Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-173162
PROSPECTUS SUPPLEMENT NO. 1
(to Prospectus dated July 1, 2011)
RAND WORLDWIDE, INC.
35,853,149 Shares of Common Stock
This Prospectus Supplement No. 1 supplements and amends our Prospectus dated July 1, 2011, as amended and supplemented. This Prospectus Supplement No. 1 includes our attached Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, as filed with the Securities and Exchange Commission on November 14, 2011.
The Prospectus and this Prospectus Supplement No. 1 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 35,853,149 shares of our common stock. We are not selling any common stock under the Prospectus and this Prospectus Supplement No. 1, 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.OB. On November 9, 2011, the last quoted sale price for our common stock as reported on the OTCBB was $0.70 per share.
This Prospectus Supplement No. 1 should be read in conjunction with the Prospectus and any prospectus supplements filed before the date hereof. Any statement contained in the Prospectus and any prospectus supplements filed before the date hereof shall be deemed to be modified or superseded to the extent that information in this Prospectus Supplement No. 1 modifies or supersedes such statement. Any statement that is modified or superseded shall not be deemed to constitute a part of the Prospectus except as modified or superseded by this Prospectus Supplement No. 1.
Investing in our common stock involves certain risks. You should review carefully the risks described under Risk Factors beginning on page 2 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. 1 is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this Prospectus Supplement No. 1 is November 14, 2011.
* * * * *
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 September 30, 2011
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
(Registrants 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 issuers classes of common equity, as of the latest practicable date: as of November 14, 2011, there were 52,282,055 shares of common stock, par value $.01 per share, outstanding.
RAND WORLDWIDE, INC. AND SUBSIDIARIES
INDEX
Rand Worldwide, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
September 30, 2011 |
June 30, 2011 |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash |
$ | 2,536,000 | $ | 2,631,000 | ||||
Accounts receivable, less allowance of $474,000 as of September 30, 2011 and $390,000 as of June 30, 2011 |
15,381,000 | 20,112,000 | ||||||
Income tax receivable |
60,000 | 87,000 | ||||||
Other receivables |
707,000 | 816,000 | ||||||
Inventory |
88,000 | 132,000 | ||||||
Prepaid expenses and other current assets |
972,000 | 926,000 | ||||||
|
|
|
|
|||||
Total current assets |
19,744,000 | 24,704,000 | ||||||
Property and equipment: |
||||||||
Computer software and equipment |
6,866,000 | 6,918,000 | ||||||
Office furniture and equipment |
1,816,000 | 1,818,000 | ||||||
Leasehold improvements |
645,000 | 647,000 | ||||||
|
|
|
|
|||||
9,327,000 | 9,383,000 | |||||||
Less accumulated depreciation and amortization |
(7,664,000 | ) | (7,628,000 | ) | ||||
|
|
|
|
|||||
1,663,000 | 1,755,000 | |||||||
Customer list, net of accumulated amortization of $5,676,000 as of September 30, 2011 and $5,570,000 as of June 30, 2011 |
3,239,000 | 3,345,000 | ||||||
Goodwill |
15,147,000 | 15,240,000 | ||||||
Trade name, net of accumulated amortization of $878,000 as of September 30, 2011 and $802,000 as of June 30, 2011 |
3,053,000 | 3,129,000 | ||||||
Other assets |
396,000 | 403,000 | ||||||
|
|
|
|
|||||
Total assets |
$ | 43,242,000 | $ | 48,576,000 | ||||
|
|
|
|
See accompanying notes.
3
Rand Worldwide, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
(unaudited)
September 30, 2011 |
June 30, 2011 |
|||||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Borrowings under line of credit |
$ | 3,218,000 | $ | 3,939,000 | ||||
Accounts payable and accrued expenses |
10,113,000 | 13,698,000 | ||||||
Accrued compensation and related benefits |
1,412,000 | 2,455,000 | ||||||
Deferred revenue |
4,026,000 | 4,017,000 | ||||||
Obligations under capital leases |
28,000 | 77,000 | ||||||
|
|
|
|
|||||
Total current liabilities |
18,797,000 | 24,186,000 | ||||||
Long-term liabilities: |
||||||||
Deferred tax liability |
1,688,000 | 1,690,000 | ||||||
Obligations under capital leases |
25,000 | 28,000 | ||||||
|
|
|
|
|||||
Total liabilities |
20,510,000 | 25,904,000 | ||||||
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 September 30, 2011 and June 30, 2011 (note 9) |
11,000 | 11,000 | ||||||
Common stock, $0.01 par value; 80,000,000 shares authorized; issued and outstanding shares of 51,955,678 and 51,882,678 at September 30, 2011 and June 30, 2011, respectively |
520,000 | 519,000 | ||||||
Additional paid-in capital |
64,901,000 | 64,864,000 | ||||||
Accumulated deficit |
(43,663,000 | ) | (44,065,000 | ) | ||||
Accumulated other comprehensive income |
963,000 | 1,343,000 | ||||||
|
|
|
|
|||||
Total stockholders equity |
22,732,000 | 22,672,000 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 43,242,000 | $ | 48,576,000 | ||||
|
|
|
|
See accompanying notes.
4
Rand Worldwide, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Three Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Product sales |
$ | 13,277,000 | $ | 9,328,000 | ||||
Service revenue |
4,802,000 | 4,495,000 | ||||||
Commission revenue |
3,865,000 | 2,999,000 | ||||||
|
|
|
|
|||||
21,944,000 | 16,822,000 | |||||||
Cost of revenue: |
||||||||
Cost of product sales |
9,302,000 | 6,363,000 | ||||||
Cost of service revenue |
3,132,000 | 3,256,000 | ||||||
|
|
|
|
|||||
12,434,000 | 9,619,000 | |||||||
Gross margin |
9,510,000 | 7,203,000 | ||||||
Other operating expenses: |
||||||||
Selling, general and administrative |
8,518,000 | 8,615,000 | ||||||
Depreciation and amortization |
396,000 | 382,000 | ||||||
|
|
|
|
|||||
8,914,000 | 8,997,000 | |||||||
Operating income (loss) |
596,000 | (1,794,000 | ) | |||||
Other expense, net |
(142,000 | ) | (315,000 | ) | ||||
|
|
|
|
|||||
Income (loss) before income taxes |
454,000 | (2,109,000 | ) | |||||
Income tax expense |
52,000 | 62,000 | ||||||
|
|
|
|
|||||
Net income (loss) |
$ | 402,000 | $ | (2,171,000 | ) | |||
Preferred stock dividends |
(39,000 | ) | (398,000 | ) | ||||
|
|
|
|
|||||
Net income (loss) available to common stockholders |
$ | 363,000 | $ | (2,569,000 | ) | |||
|
|
|
|
|||||
Income (loss) per common share, basic |
$ | 0.01 | $ | (0.06 | ) | |||
|
|
|
|
|||||
Income (loss) per common share, diluted |
$ | 0.01 | $ | (0.06 | ) | |||
|
|
|
|
|||||
Shares used in computing income (loss) per common share: |
||||||||
Weighted average shares used in computation - basic |
51,921,676 | 42,701,339 | ||||||
Weighted average shares used in computation - diluted |
52,138,108 | 42,701,339 |
See accompanying notes.
5
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, 2011 |
1,090,150 | $ | 11,000 | 51,882,678 | $ | 519,000 | $ | 64,864,000 | $ | (44,065,000 | ) | $ | 1,343,000 | $ | 22,672,000 | |||||||||||||||||
Vesting of stock options granted to employees |
41,000 | 41,000 | ||||||||||||||||||||||||||||||
Preferred stock dividends |
(39,000 | ) | (39,000 | ) | ||||||||||||||||||||||||||||
Issuance of common stock upon the exercise of stock options |
73,000 | 1,000 | 35,000 | 36,000 | ||||||||||||||||||||||||||||
Foreign currency translation adjustment |
(380,000 | ) | (380,000 | ) | ||||||||||||||||||||||||||||
Net income for the three months ended September 30, 2011 |
402,000 | 402,000 | ||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
Comprehensive income |
22,000 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at September 30, 2011 |
1,090,150 | $ | 11,000 | 51,955,678 | $ | 520,000 | $ | 64,901,000 | $ | (43,663,000 | ) | $ | 963,000 | $ | 22,732,000 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
Rand Worldwide, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net income (loss) |
$ | 402,000 | $ | (2,171,000 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Loss on sale of property and equipment |
9,000 | | ||||||
Bad debt expense (recoveries) |
(85,000 | ) | 15,000 | |||||
Depreciation and amortization |
396,000 | 492,000 | ||||||
Stock-based compensation |
41,000 | 5,000 | ||||||
Deferred income taxes |
(2,000 | ) | (1,000 | ) | ||||
Changes in operating assets and liabilities net of those acquired: |
||||||||
Accounts receivable and other receivables |
4,925,000 | 640,000 | ||||||
Income tax receivable |
27,000 | (289,000 | ) | |||||
Inventory |
44,000 | 150,000 | ||||||
Prepaid expenses and other current assets |
(46,000 | ) | (59,000 | ) | ||||
Other assets |
7,000 | 66,000 | ||||||
Accounts payable and accrued expenses |
(3,585,000 | ) | (73,000 | ) | ||||
Accrued compensation and related benefits |
(1,043,000 | ) | 633,000 | |||||
Deferred revenue |
9,000 | 146,000 | ||||||
Income taxes payable |
| (34,000 | ) | |||||
Other long-term liabilities |
| (70,000 | ) | |||||
Net effect of recapitalization of Term Notes |
| 115,000 | ||||||
|
|
|
|
|||||
Net cash provided by (used in) operating activities |
1,099,000 | (435,000 | ) | |||||
|
|
|
|
|||||
Cash flows from investing activities |
||||||||
Cash acquired through reverse acquisition |
| 2,123,000 | ||||||
Purchases of property and equipment |
(131,000 | ) | (207,000 | ) | ||||
|
|
|
|
|||||
Net cash (used in) provided by investing activities |
(131,000 | ) | 1,916,000 | |||||
|
|
|
|
|||||
Cash flows from financing activities |
||||||||
Proceeds from borrowings under line of credit |
32,205,000 | 12,940,000 | ||||||
Repayment of borrowings under line of credit |
(32,978,000 | ) | (13,081,000 | ) | ||||
Proceeds from the issuance of common stock to employees |
36,000 | | ||||||
Payment of preferred stock dividends |
(39,000 | ) | (27,000 | ) | ||||
|
|
|
|
|||||
Net cash used in financing activities |
(776,000 | ) | (168,000 | ) | ||||
Effect of exchange rate changes on cash |
(287,000 | ) | 182,000 | |||||
|
|
|
|
|||||
Net change in cash |
(95,000 | ) | 1,495,000 | |||||
Cash - beginning of period |
2,631,000 | 1,198,000 | ||||||
|
|
|
|
|||||
Cash - end of period |
$ | 2,536,000 | $ | 2,693,000 | ||||
|
|
|
|
See accompanying notes.
7
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.
On August 17, 2010, the Company, then known as Avatech Solutions, Inc. (Avatech), acquired all the outstanding common stock of a separate corporation then known as Rand Worldwide, Inc. in a reverse merger transaction (the Merger). On January 1, 2011, the Company changed its name from Avatech Solutions, Inc. to Rand Worldwide, Inc. In accordance with U.S. generally accepted accounting principles (U.S. GAAP), because the Merger was accounted for as a reverse merger, the consolidated financial statements represent a continuation of the pre-Merger Rand Worldwide, Inc. Accordingly, the financial results for the quarter ended September 30, 2010 include the results of pre-Merger Rand Worldwide, Inc. from July 1, 2010 through August 17, 2010 and the results of the post-Merger combined Company from August 18, 2010 through September 30, 2010. Results for pre-Merger Avatech prior to August 17, 2010 have not been included. The results for the quarter ended September 30, 2011 are those of the combined post-Merger Company. All intercompany accounts and transactions between Avatech and its subsidiaries prior to the Merger, between pre-Merger Rand Worldwide, Inc. and its subsidiaries prior to the Merger, and the combined post-Merger Company and its subsidiaries have been eliminated in consolidation.
References in these Notes to Rand Worldwide, the Company, us, we, our are references to the post-Merger corporation and, unless the context clearly contemplated otherwise, its consolidated subsidiaries.
The Company is organized into three divisions: IMAGINiT Technologies (IMAGINiT), Enterprise Applications and ASCENTCenter 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 10.
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 managements 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 Rands Annual Report on Form 10-K for the fiscal year ended June 30, 2011. Operating results for the three months ended September 30, 2011 are not necessarily indicative of results for the full fiscal year or any future interim period.
8
The books of the Company are maintained in United States dollars and this is the Companys functional reporting currency. Translations 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 at 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. |
2. Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued guidance to amend the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured on a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. We do not anticipate adoption to have a material impact on our consolidated financial statements.
In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or two separate but consecutive statements and will result in presentation changes for our consolidated financial statements. The updated guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. We do not anticipate adoption to have a material impact on our consolidated financial statements.
In September 2011, the FASB amended Accounting Standards Codification (ASC) 350, Intangibles Goodwill and Other. Under the amendment, an entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If determined to be necessary, the two-step impairment test shall be used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized, if any. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We do not anticipate adoption of this amendment will have a material impact on our consolidated financial statements.
3. Supplemental Disclosure of Cash Flow Information
The Company paid interest of approximately $61,000 and $36,000 during the three months ended September 30, 2011 and 2010, respectively. The Company also paid federal and state income taxes of approximately $100,000 and $275,000 during the three months ended September 30, 2011 and 2010, respectively.
4. 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 Companys 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 provided 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. At the Companys Annual Shareholder meeting held on November 9, 2011, shareholders approved an amendment to the Plan increasing the aggregate number of shares in the Plan by 3,700,000, or a total of 7,800,000 shares. Stock options generally expire after 10 years. Options generally vest ratably over three or four years, depending on the specific grant award. As of the date of the Merger with Rand Worldwide, all of Avatechs outstanding stock options became fully vested in accordance with their respective option agreements. For the three months ended September 30, 2011, total stock compensation expense charged against income for this Plan was $41,000. There were no stock options granted during the three months ended September 30, 2011 or 2010.
9
Expected volatilities are based on historical volatility of the Companys 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 three months ended September 30, 2011 and related information is included in the table below:
Options | Weighted- Average Exercise Price |
Aggregate Intrinsic Value |
||||||||||
Outstanding at July 1, 2011 |
3,328,332 | $ | 0.81 | |||||||||
Granted |
| | ||||||||||
Exercised |
(73,000 | ) | 0.50 | |||||||||
Forfeited |
(634,800 | ) | 1.07 | |||||||||
Expired |
| | ||||||||||
|
|
|
|
|||||||||
Outstanding at September 30, 2011 |
2,620,532 | $ | 0.76 | $ | 149,000 | |||||||
|
|
|
|
|
|
|||||||
Exercisable at September 30, 2011 |
827,012 | $ | 0.88 | $ | 36,000 | |||||||
|
|
|
|
|
|
|||||||
Weighted-average remaining contractual life |
4.3 Years | |||||||||||
|
|
All options granted have an exercise price equal to the fair market value of the Companys common stock on the date of grant. Exercise prices for options outstanding as of September 30, 2011 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 0.50 |
189,947 | $ | 0.41 | 3.0 years | 189,947 | $ | 0.41 | 3.0 years | ||||||||||||
0.51 0.75 |
1,883,320 | 0.70 | 9.4 years | 89,800 | 0.64 | 5.7 years | ||||||||||||||
0.76 1.00 |
280,000 | 0.86 | 4.8 years | 280,000 | 0.86 | 4.8 years | ||||||||||||||
1.01 3.81 |
267,265 | 1.31 | 4.2 years | 267,265 | 1.31 | 4.2 years | ||||||||||||||
|
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|
|||||||||||||||||
2,620,532 | 827,012 | |||||||||||||||||||
|
|
|
|
Assuming that no additional share-based payments are granted after September 30, 2011, $584,000 of compensation expense will be recognized in the consolidated statement of operations over a weighted-average period of 3.7 years.
5. 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 Companys 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 banks 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 September 30, 2011 was 5%. The Company had outstanding borrowings from the bank under its
10
credit line of approximately $3.2 million as of September 30, 2011 and had $3.9 million outstanding as of June 30, 2011. The line expires on December 31, 2012 and is secured by 65% of the stock in one of the Companys subsidiaries and 100% of the stock of a separate subsidiary.
6. Obligations Under Capital Leases
The Company has incurred various capital lease obligations for computer equipment purchased in prior years. This capital lease obligation totaled $53,000 and $105,000 as of September 30, 2011 and June 30, 2011, respectively.
7. 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.
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 upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Companys financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded.
8. Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed by dividing net earnings (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) 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. There is no dilutive effect on earnings (loss) per share during loss periods. As of September 30, 2011, 6,242,315 shares of common stock were issuable upon the conversion or exercise of options, warrants and preferred stock. For the three months ended September 30, 2011 and 2010, there were 4,174,448 and 5,947,062 shares of common stock equivalents, respectively, excluded from the computation of diluted earnings (loss) per share because their effect would have been antidilutive.
The following summarizes the computations of basic and diluted earnings (loss) per common share for the three months ended September 30, 2011 and 2010:
Three Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Numerator for basic and diluted earnings per share: |
||||||||
Net income (loss) |
$ | 402,000 | $ | (2,171,000 | ) | |||
Payment and/or accretion of preferred stock dividends |
(39,000 | ) | (398,000 | ) | ||||
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|
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Net income (loss) available to common stockholders |
$ | 363,000 | $ | (2,569,000 | ) | |||
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|
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Weighted average shares used in computing basic net income (loss) per share: |
51,921,676 | 42,701,339 | ||||||
Effect of dilutive securities |
216,432 | | ||||||
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|
|
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Weighted average shares used in computing diluted net income (loss) per share: |
52,138,10854 | 42,701,339 | ||||||
Income (loss) per common share, basic |
$ | 0.01 | $ | (0.06 | ) | |||
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Income (loss) per common share, diluted |
$ | 0.01 | $ | (0.06 | ) | |||
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9. Preferred Stock
Convertible Preferred Stock
At September 30, 2011, 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 Companys 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% 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 September 30, 2011, 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 September 30, 2011, 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 Companys 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% 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 September 30, 2011 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.
10. Segment Information
The Companys 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 Companys 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 September 30, 2011
North America | Singapore/Malaysia | Australia | Total | |||||||||||||
Revenue- |
||||||||||||||||
Product sales |
$ | 11,297,000 | $ | 781,000 | $ | 1,199,000 | $ | 13,277,000 | ||||||||
Service revenue |
4,348,000 | 194,000 | 260,000 | 4,802,000 | ||||||||||||
Commission revenue |
3,635,000 | 21,000 | 209,000 | 3,865,000 | ||||||||||||
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Total revenue |
19,280,000 | 996,000 | 1,668,000 | 21,944,000 | ||||||||||||
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Cost of revenue- |
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Cost of product sales |
7,870,000 | 566,000 | 866,000 | 9,302,000 | ||||||||||||
Cost of service revenue |
2,879,000 | 122,000 | 131,000 | 3,132,000 | ||||||||||||
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Total cost of revenue |
10,749,000 | 688,000 | 997,000 | 12,434,000 | ||||||||||||
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Gross margin |
8,531,000 | 308,000 | 671,000 | 9,510,000 | ||||||||||||
Total operating expenses |
8,224,000 | 242,000 | 448,000 | 8,914,000 | ||||||||||||
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Income from operations |
$ | 307,000 | $ | 66,000 | $ | 223,000 | $ | 596,000 | ||||||||
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Three Months Ended September 30, 2010
North America | Singapore/Malaysia | Australia | Total | |||||||||||||
Revenue- |
||||||||||||||||
Product sales |
$ | 8,370,000 | $ | 528,000 | $ | 430,000 | $ | 9,328,000 | ||||||||
Service revenue |
4,136,000 | 120,000 | 239,000 | 4,495,000 | ||||||||||||
Commission revenue |
2,837,000 | 50,000 | 112,000 | 2,999,000 | ||||||||||||
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Total revenue |
15,343,000 | 698,000 | 781,000 | 16,822,000 | ||||||||||||
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Cost of revenue- |
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Cost of product sales |
5,680,000 | 364,000 | 319,000 | 6,363,000 | ||||||||||||
Cost of service revenue |
3,045,000 | 89,000 | 122,000 | 3,256,000 | ||||||||||||
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Total cost of revenue |
8,725,000 | 453,000 | 441,000 | 9,619,000 | ||||||||||||
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Gross margin |
6,618,000 | 245,000 | 340,000 | 7,203,000 | ||||||||||||
Total operating expenses |
8,581,000 | 138,000 | 278,000 | 8,997,000 | ||||||||||||
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Income (loss) from operations |
$ | (1,963,000 | ) | $ | 107,000 | $ | 62,000 | $ | (1,794,000 | ) | ||||||
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ITEM 2. | MANAGEMENTS 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 Companys products and services; changes in the Companys competitive position or competitive actions by other companies; the Companys 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 Companys 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 Companys 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
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 Companys 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 economy; |
| Profitably grow its consulting and services business by leveraging its expertise in design engineering; and |
| 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 Companys 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; |
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| 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 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 Autodesks subscription programs, which entitle subscribers to receive software upgrades, web support and eLearning lessons directly from Autodesk. Because the Company 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 Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605.
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. The Company earns incentives from its main supplier based upon the achievement of certain quarterly sales targets and these incentives, when achieved, serve to reduce the cost of product sales. The incentive targets are set annually and while the targets have changed over time in amount and structure, 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 from 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, 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 Companys 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.
16
Interest Expense- Interest expense consists of interest on capital lease obligations and borrowings from lines of credit.
Three Months Ended September 30, 2011 Compared to the Three Months Ended September 30, 2010
The following tables set forth a comparison of the Companys results of operations for the three-month period ended September 30, 2011 to the three-month period ended September 30, 2010. The amounts are derived from selected items reflected in the Companys unaudited Consolidated Statements of Operations included elsewhere in this report. The three-month financial results are not necessarily indicative of future results.
On August 17, 2010, the Company, then known as Avatech Solutions, Inc. (Avatech), acquired all the outstanding common stock of a separate corporation then known as Rand Worldwide, Inc. in a reverse merger transaction (the Merger). On January 1, 2011, the Company changed its name from Avatech Solutions, Inc. to Rand Worldwide, Inc. In accordance with U.S. generally accepted accounting principles (U.S. GAAP), because the Merger was accounted for as a reverse merger, the consolidated financial statements represent a continuation of the pre-Merger Rand Worldwide, Inc. Accordingly, the financial results for the quarter ended September 30, 2010 include the results of pre-Merger Rand Worldwide, Inc. from July 1, 2010 through August 17, 2010 and the results of the post-Merger combined Company from August 18, 2010 through September 30, 2010. Results for pre-Merger Avatech prior to August 17, 2010 have not been included. The results for the quarter ended September 30, 2011 are those of the combined post-Merger Company.
Revenues
Three Months Ended September 30, | ||||||||||||
2011 | 2010 | % change |
||||||||||
Revenues: |
||||||||||||
Product sales |
$ | 13,277,000 | $ | 9,328,000 | 42.3 | % | ||||||
Service revenue |
4,802,000 | 4,495,000 | 6.8 | % | ||||||||
Commission revenue |
3,865,000 | 2,999,000 | 28.9 | % | ||||||||
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|
|
|
|||||||||
Total revenues |
$ | 21,944,000 | $ | 16,822,000 | 30.4 | % | ||||||
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|
|
Revenues. Total revenues for the three months ended September 30, 2011 increased by $5,122,000, or 30.4%, when compared to the same period in the prior fiscal year.
Product sales increased $3,949,000, or 42.3% for the three months ended September 30, 2011 when compared to the same period in the prior fiscal year. Approximately $2.4 million of this increase was because the prior fiscal quarter included only a partial quarter of post-Merger operations, while the current fiscal quarter included a full quarter of post-Merger results. In addition, approximately $700,000 of the increase was due to a single sale from the Companys Australian operations with the remaining increase due to economic improvements in the markets served by the Company.
Service revenues increased $307,000, or 6.8%, for the three months ended September 30, 2011 when compared with the same period in the prior fiscal year. The effect of having a full quarter of post-Merger operations in the current fiscal quarter versus a partial quarter of post-Merger operations in the prior fiscal quarter was an increase in service revenues of $865,000. Service revenues would have decreased approximately $557,000 if the Merger had not taken place, due to decreases in Autodesk-related services of approximately $400,000 and declines in email archiving and data storage services of approximately $155,000. The Company recently made substantial investments in new data archiving infrastructure, greatly enhancing its data archiving service offerings. These new data archiving services, marketed under the trade name of Rand Secure Archive, are expected to improve data archiving service revenues in the near term. Additionally, the Company recently started an initiative targeting strategic accounts and offering enterprise-wide training services for the Autodesk products, leveraging on the proven skills of a team of training sales professionals.
17
Commission revenues increased $866,000, or 28.9%, for the three months ended September 30, 2011 when compared with the same period in the prior fiscal year. Approximately $776,000 of this increase was because the prior fiscal quarter included only a partial quarter of post-Merger operations, while the current fiscal quarter included a full quarter of post-Merger results.
Cost of Revenues and Gross Margin
Three Months Ended September 30, | ||||||||||||
2011 | 2010 | % change |
||||||||||
Cost of revenue: |
||||||||||||
Cost of product sales |
$ | 9,302,000 | $ | 6,363,000 | 46.2 | % | ||||||
Cost of service revenue |
3,132,000 | 3,256,000 | (3.8 | )% | ||||||||
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|
|
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Total cost of revenue |
$ | 12,434,000 | $ | 9,619,000 | 29.3 | % | ||||||
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|
|
|
|||||||||
Gross margin |
$ | 9,510,000 | $ | 7,203,000 | ||||||||
|
|
|
|
Cost of revenue. The total cost of revenue increased $2,815,000, or 29.3%, for the three months ended September 30, 2011 when compared to the same period in the prior fiscal year.
Cost of product sales increased 46.2% during the three months ended September 30, 2011 when compared with the same period in the prior fiscal year, while product revenue increased 42.3%. Product costs increased at a higher rate than product revenues due to the Company earning lower sales rebates based on targets established by the Companys principal supplier, Autodesk. These sales rebates were applied to the cost of product sales.
Cost of service revenue decreased 3.8%, or $124,000, for the three months ended September 30, 2011 when compared to the same period in the prior fiscal year, while service revenues increased 6.8%. The effect of having a full quarter of post-Merger operations in the current fiscal quarter versus a partial quarter of post-Merger operations in the same quarter the prior fiscal year was a $588,000 increase in cost of services revenue, offset by cost reductions due to having fewer technical staff as well as decreased external costs associated with email archiving and data storage services. Cost of service revenue as a percentage of related revenue decreased to 65.2% during the three months ended September 30, 2011 from 72.4% during the same period in the prior fiscal year for the reasons explained above.
Gross margin. The Companys overall gross margin percentage of 43.3% for the three months ended September 30, 2011 was higher than the 42.8% gross margin in the same period in the prior fiscal year due primarily to the decreased services costs.
Other Operating Expenses
Three Months Ended September 30, | ||||||||||||
2011 | 2010 | % change |
||||||||||
Other operating expenses: |
||||||||||||
Selling, general and administrative |
$ | 8,518,000 | $ | 8,615,000 | (1.1 | )% | ||||||
Depreciation and amortization |
396,000 | 382,000 | 3.7 | % | ||||||||
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|
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Total other operating expenses |
$ | 8,914,000 | $ | 8,997,000 | (0.9 | )% | ||||||
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|
Selling, General and Administrative Expense. Selling, general and administrative expenses decreased $97,000, or 1.1%, for the three months ended September 30, 2011 when compared to the same period in the prior fiscal year. Selling, general and administrative expense as a percent of total revenues was 38.8% for the three months ended September 30, 2011, a decrease from 51.2% for the same period in the prior fiscal year. The quarter ended September 30, 2010 included $1.7 million in one-time Merger-related costs, and
18
did not include $1.6 million in expenses from the operations of pre-Merger Avatech, while the quarter ended September 30, 2011 included no Merger-related costs, and was for a full quarter of post-Merger operations, resulting in a net $97,000 decrease in selling, general and administrative expenses.
Depreciation and Amortization. Depreciation and amortization expenses increased $14,000, or 3.7%, for the three months ended September 30, 2011 when compared to the same period in the prior fiscal year. The increase was due primarily to the additional amortization costs associated with the customer list and trade name acquired from Avatech in the Merger.
Other (Expense) Income, net
Three Months Ended September 30, | ||||||||||||
2011 | 2010 | % change |
||||||||||
Other expense, net |
$ | (142,000 | ) | $ | (315,000 | ) | (54.9 | )% | ||||
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|
Other (Expense) Income, net. The Company incurred $142,000 in other expense, net, during the three months ended September 30, 2011, compared to $315,000 during the same period in the prior fiscal year. The decrease is due to $165,000 of interest expense incurred on related-party notes payables for the three months ended September 30, 2010 as discussed below.
The pre-Merger Rand Worldwide, Inc. had outstanding term notes totaling approximately $12.6 million held by its majority stockholder. Immediately prior to the Merger, the pre-Merger Rand Worldwide, Inc. 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. The pre-Merger Rand Worldwide, Inc. incurred $165,000 of interest expense on these term notes for the three months ended September 30, 2010.
Income Tax Expense
Three Months Ended September 30, | ||||||||||||
2011 | 2010 | % Change |
||||||||||
Income tax expense |
$ | 52,000 | $ | 62,000 | (16.1 | )% | ||||||
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Income Tax Expense. The Company recorded $52,000 of income tax expense during the three months ended September 30, 2011, compared to $62,000 in income tax expense recorded for the same period in the prior fiscal year.
As of September 30, 2011, 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 September 30, 2011, 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 September 30, 2011, 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
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 December 31, 2010, 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 Companys new line of credit permits up to $9 million of borrowing limited to 85% of aggregate eligible accounts
19
receivable. The interest rate is, at the Companys 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 banks 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 September 30, 2011 was 5%. The Company had outstanding borrowings from the bank under its credit line of approximately $3.2 million as of September 30, 2011 and had $3.9 million outstanding as of June 30, 2011. The line expires on December 31, 2012 and is secured by 65% of the stock in one of the Companys subsidiaries and 100% of the stock of a separate subsidiary.
The Companys 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.
For the three months ended September 30, 2011, net cash provided by operating activities was $1,099,000, compared with net cash used in operating activities of $435,000 during the three months ended September 30, 2010. The increase in cash provided by operating activities from the three months ended September 30, 2011, compared to the three months ended September 30, 2010 was due mainly to the profitability of the Company, with some offsetting changes such as increased accounts receivable as a result of increased revenues.
The Companys investing activities consist principally of investments in computer and office equipment. Cash purchases of equipment for the three months ended September 30, 2011 decreased to $131,000 from $207,000 when compared to the three months ended September 30, 2010. The Company also acquired $2,123,000 of cash during the three months ended September 30, 2010 as a result of the Merger.
For the three months ended September 30, 2011, net cash used in financing activities was $776,000. compared to $168,000 during the three months ended September 30, 2010 as a result of making a larger net pay down on the line of credit.
The Company had a working capital surplus of $947,000 as of September 30, 2011.
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, 2010. 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 September 30, 2011:
Twelve months ending September 30: | ||||
2012 |
$ | 2,380,000 | ||
2013 |
1,907,000 | |||
2014 |
1,594,000 | |||
2015 |
1,184,000 | |||
2016 |
525,000 | |||
Thereafter |
615,000 | |||
|
|
|||
Total minimum lease payments |
$ | 8,205,000 | ||
|
|
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Capital Leases
The Company has various computer equipment used in training facilities and by employees throughout its office locations. These capital lease obligations totaled $53,000 as of September 30, 2011 with approximately $28,000 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 $46,000 as of September 30, 2011. Future minimum payments consisted of the following at September 30, 2011:
Twelve months ending September 30: | ||||
2012 |
$ | 34,000 | ||
2013 |
21,000 | |||
2014 |
5,000 | |||
2015 |
2,000 | |||
|
|
|||
Total minimum lease payments |
62,000 | |||
Less: |
||||
Taxes |
1,000 | |||
Imputed interest |
8,000 | |||
|
|
|||
Present value of future minimum lease payments |
$ | 53,000 | ||
|
|
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 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 September 30, 2011 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 Companys 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 Companys 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.
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ITEM 6. | EXHIBITS |
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: November 14, 2011 | By: | /s/ Marc L. Dulude | ||
Marc L. Dulude | ||||
Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Date: November 14, 2011 | 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. |
| Furnished herewith. |
* | Furnished electronically with this report. |
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