Note 2 - Reverse Merger Transaction

12 Months Ended

Jun. 30, 2012

Mergers, Acquisitions and Dispositions Disclosures [Text Block]

2. Reverse Merger Transaction

On August 17, 2010, the Company, then known as Avatech Solutions, Inc., acquired all the outstanding common stock of a corporation then known as Rand Worldwide, Inc. as a result of a merger. Pre-merger Rand Worldwide, Inc. was also a software reseller in the design automation marketplace. The Company believes the merger expanded its overall geographic presence and increased its market share.

In consideration for the merger, the stockholders of pre-merger Rand Worldwide received shares of Avatech common stock representing approximately 66% of the outstanding shares of Avatech common stock and Avatech’s stockholders retained approximately 34% of the outstanding shares of Avatech common stock.  When calculated based on the number of shares of Avatech common stock outstanding on a fully diluted basis, the common stock issued to the pre-merger Rand Worldwide stockholder was equal to approximately 59% of the total common equivalent shares as of the date of the merger.  As the pre-merger Rand Worldwide stockholder acquired more than 50% of the outstanding shares of Avatech common stock, Rand Worldwide was deemed, for accounting and SEC reporting purposes to be the continuing reporting entity.  As such, the consolidated financial statements for the year ended June 30, 2011 include the accounts of pre-merger Rand Worldwide for the full year and those of Avatech since August 17, 2010, while the consolidated financial statements for the year ended June 30, 2012 are those of the combined post-merger Company.  Balances reported for prior periods reflect the accounts of pre-merger Rand Worldwide only.  Additionally, the equity structure of Rand Worldwide has been restated for balance sheet dates prior to the merger using the exchange ratio established in the acquisition agreement to reflect the number of shares of Avatech Solutions, Inc. common stock issued in the merger.

RWWI Holdings, LLC (“RWWI Holdings”) was formed in the recapitalization by the stockholders of pre-merger Rand Worldwide prior to the merger to hold their interests in Avatech.  Accordingly, RWWI Holdings holds 66% of the outstanding shares of the Company.  RWWI Holdings is not part of the Company’s consolidated group.

Recognized amounts of identifiable intangible assets acquired and liabilities assumed

The Company accounted for the transaction using the acquisition method in accordance with ASC 805, Business Combinations. Accordingly, the consideration has been allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair values on the acquisition date. The Company’s allocation of the total consideration transferred of $14,226,000 is summarized below:

Net tangible assets acquired	$	2,449,000
Deferred income tax assets		392,000
Trade name		2,649,000
Customer list		3,010,000
Goodwill		8,151,000
Deferred tax liability		(2,425,000	)
Total consideration transferred	$	14,226,000

Identifiable intangible assets

Fair values for the trade name and customer list were determined based on the income approach.  The following table presents certain information on the acquired identifiable intangible assets:

Intangible asset	Discount rate used			Estimated useful life (years)
Trade name		19.0	%	15
Customer list		21.0	%	15

Goodwill

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. These benefits include expansion opportunities and increased presence in the design automation marketplace.

Pro Forma — Financial Information

The following reflects the unaudited pro forma combined results of operations for the year ended June 30, 2011 of Avatech and Rand Worldwide as if the acquisition had taken place as of July 1, 2010:

Total revenue	$	93,201,000
Net income		1,467,000
Earnings per common share, basic		0.03
Earnings per common share, diluted		0.03

In connection with the merger, during the year ended June 30, 2011, Avatech and pre-merger Rand Worldwide incurred combined non-recurring costs of $2,251,000, including $932,000 in professional fees, $873,000 in severance costs, $233,000 in accrued lease costs for office closings, $151,000 due to accelerated vesting of stock options, $30,000 for the corporate name change and $32,000 in additional board fees.  The $2,251,000 of non-recurring costs are included in the proforma results shown above, however only $1,893,000 of such costs are included in the consolidated statement of operations for the year ended June 30, 2011, because $358,000 of these costs were incurred by Avatech prior to the merger.