PNC Bank, National Association. The interest rate is the “Eurodollar Rate”, which is calculated by using the LIBOR rate, plus a margin of 2.0%. The interest rate as of March 31, 2013 was 2.2%. The Company had outstanding borrowings from the bank under its credit line of approximately $2.4 million as of March 31, 2013 and $3.1 million outstanding as of June 30, 2012. The line expires on November 30, 2014.
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 and its distributors that provide it with credit to finance those purchases.
For the nine months ended March 31, 2013, net cash provided by operating activities was $2,550,000, compared to $3,411,000 for the nine months ended March 31, 2012. The decrease between periods was due mainly to increased accounts receivable due to increased revenue, partially offset by changes in accounts payable, accrued compensation and deferred income taxes.
The Company’s ongoing investing activities consist principally of investments in computer and office equipment. In July 2012, the Company acquired IDP for $600,000 in cash, $400,000 in common stock and potential future earnout payments. Purchases of equipment for the nine months ended March 31, 2013 increased to $829,000 from $679,000 when compared to the nine months ended March 31, 2012, mainly as the result of purchases of software and hardware for the Rand Secure Archive business and normal periodic replacement of computer equipment.
For the nine months ended March 31, 2013, net cash used in financing activities was $1,021,000 compared to net cash used in financing activities of $2,404,000 during the nine months ended March 31, 2012. The difference resulted mainly from a larger net pay down of the line of credit during nine months ended March 31, 2012.
The Company had a working capital surplus of $7,481,000 as of March 31, 2013 as compared with $3,573,000 as of June 30, 2012.
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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 is a party to a Value Added Reseller Agreement with Autodesk effective February 1, 2013. The agreement provides for an initial term of twelve months that, subject to certain requirements and termination rights of the parties, automatically renews on an annual basis for two additional twelve-month periods. The agreement designates the Company as an authorized reseller 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 March 31, 2013:
Twelve months ending March 31: | ||||
2014 | $ | 2,423,000 | ||
2015 | 2,034,000 | |||
2016 | 1,526,000 | |||
2017 | 946,000 | |||
2018 | 525,000 | |||
Thereafter | 349,000 | |||
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Total minimum lease payments | $ | 7,803,000 | ||
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Capital Leases
The Company has various components of computer equipment that are used in its training facilities and by employees throughout its office locations, much of which is leased. These capital lease obligations totaled $689,000 as of March 31, 2013 with approximately $294,000 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 September 2016 and depreciation expense on this equipment was approximately $187,000 as of March 31, 2013. Future minimum payments consisted of the following at March 31, 2013:
Twelve months ending March 31: | ||||
2014 | $ | 339,000 | ||
2015 | 256,000 | |||
2016 | 136,000 | |||
2017 | 56,000 | |||
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Total minimum lease payments | 787,000 | |||
Less: | ||||
Taxes | 39,000 | |||
Imputed interest | 59,000 | |||
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Present value of future minimum lease payments | $ | 689,000 | ||
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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 its principal executive officer (“CEO”) and its principal financial and accounting 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
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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 March 31, 2013 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, in fact, effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were 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 controls 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: May 15, 2013 | By: | /s/ Marc L. Dulude | ||||
Marc L. Dulude | ||||||
Chief Executive Officer | ||||||
(Principal Executive Officer) | ||||||
Date: May 15, 2013 | By: | /s/ Lawrence Rychlak | ||||
Lawrence Rychlak | ||||||
President and Chief Financial Officer | ||||||
(Principal Financial and Accounting Officer) |
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Exhibit | Description | |
31.1 | Rule 15d-14(a) Certification of Principal Executive Officer† | |
31.2 | Rule 15d-14(a) Certification of Principal Financial and Accounting Officer† | |
32.1 | Section 1350 Certifications† | |
101.INS | XBRL Instance Document.† | |
101.SCH | XBRL Taxonomy Extension Schema Document.† | |
101.CAL | XBRL Taxonomy Calculation Linkbase Document.† | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document.† | |
101.LAB | XBRL Taxonomy Label Linkbase Document. † | |
101.PRE | XBRL Taxonomy Presentation Linkbase Document.† |
† | Filed herewith. |
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