ITEM 1. BUSINESS
General
Rand Worldwide, Inc. (“Rand Worldwide”) is a Delaware corporation formed in 1986. On August 17, 2010, the Company, then known as Avatech Solutions, Inc., acquired all of the issued and outstanding capital securities of a Delaware corporation then known as Rand Worldwide, Inc. from RWWI Holdings LLC in a reverse merger transaction. Subsequently, on January 1, 2011, Avatech Solutions, Inc. changed its name to Rand Worldwide, Inc.
The Company 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, 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. 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, Dassault Systèmes and Autonomy. The Company’s clients include businesses, government agencies, and educational institutions.
The Company differentiates itself from traditional product resellers through a wide range of value-added services, consisting primarily of training, technical support, professional services and courseware development. It also provides software customization, data migration, computer-aided design standards consulting, process workflow analysis, and implementation assistance for complex design environments. Its strategic focus is to provide clients a competitive advantage with technology solutions that address broad, enterprise-wide initiatives.
Rand Worldwide’s sales and service delivery network consists of approximately 250 employees operating out of 47 business offices throughout North America. The Company has an extensive sales database that contains several hundred thousand point-of-contact names collected over its history and an active customer list of approximately 30,000 private firms, federal, state, and local agencies, and colleges and universities.
The Company’s ongoing strategic plan calls for it to leverage the solid core business base that has been established to profitably grow its product and services offerings in the design engineering market space. Concurrently, the Company plans to continue to identify and engage in diverse software and services opportunities through strategic relationship development while taking advantage of its established brand, its geographic footprint and technical expertise to accomplish its objectives. Thus, the strategic plan calls for the Company to target specific product lines that will maximize its Autodesk business, to leverage its market position and core competencies, and to grow the services component of its business.
Rand Worldwide has a software development team within its professional services group that is charged with the responsibility of developing software-based solutions for customers that improve the customers’ design workflow processes. These may include sales-oriented configuration tools or engineering-oriented automation and integration tools. The solutions often involve automating or enhancing the software products the Company sells. While focused on software customization services, the team has developed a series of add-ons and utilities complementary to the products that it resells. Such software is both offered for sale and, in some cases, provided at no cost as an additional benefit to its customers. It is Rand Worldwide’s intention to continue the development of software applications as well as to identify new areas for commercial software development.
The Company’s product sales are somewhat cyclical, and increase when the developer of a specific software product releases a new version, offers promotions or discontinues support of an older product. As is common among software resellers, the Company purchases products from its suppliers with a combination of cash and credit. The Company allows returns in limited situations.
Products
Substantially all of Rand Worldwide’s product sales consist of the sale of prepackaged software focused on the following four major product categories.
Design Automation. More than 95% of product revenues arise from the resale of design software developed by Autodesk for the building design and land development, manufacturing, utilities, and telecommunications industries. These product sales are primarily packaged software programs installed on a user workstation, on a local area network server, or in a hosted environment. The programs perform and support a wide variety of functions related to design, drafting, manufacturing, workflow automation, and document management activities.
Rand Worldwide also provides 3D laser scanning products including scanners and related hardware and software, as well as equipment rentals. This solution provides accurate as-builts of existing structures and facilities, resulting in a more accurate and cost effective design.
Data Management. Data management software products help businesses reduce costs, improve quality, strengthen relationships with customers and suppliers, and deliver more innovative products and services to minimize product time-to-market by leveraging the value of existing data.
Facilities Management. Physical assets, such as real estate, buildings, equipment, materials, and furniture are a significant percentage of an organization’s total asset value. These assets are used by many different business units, departments, and individuals, and must be accurately managed in order to extend asset life cycles and keep operating costs at a minimum.
Integrated Workplace Management Systems (“IWMS”) and Computer Aided Facilities Management (“CAFM”) systems enable organizations to make informed strategic and business decisions that optimize return on investment, lower asset lifecycle costs, and increase enterprise-wide productivity and profitability. Organizations of all sizes, spanning the financial, educational, governmental, healthcare, and manufacturing industries, use these solutions to deliver timely, relevant facilities information as part of their strategic business plans.
Geographic Information Systems (“GIS”) permit users to link together disparate data files (maps, aerial photos, tax records, marketing data, etc.) and provide the user with a unified image and knowledge base of a specific geographic location or building location. When combined with information from a facilities management system, information from GIS applications provide an integrated facilities view that allows enhanced analysis in various spatial contexts for professionals responsible for asset tracking, maintenance, emergency preparedness, space allocation, and construction planning.
The Company sells, customizes, and implements IWMS and CAFM solutions through its dedicated sales team, technical specialists, and network of strategic partners. It also provides GIS database development services to facilities management customers, both through its employees and strategic partners.
ASCENT Courseware. Through its ASCENT division, the Company is a leading developer and publisher of professional training and knowledge products for engineering software applications. ASCENT courseware is distributed globally through outside distribution channels and its products are used to train thousands of people in the engineering and manufacturing fields around the world each year. ASCENT’s courseware for the Autodesk products has received Autodesk Official Training Guide (AOTG) designation.
Services
Professional services include project-focused software implementations, software customization, data migration, computer aided design standards consulting, supplemental design staffing, drawing digitization, symbol library development, and CFD analysis consulting and thermal simulation services. The Company employs over 100 industry specialists who provide professional services to its design automation customers.
Rand Worldwide offers training courses in approximately 50 different subjects related to various software solutions offered at 43 training facilities and through mobile labs sent to customer sites or other off-site facilities. Training is led by over 100 technical experts that have formal training or proven industry experience in the topics they teach. The Company also provides training services that are highly tailored to meet the needs of a particular customer, including company-specific operational topics, customized product usage, and other general technology or process training. As part of the training offering, the Company has developed and deployed an Internet-based assessment tool that allows its clients to test their employees’ knowledge and ability to use the software tools.
The Company provides end-user support services through its Solution Center which provides customers with access to highly-trained certified product-specific support engineers who accelerate issue resolution, live telephone and desktop support, online case management, and the ProductivityNOW Online Portal. A staff of full-time technology consultants assists customers with questions about product features, functions, usability issues, and configurations. The Solution Center offers services through multiple access levels including prepaid services, actual elapsed time, and annual support contracts.
Markets and Competition
Design Automation. In the design automation market, Rand Worldwide focuses on providing enterprise solutions to small- and medium-sized businesses with under one billion dollars of annual revenue, primarily in the architecture, engineering, and construction (“AEC”) market and the mechanical design and manufacturing (“MFG”) market. The AEC market is comprised of design services focused on the construction of large physical assets such as buildings, roads, factories, utility companies, and commercial infrastructure projects. The MFG market is primarily focused on the design, tooling, assembly, and testing of instruments, electronic devices, machines, mechanical devices, and power-driven equipment.
While several local and regional competitors exist in the various geographic territories where the Company conducts business, it believes that it has a competitive advantage in terms of geographic reach, comprehensive training and support, and the provision of other products and services, and that it is one of the largest commercial Autodesk resellers in the United States. Two competitors that could be compared to Rand Worldwide in scale, size, geographical reach, and target markets for the resale of Autodesk products are Tata Technologies Company (“Tata”) and Mensch und Maschine Software SE (“M+M”).
Tata is a systems integrator for design automation products with offices located in 17 countries and has headquarters in the United States, the United Kingdom, and India. While the Company believes that Tata has greater revenues than Rand Worldwide, the Company estimates that the Autodesk portion of Tata’s business is less than the Company’s Autodesk business.
M+M is one of the leading European providers of computer aided design and manufacturing solutions with more than 50 offices located across the world and headquarters in Germany. M+M is the largest European Autodesk value-added reseller; however, the Company believes that M+M’s Autodesk-related business in Europe is comparable to the Company’s Autodesk-related business in North America.
Data Management. In this market, the Company faces similar competition from local and regional Autodesk resellers in its design automation business.
Facilities Management. The Company provides IWMS and CAFM solutions to organizations of all sizes, spanning the financial, educational, governmental, healthcare, and manufacturing industries. As a reseller of technology from ARCHIBUS and Idisis, the Company competes with not only competitive applications but also other resellers of the products it represents.
Computational Fluid Dynamics. In the CFD market, the Company provides CFD analysis consulting and thermal simulation services to businesses primarily in the AEC and MFG markets. Competitors include local and regional consulting firms as well as software companies which have developed CFD analysis software and provide consulting services.
Arrangements with Principal Suppliers
Revenues are primarily derived from the resale of vendor software products and services. These sales are made pursuant to channel sales agreements whereby Rand Worldwide is granted the authority to purchase and resell the vendor products and services. Under these agreements, the Company both resells software directly to its customers and acts as a sales agent for various vendors and receives commissions for its sales efforts.
On February 1, 2013, the Company entered into renewable Value Added Reseller Agreements with Autodesk. The renewable agreements have a term of three years but provide targets and set forth rebate programs for a one-year period. Under these agreements, Autodesk appointed the Company as a non-exclusive partner to market, distribute, and support Autodesk software products. The territories for such authorizations include the authorization to sell various Autodesk products in parts of the United States and in all of Canada. The Company must achieve yearly minimum purchase requirements from the sale of Autodesk’s various software products in order to be eligible to purchase such products directly from Autodesk. For the year ended June 30, 2014, the Company’s revenue from the sale of Autodesk software and subscriptions was approximately $63.9 million.
Customers
The Company currently markets its products to private companies, public corporations, government agencies, and educational institutions throughout the United States and Canada. In the fiscal year ended June 30, 2014, the revenues generated by our top 10 customers represented approximately nine percent of consolidated revenues, and no single customer accounted for five percent or more of our consolidated revenues.
Intellectual Property
The Company regards its technology and other proprietary rights as essential to its business. As such, it relies on copyright, trade secret, confidentiality procedures, contract provisions, and trademark law to protect its technology and intellectual property. Rand Worldwide has confidentiality agreements with its consultants and corporate partners and controls access to, and distribution of, its products, documentation, and other proprietary information.
Rand Worldwide owns several federally registered trademarks, and has other trademark applications pending, but has no patents or patent applications pending. This Annual Report contains trademarks and trade names of Rand Worldwide and its affiliates as well as those of other companies. All trademarks and trade names appearing in this report are the property of their respective holders.
Employees
At June 30, 2014, the Company had 360 employees, of which 354 are full-time employees including 34 at our Owings Mills, Maryland office and 17 at our Framingham, Massachusetts office, which both constitute our corporate headquarters and house a training facility and some sales and technical personnel. Other employees are located in 45 other offices throughout the United States and Canada. None of our employees are represented by collective bargaining agreements, and we have never experienced a work stoppage. We believe that our employee relations are good.
Available Information
Rand Worldwide maintains an Internet site at http://rand.com on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). In addition, stockholders may access these reports and documents on the SEC’s web site at www.sec.gov. The Company’s executive offices are located at 161 Worcester Road, Suite 401, Framingham, Massachusetts 01701 and its telephone number is (508) 663-1400.
ITEM 1B.
ITEM 1B. RISK FACTORS
This item is not required for smaller reporting companies.
ITEM 1B. UNRESOLVED STAFF COMMENTS
This item is not applicable to smaller reporting companies.
ITEM 2.
ITEM 2. PROPERTIES
The Company has corporate offices in Framingham, Massachusetts and Owings Mills, Maryland with leases for 10,127 square feet and 10,179 square feet, respectively, that expire on October 31, 2015 and September 30, 2016, respectively. These facilities house executive and primary administrative offices as well as accounting, order processing operations, IT, sales, and marketing. The Company also leases office space at the following locations:
The commercial real estate market is volatile and unpredictable in terms of available space, rental fees, and occupancy rates and preferred locations. The Company cannot be certain that additional space will be available when it is required, or that it will be affordable or in a preferred location.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal matters or named as a defendant in legal actions arising from normal operations, or is presented with claims for damages arising out of the conduct of its business. Management believes that no pending matter, alone or together with other pending matters, is likely to have a material adverse effect on the Company’s future financial condition or results of operations.
ITEM 4.
ITEM 4. MINE SAFTEY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Price Data
Rand Worldwide’s common stock is not heavily traded. Trades are affected in privately-negotiated transactions and by certain broker-dealers, who make a market in the common stock through the Over-the-Counter Bulletin Board (the “OTCBB”) . Market information for Rand Worldwide, Inc.’s common stock may be found at the OTCBB’s Internet website, www.otcbb.com , under the symbol “RWWI”. The information contained in or accessed through that website is not part of this Annual Report or incorporated herein by reference. The following table sets forth, to the best knowledge of the Company, the high and low bid quotations per share, rounded to the nearest whole cent, as available through the OTCBB for each quarterly period within the two most recent fiscal years. These quotations represent prices between dealers and do not reflect retail mark-ups, mark-downs or commissions, and may not represent actual transactions. There may have been additional transactions during these periods of which the Company is not aware.
Recent Closing Price
On September 22, 2014, the closing sales price for our common stock as reported on the OTCBB was $1.13 per share.
Dividend Information
The Company has never paid cash dividends on its common stock and has no plans to pay cash dividends in the foreseeable future. The declaration and amount of any future cash dividends is at the discretion of the Company’s Board of Directors. Moreover, without the consent of our senior lender, the Company is prohibited from declaring dividends on the Company’s common stock. Accordingly, there can be no guarantee that stockholders will receive any cash dividends on their common stock in the future.
The Company has outstanding shares of Series D Convertible Preferred Stock (“Series D Stock”) and Series E Convertible Preferred Stock (“Series E Stock”), which are eligible for 10% annual, cumulative dividends. The dividends are payable quarterly as declared by the Board of Directors. These dividends have priority over any declaration or payment of any dividend or other distribution on the common stock and have been paid each quarter.
For the years ended June 30, 2014 and 2013, dividends totaling $109,000 during each fiscal year were paid to the holders of the Series D Stock and Series E Stock.
Number of Stockholders
As of September 22, 2014, there were 280 holders of record of the Company’s common stock, 7 holders of Series D Stock, and 25 holders of Series E Stock.
Equity Compensation Plan Information
Pursuant to the SEC’s Regulation S-K Compliance and Disclosure Interpretation 106.01, the information regarding the Company’s equity compensation plans required by this Item pursuant to Item 201(d) of Regulation S-K is located in Item 12 of Part III of this annual report and is incorporated herein by reference.
Issuer Purchases of Equity Securities
During the fourth quarter of fiscal year 2014, the Company did not purchase any shares of its common stock.
Sales of Unregistered Equity Securities
During the fourth quarter of fiscal year 2014, the Company did not sell any unregistered equity securities.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
This item is not required for smaller reporting companies.
ITEM 7.
ITEM 7. 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.
Overview
Rand Worldwide is a leading provider of design automation and data management solutions for the manufacturing, building design, engineering, infrastructure and facilities management markets. The Company also specializes in technical support, training, and consulting aimed at improving design and documentation efficiencies and the seamless integration of workflow processes. This combination of technology solutions and services enables customers to enhance productivity, profitability, and competitive position.
The Company’s business strategy is built on three core principles designed to leverage its existing strengths with expected market opportunities:
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Maintain and profitably grow its strong position in the Autodesk software market.
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Profitably grow its consulting and services business by leveraging its experts in design engineering.
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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.
Discontinued Operations
During the fourth quarter of its fiscal year ended June 30, 2013, the Company sold its operations in Singapore, Malaysia and Australia. Accordingly, the results of these operations and the gains and losses recognized upon their disposal are considered discontinued operations and are presented separately from the results of the Company’s continuing operations. The results for prior periods have been reclassified to separately present the results of discontinued operations.
Recent Developments
During September of 2014, the Company spun off its Rand Secure Data division into a separate subsidiary and sold the stock of the newly formed subsidiary for $500,000 in cash, resulting in an estimated loss of $1.1 million. During FY2014 the Secure Data division had revenues of $2.6 million, gross margins of $761,000 and operating losses of $1.2 million before income taxes, interest, depreciation, amortization and corporate overhead allocations.
Critical Accounting Policies
The consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. Critical accounting policies and estimates that impact the consolidated financial statements are those that relate to software revenue recognition, estimates of bad debts, income taxes and recoverability of goodwill and purchased intangible assets. All of these critical accounting policies are discussed with and reviewed by the Company’s Audit Committee on a periodic basis. Presented below is a description of the accounting policies that management believes are most critical to an understanding of the consolidated financial statements.
Software Revenue Recognition- The Company derives most of its revenue from the resale of packaged software products, and, historically, the Company has not experienced significant customer returns. Rand Worldwide earns service revenue from training and other professional services, which often are related to the products that are sold but are not essential to the functionality of the software. Annual support contracts are also offered to customers for the software products that are sold, or the Company offers maintenance and support services under hourly billing arrangements.
Revenue from software arrangements is recognized in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 985, Software Revenue Recognition. Prior to recognizing any revenue under these arrangements, (1) persuasive evidence of an arrangement must exist, (2) delivery of the software or service must have occurred, (3) all fees must be assessed as fixed or determinable, and (4) all fees must be probable of collection. The Company determines whether criteria (3) and (4) have been satisfied based on its judgment regarding the fixed nature of the fee charged for services rendered and products delivered and the collectability of such fee. Revenue recognized in a reporting period could be adversely affected if future changes in conditions related to a transaction cause management to determine these criteria are not met. In the past, it has not been necessary to adjust reported revenues due to changes in conditions, and the Company continues to evaluate current conditions that may affect the nature and timing of our revenue recognition.
The Company’s arrangements with its customers may involve the sale of one or more products and services at the same time. The Company considers these to be multiple elements of a single arrangement. The Company follows the guidance in FASB ASC 605-25, Multiple-Element Arrangements, where we allocate the total arrangement consideration to each separable element based on the relative selling price of each element in accordance with selling price hierarchy, which includes: vendor specific objective evidence (“VSOE”) if available; third party evidence (“TPE”) if VSOE is not available; and best estimate of selling price if neither VSOE nor TPE is available. In general, the Company uses VSOE to allocate the selling price to each element. Arrangement consideration allocated to undelivered elements is deferred until delivery of the individual elements.
Bad Debts- The Company maintains an allowance for doubtful accounts for estimated losses which may result from the inability of customers to pay for purchased products and services or for disputes that affect the ability to fully collect accounts receivable. Rand Worldwide estimates this allowance by reviewing the status of past-due accounts and records general reserves based on historical bad debt expense. Accounts are considered past due based on the payment terms as stated on the invoice. Actual experience has not varied significantly from
estimates; however, if the financial condition of the Company’s customers were to deteriorate, resulting in their inability to pay for products or services, there may be a need to record additional allowances in future periods. To mitigate this risk, the Company performs ongoing credit evaluations of its customers.
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 records liabilities for uncertain tax positions in accordance with ASC 740-10, Income Taxes.
Recoverability of goodwill and purchased intangible assets- The Company accounts for goodwill and other intangibles under ASC 350, Goodwill and Other Intangible Assets. ASC 350 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment; while the second phase, if necessary, measures the impairment. The Company performs the required impairment analysis of goodwill at the reporting unit level annually or on an interim basis if circumstances dictate. Any reduction of the reporting unit fair value below the recorded amount of equity could require the Company to write down the value of goodwill and record an expense for an impairment loss. Management’s analysis of the recoverability of goodwill as of June 30, 2014 identified an impairment of the goodwill and acquired customer list of the CFD consulting business that was acquired in July of 2012. Impairment charges of $1 million were recorded during the fourth quarter of fiscal year 2014, reducing the carrying value of the CFD goodwill and customer list. There were no further impairments of goodwill or other intangible assets outside of the CFD business.
Results of Operations
The following describes the components of each line item of our consolidated statement of operations.
Product Sales- Product sales consist primarily of the resale of packaged design software, including:
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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;
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Archibus facilities management software for space planning, strategic planning, and lease/property administration;
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Leica 3D laser scanning equipment for the Architectural, Engineering and Construction sector;
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ASCENT internally-developed courseware for a variety of engineering applications; and
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Autonomy data archiving solutions
Service Revenue- Rand Worldwide provides services in the form of training, consulting services, software development, custom courseware development, technical support and data archiving solutions to its customers. Rand Worldwide 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 Data 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 ASC 605, Revenue Recognition.
Rand Worldwide 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. Rand Worldwide 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-based rebate from its primary supplier, Autodesk, paid monthly as a percentage of qualifying purchases. The rebate percentage is established based on the level of new product and subscription purchases as measured against quarterly targets developed by Autodesk . 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, literature, 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 Expenses- Selling, general and administrative expenses consist primarily of compensation and other expenses associated with the Company’s sales force, management, finance, human resources, and information systems. Advertising and public relations expenses and expenses for facilities, such as rent and utilities, are also included in selling, general and administrative expenses.
Depreciation and Amortization Expenses- 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. Rand Worldwide leases all of its facilities and depreciates leasehold improvements over the lesser of the lease term or the estimated useful life of the asset. Total amortization expense for the year ended June 30, 2014 was $828,000 and total depreciation expense for the same period was $1,087,000.
Interest Expense- For the year ended June 30, 2014, interest expense consisted of interest on capital lease obligations, earn-out consideration and borrowings from lines of credit.
Selected Revenue Information for Years Ended June 30, 2014 and June 30, 2013
The following table sets forth the percentages of total revenue represented by selected items reflected in our audited Consolidated Statements of Operations included elsewhere in this report. The year-to-year comparisons of financial results are not necessarily indicative of future results.
Year Ended June 30, 2014 Compared to Year Ended June 30, 2013
Revenue
Revenue: Total revenue for the year ended June 30, 2014 increased by $9.1 million, or 11.0%, when compared to the prior year.
Product sales as reported in the current fiscal year increased by $6.0 million, or 14.2%, from the levels in the prior year. Of this increase, $3.2 million was the result of a single large sale. Additionally, product sales from the Company’s Rand 3D division have increased $546,000. The remaining increased product revenues are attributable to the increased focus of the sales division on generating new product sales and new subscriptions.
Service revenues increased $1.7 million, or 7.9%, for the year ended June 30, 2014 when compared to those reported for the year ended June 30, 2013. The increased service revenues were fueled by large growth in CFD consulting, facilities management software services and Rand Secure Data implementations.
In fiscal year 2014, commission revenues increased $1.4 million, or 7.5%. Through a disciplined approach to sales and a heightened attention to customer satisfaction, the Company’s renewal rates on its Autodesk subscriptions are among the highest in the sales channel, leading to year-over-year growth in commission revenues.
Cost of Revenue
Cost of Revenue: Total cost of revenue increased by $5.5 million, or 13.4%, for the year ended June 30, 2014 when compared to the year ended June 30, 2013.
Cost of product sales increased 16.2% while product sales increased 14.2% over the previous fiscal year. During fiscal year 2014, the Company’s product margin rates decreased from 37.2% to 36.1%. Cost of product sales increased to a larger extent than did product revenues primarily due to a decreased rate of sales rebates from the Company’s principal supplier, Autodesk, because the Company had a single large product sale of $3.2 million which did not qualify for a supplier rebate.
Cost of service revenue increased 8.4%, while service revenue increased by 7.9% over last year. Salaries increased due to added technical staff, including filling vacant positions on the IMAGINiT services team and expanding the Rand Secure Data division. Royalties relating to the Rand Secure Data services increased at a faster pace than their corresponding revenue growth. Additionally, the Company had a large services project which involved significantly more subcontracted services than usual resulting in a temporary increase in the cost of service revenue. As a result, cost of service revenue as a percentage of related revenue increased to 67.1% during fiscal year 2014 from 66.8% during the prior fiscal year.
Gross Margin: The Company’s overall gross margin percentage of 49.4% for the year ended June 30, 2014 was lower than the 50.5% gross margin for the previous year. The Company had a large sale during the current fiscal year which was primarily comprised of new products. This sale did not qualify for any supplier rebates and, due to its size, adjusted the overall revenue mix that the Company realized for the year. Both of these factors served to reduce the reported gross margin percentage.
Other Operating Expenses
Selling, General and Administrative: Selling, general and administrative expenses increased $791,000, or 2.3%, over the prior year. The increase in these expenses was primarily the result of higher commissions and bonuses due to the increased revenues and earnings of the Company as compared to the prior fiscal year.
Impairment of goodwill and intangible assets: The Company recorded impairment charges against its goodwill and the value of its acquired customer list of the CFD consulting business that was acquired in July 2012. While the CFD business is consistently profitable and experiencing growth in revenue, its earnings have been less than the levels forecasted at the time of the acquisition. Following an assessment of the fair value of the CFD business, impairment charges were recorded to reduce the book value of goodwill and the value of the acquired customer list.
Change in the value of contingent consideration: Part of the acquisition price for the CFD consulting business includes contingent consideration to be paid in future years based upon whether the CFD business achieves certain earnings targets in those years. At the time of the acquisition, the Company estimated the value of future contingent consideration payments. Because the historical earnings of the CFD business have been less than those earnings targets, the Company reduced its estimate of the remaining liability for contingent consideration recorded and recorded an adjustment during the current fiscal year to reflect the reduced liability for contingent consideration.
Depreciation and Amortization: Depreciation and amortization expenses increased $24,000, or 1.3%, when compared to fiscal year 2013 as a result of additional depreciation expense associated with hardware and software acquired for the Company’s data archiving division as well as the regularly scheduled replacement of computer equipment.
Other Income (Expense):
Other Income (Expense): Other income (expense) includes interest expense arising from the Company’s borrowings and recognized foreign exchange gains and losses.
Interest expense for fiscal year 2014 decreased $146,000, or 48.0%, when compared to the prior fiscal year, mainly due to decreased borrowings on its line of credit.
The Company incurred $70,000 of currency exchange losses during the year ended June 30, 2014, compared with $110,000 of losses for the year ended June 30, 2013, mainly due to the Canadian Dollar gaining strength relative to the US Dollar.
Income Tax Expense (Benefit)
Income Tax Expense (Benefit): The Company recorded a tax benefit of $1,723,000 for the year ended June 30, 2014 versus income tax expense of $1,691,000 for the prior year.
The income tax benefit recorded during fiscal year 2014 was the result of recognizing the realizable portion of the Company’s Canadian net operating loss carryforward as a deferred tax asset. The Company previously had created a valuation allowance against the entire Canadian 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 Canadian entity has established a sufficient history of profitability and projects continuing profits, the valuation allowance against the Canadian net operating loss carryforward was reduced in the fourth quarter of fiscal year 2014 by $4.5 million to recognize the portion of net operating loss carryforwards projected to be utilized prior to expiration. As of June 30, 2014, the remaining valuation allowance on the Canadian deferred tax asset totaled $1.4 million.
As of June 30, 2014, the Company had U.S. federal net operating loss carryforwards available to reduce future taxable income of approximately $30.3 million; however, $23.3 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. For tax year June 30, 2014, it is projected that approximately $2.4 million of net operating loss carryforwards will be utilized to offset taxable income.
In addition, as of June 30, 2014, the Company had foreign net operating loss carryforwards of approximately $14.8 million available to reduce future taxable income; however approximately $4.0 million is expected to expire by December 31, 2014 and the balance will expire between 2028 and 2031.
The Company maintains a valuation allowance of $9.7 million for it and its United States subsidiaries due to the expiration of net operating losses carryforward prior to utilization, capital losses and a portion of state net operating loss carryforwards. The valuation allowances are evaluated quarterly to determine the appropriate allowance amount.
Rand Worldwide’s Canadian subsidiary, Rand A Technology Corporation, underwent an audit by the Canadian Revenue Authority for tax years 2005 through 2009. The audit has been concluded and adjustments resulting from the audit were not material to the financial statements.
Discontinued Operations
The Company disposed of its operations in Singapore, Malaysia and Australia during May and June of 2013 as detailed in Note 15. The disposals resulted in losses of $463,000 and $370,000 during the fiscal years 2014 and 2013, respectively.
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 debt arrangements.
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 Company had no outstanding borrowings from the bank under its credit line as of June 30, 2014 and June 30, 2013 and did not utilize the line during its third and fourth fiscal quarters. The Company’s U.S. trade accounts receivable are pledged as collateral against the line of credit and 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 92% of its product from one principal supplier and its distributors, which provide the Company with credit to finance those purchases.
For the year ended June 30, 2014, net cash provided by operating activities was $9,406,000, compared with cash provided by operating activities of $4,645,000 during the year ended June 30, 2013. The increase was due mainly to the Company’s increased profitability along with a small net difference in various balance sheet accounts.
Approximately $1,059,000 of cash was used in investing activities during the year ended June 30, 2014 compared to $1,632,000 of cash used in investing activities during the year ended June 30, 2013. The main change in the use of cash in the prior fiscal year was the acquisition of its CFD business. The Company did not have any acquisitions in the current fiscal year.
For the year ended June 30, 2014, net cash used in financing activities was $42,000 compared to $3,534,000 of net cash used in financing activities during the year ended June 30, 2013. The difference resulted mainly from little activity in the Company’s line of credit during the current fiscal year compared to net paydowns of $3.1 million during the prior fiscal year. Additionally, the Company received $348,000 in proceeds upon the exercise of stock options during the current fiscal year compared with $3,000 in proceeds during the prior fiscal year.
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 12 months that, subject to certain requirements and termination rights of the parties, automatically renews on an annual basis for two additional 12 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.
Off Balance Sheet Transactions
The Company is not party to any off-balance sheet transactions as defined in Item 303 of the SEC’s Regulation S-K.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
This item is not required for smaller reporting companies.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item may be found immediately after the signatures to this report and is incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management in a timely manner. 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 also is 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, control 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 and procedures as of June 30, 2014 was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, has concluded that the Company’s disclosure controls and procedures are, in fact, effective at the reasonable assurance level.
During the fourth quarter of the fiscal year ended June 30, 2014, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has performed an evaluation and testing of the Company’s internal control over financial reporting as of June 30, 2014. Management’s report on the Company’s internal control over financial reporting is included in Item 8 of this report and is incorporated herein by reference.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is contained in the sections of the definitive Proxy Statement of the Company to be filed with the SEC in connection with the 2014 Annual Meeting of Stockholders (the “Proxy Statement”) entitled, “ELECTION OF DIRECTORS (Proposal 1)”, “EXECUTIVE OFFICERS”, “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE”, and “CORPORATE GOVERNANCE” and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the sections of the Proxy Statement entitled “CORPORATE GOVERNANCE” and “EXECUTIVE COMPENSATION” and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table provides information, as of June 30, 2014, with respect to all compensation arrangements that we maintain under which shares of common stock may be issued:
(1) This amount represents shares of stock that may be issued under (a) the Avatech Solutions, Inc. Amended and Restated Restricted Stock Plan, which contemplates the grant of shares of common stock upon such terms, including with respect to forfeiture and restrictions of resale and transfer, as the Board deems appropriate, and (b) the Rand Worldwide, Inc. Omnibus Equity Compensation Plan, which, in addition to stock options, permits the grant of stock awards, stock units, performance units, and other stock-based awards in the amounts and types to be determined by the Board of Directors and/or its Compensation Committee.
All other information required by this item is contained in the section of the Proxy Statement entitled, “BENEFICIAL OWNERSHIP OF VOTING SECURITIES OF RAND WORLDWIDE, INC.” and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is contained in the sections of the Proxy Statement entitled, “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” and “CORPORATE GOVERNANCE” and is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is contained in the section of the Proxy Statement entitled, “ACCOUNTING FEES AND SERVICES” and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2). List of Financial Statements and Schedules.
(a)(3) and (b). Exhibits required to be filed by Item 601 of Regulation S-K
The exhibits filed or furnished with this annual report are listed in the Exhibit List that immediately follows the Notes to the Consolidated Financial Statements presented elsewhere in this report, which list is incorporated herein by reference.
(c). Financial Statement Schedule - Schedule II
Rand Worldwide, Inc. and Subsidiaries Valuation and Qualifying Accounts
(1) Uncollectible accounts written off, net of recoveries
(2) Change in valuation allowance, net of temporary differences as discussed in Footnote 11 of the accompanying financial statements
(3) Write-off from disposal of foreign subsidiaries
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
FINANCIAL STATEMENTS
Rand Worldwide, Inc. and Subsidiaries
Index to Audited Consolidated Financial Statements
Page
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Rand Worldwide, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting because management’s report is not subject to attestation pursuant to Section 989G(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits the Company, as a “smaller reporting company”, to provide only this management’s report.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met. 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 cost.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2014 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (1992 Framework). Based on its assessment and the foregoing criteria, management has concluded that, as of June 30, 2014, the Company’s internal control over financial reporting is effective.
September 29, 2014
/s/ Marc L. Dulude
/s/ Lawrence Rychlak
Chief Executive Officer
President and Chief Financial Officer
(Principal Executive Officer)
(Principal Financial and Accounting Officer)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Rand Worldwide, Inc.
We have audited the accompanying consolidated balance sheets of Rand Worldwide, Inc. and Subsidiaries (the “Company”) as of June 30, 2014 and 2013 and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the years in the two year period ended June 30, 2014. Company management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rand Worldwide, Inc. and Subsidiaries as of June 30, 2014 and 2013 and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended June 30, 2014, in conformity with accounting principles generally accepted in the United States of America.
/s/ Stegman & Company
Baltimore, Maryland
September 29, 2014
Rand Worldwide, Inc. and Subsidiaries
Consolidated Balance Sheets
Rand Worldwide, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
See accompanying notes.
Rand Worldwide, Inc. and Subsidiaries
Consolidated Statements of Operations
Rand Worldwide, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
See accompanying notes.
Rand Worldwide, Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
See accompanying notes.
Rand Worldwide, Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity (Continued)
See accompanying notes.
Rand Worldwide, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
See accompanying notes.
Rand Worldwide, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
When used throughout these notes, 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.
Nature of Business and Basis of Presentation
Rand Worldwide, Inc. 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, hosted data archiving solutions and other consulting and professional services to businesses, government agencies and educational institutions worldwide.
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 in the United States and Canada.
The Enterprise Applications division is the non-Autodesk component of the business and offers various products and services including data governance solutions, facilities management solutions and 3DExperience products from Dassault Systèmes which include CATIA, ENOVIA, SIMULIA, DELMIA, and DMU. Enterprise Applications also specializes in training solutions for Dassault Systèmes and PTC products including Pro/ENGINEER, CREO, and Windchill. In December 2013, the Rand Secure Archive division within Enterprise Applications expanded its range of data governance solutions with the addition of data backup. To reflect this evolution beyond data archiving and eDiscovery, this division has changed its name to Rand Secure Data.
ASCENT is the courseware division of Rand Worldwide and is a leading developer of professional training materials and knowledge products for engineering software tools.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Inventory
Inventory consists of packaged computer hardware and software and is stated at the lower of first-in, first-out cost, or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation for computer software and equipment and office furniture and equipment is provided for by the straight-line method over estimated useful lives ranging from three to seven years. Leasehold improvements are amortized over the lesser of the lease term or the useful life of the asset using the straight-line method. Repairs and maintenance costs are expensed as incurred.
Impairment of Long-Lived Assets Excluding Goodwill
Long-lived assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. Assets are grouped at the lowest levels for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. Fair value is generally determined by estimates of discounted cash flows. The discount rate used in any estimate of discounted cash flows would be the rate required for a similar investment of like risk. During the fiscal year ended June 30, 2014, the Company recorded impairment charges of $80,000 against its acquired customer list of the CFD consulting business that was acquired in July 2012.
Goodwill
Goodwill is the excess of the purchase price paid over the fair value of the identifiable net assets acquired in purchase business combinations. The Company accounts for goodwill in accordance with Financial Standards Accounting Board Accounting Standards Codification (“ASC”) 350, Goodwill and Other Intangible Assets. Under ASC 350, goodwill is subject to annual impairment tests or more frequently when events and circumstances occur indicating that recorded goodwill may be impaired. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The implied fair value of goodwill is the amount determined by deducting the estimated fair value of all tangible and identifiable intangible net assets of the reporting unit to which goodwill has been allocated from the estimated fair value of the reporting unit. If the recorded value of goodwill exceeds its implied value, an impairment charge is recorded for the excess.
During the fiscal year ended June 30, 2014, the Company recorded impairment charges of $920,000 against its goodwill of the CFD consulting business that was acquired in July 2012. While the CFD business is consistently profitable and experiencing growth in revenue, its earnings have been less than the levels forecasted at the time of the acquisition. Following an assessment of the fair value of the CFD business, impairment charges were recorded to reduce the book value of goodwill.
The change in the carrying amount of goodwill during the twelve months ended June 30, 2014 is as follows:
Stock Options and Stock Granted to Employees
The Company applies ASC 718-10, Share-Based Payment, which requires companies to measure the cost of share-based awards to employees based on the grant-date fair value of the award using an option pricing model, and to recognize that cost over the period during which an employee is required to provide service in exchange for the award. The Company uses the Black-Scholes option pricing model to determine the fair value of stock options granted to employees and recognizes the compensation cost of employee share-based awards in its statement of operations using the straight-line method over the vesting period of the award, net of estimated forfeitures.
The use of the Black-Scholes option pricing model to estimate the fair value of share-based awards requires that the Company make certain assumptions and estimates for required inputs to the model, including (i) the fair value of the Company’s common stock at each grant date, (ii) the expected volatility of the Company’s common stock value based on industry comparisons, (iii) the expected life of the share-based award, (iv) the risk-free interest rate, and (v) the dividend yield. The Company uses the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility.
Revenue Recognition and Accounts Receivable
The Company’s revenue recognition policies are in accordance with ASC 985-685, Software - Revenue Recognition, and ASC 605-20, Revenue Recognition.
Revenue from product sales and the sale of developed software is recognized when the following four criteria are met: (i) an executed proposal or signed purchase order has been obtained; (ii) delivery of the software has occurred; (iii) the fee is fixed or determinable; and (iv) the fee is probable of collection. Software product sales billed and not recognized as revenue are included in deferred revenue. The Company generally does not require collateral for accounts receivable. The Company allows returns from customers in limited situations. The Company has historically not experienced significant returns, and accordingly, allowances for returned products are not recorded.
Product Sales
For revenue derived from license fees for packaged software products, the Company follows ASC 985-605, Software-Revenue Recognition, and ASC 605-10, Revenue Recognition. The Company recognizes revenue from the sale of software licenses and training materials upon shipment of the products, provided that evidence of the arrangement exists, the arrangement fee is fixed or determinable, and collection of the related receivable is probable and free of contingencies.
Service Revenue
Revenue from installation, training and consulting services is recognized upon completion of the requested service, which typically occurs within ninety days of receipt of an order. Support services are sold either in prepaid blocks of hours which typically expire in one year, or as annual contracts for unlimited support for a specified number of users and products supported. Prepaid support service revenue is recognized monthly based upon usage with unused balances recognized in full upon expiration. Annual support contract revenues are recognized ratably over the contract period. Revenue from the Rand Secure Archive hosted data archiving solution is recognized ratably over the contract period. Installation and consulting services provided by the Company are not considered essential to the functionality of any software products sold as those services do not alter the functionality or capabilities of the product and could be performed by customers or other vendors.
Commission Revenue
Fees earned from the resale of Autodesk’s software support agreements are reported as commission revenue and presented net of their related costs. For these transactions, the Company considers Autodesk to be the primary obligor in the arrangement as Autodesk has the responsibility of providing the end-customer all the deliverables under the contract, including software upgrades and various support services. As a result, the Company assumes an agency relationship in these transactions, and recognizes the net fee associated with serving as an agent in revenue.
The Company earns a rebate from its primary supplier, Autodesk, for its qualifying renewal subscriptions, which increase gross profits and the corresponding commission revenues on such sales. The rebates on renewal subscriptions are paid monthly and are accrued in accordance with ASC 605-50, Customer Payments and Incentives, in the month the underlying sales are posted.
Commissions revenue also includes referral fees paid by Autodesk for major account and government customer transactions, determined based on specified percentages of the amount billed by Autodesk to the referred customer. These referral fees are recorded as revenue in the period earned, based on reporting by Autodesk, and are typically settled within ten days following the end of the reporting period.
Multiple-Element Arrangements
The Company’s arrangements with its customers may involve the sale of one or more products and services at the same time. The Company considers these to be multiple elements of a single arrangement. The Company follows ASC 605-25, Multiple-Element Arrangements. We allocate the total arrangement consideration to each separable element based on the relative selling price of each element in accordance with selling price hierarchy, which includes: vendor specific objective evidence (“VSOE”) if available; third party evidence (“TPE”) if VSOE is not available; and best estimate of selling price if neither VSOE nor TPE is available. In general, the Company uses VSOE to allocate the selling price to each element. Arrangement consideration allocated to undelivered elements is deferred until delivery of the individual elements.
Fixed or Determinable Fee
Management assesses whether the total fee payable to the Company for the order is fixed or determinable and free of contingencies at the time of delivery. Management considers the payment terms of the transaction, including whether the terms are extended, and its collection experience in similar transactions that did not require concessions, among other factors. If the total consideration payable to the Company is not fixed or determinable, revenue is recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met.
Customer Acceptance Criteria
If an arrangement includes customer acceptance criteria, the Company defers all revenue from the arrangement until acceptance is received or the acceptance period has lapsed, unless those acceptance criteria only require that the product perform in accordance with the software vendor’s standard published product specifications. If a customer’s obligation to pay the Company is contingent upon a future event, such as installation or acceptance, the Company defers all revenue from the arrangement until that event has occurred.
Deferred Revenue
Deferred product revenue is comprised of amounts that have been invoiced to customers upon delivery of a product, but are not yet recognizable as revenue because one or more of the conditions required for revenue recognition have not yet been met. Deferred service revenue represents amounts invoiced to customers for telephone support contracts or maintenance and support contracts, which are recognized ratably as revenue over the term of the arrangements, or for installation, training or professional services that have not yet been performed.
Product Returns
The Company’s arrangements with customers do not contain any rights of product return, other than those related to standard warranty provisions that permit replacement of defective goods. As of June 30, 2014 and June 30, 2013, the Company had no reserve recorded for product returns because such returns have historically been insignificant.
Shipping and Handling Fees
The Company records as revenue any amounts billed to customers for shipping and handling costs, and it records as cost of revenue its actual shipping costs incurred.
Allowance for Doubtful Accounts
The Company uses estimates to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to its expected net realizable value. The Company estimates the amount of the required allowance by reviewing the status of past-due receivables and analyzing historical bad debt trends. Actual collection experience has not varied significantly from estimates, due primarily to credit policies, collection experience, and a lack of concentration of accounts receivable. The Company charges-off receivables deemed to be uncollectible to the allowance for doubtful accounts.
Cost of Product Sales
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-based rebate from its primary supplier, Autodesk, paid monthly as a percentage of qualifying purchases. The rebate percentage is established based on the level of new product and subscription purchases as measured against quarterly targets developed by Autodesk. 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 from period to period.
Cost of Service Revenue
Cost of service revenue consists primarily of direct employee compensation of all service personnel, the cost of subcontracted services and direct expenses billable to customers. Cost of service revenue does not include an allocation of overhead costs.
Advertising and Marketing Costs
The Company’s marketing activities performed and executed over the course of the year include public relations, tradeshows, email campaigns, social media, website development and enhancement, marketing automation initiatives, virtual events, advertising and promotions as well as ongoing branding efforts. The Company receives funding from its primary vendor, Autodesk, which offsets a portion of the costs incurred for marketing and advertising. Marketing and advertising costs are expensed as incurred, net of vendor funding and are included in selling, general and administrative expenses in the accompanying statements of operations. Advertising expenses, net of reimbursements from suppliers, were immaterial for the years ended June 30, 2014 and June 30, 2013.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income and foreign currency translation adjustments. During the years ended June 30, 2014 and June 30, 2013, unrealized foreign currency translation losses of $10,000 and $102,000, respectively, were recorded in accumulated other comprehensive income within stockholders’ equity.
Income Taxes
The Company uses the liability method to account for income taxes. Income tax expense includes income taxes currently payable and deferred taxes arising from temporary differences between financial reporting and income tax bases of assets and liabilities. Deferred income taxes are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. Income tax expense, if any, consists of the taxes payable for the current period. Valuation allowances are established when the realization of deferred tax assets are not considered more likely than not. The Company records liabilities from uncertain tax positions in accordance with ASC 740-10, Income Taxes. 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 results in a material adverse impact on the Company’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax position have been recorded. Interest and penalties related to unrecognized tax benefits are recorded as part of income tax expense. The Company’s income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination.
Foreign Currency Translation
Assets and liabilities of the Company’s foreign subsidiaries, whose functional currencies are the respective local currencies, are translated into U.S. dollars at the current rates of exchange in effect at the balance sheet dates. Revenues and expenses are translated using the average exchange rates for the period. The resulting translation adjustments are included as a separate component of stockholders’ deficit in the consolidated balance sheets within accumulated other comprehensive income. Foreign currency transaction gains or losses resulting from the re-measurement of monetary assets and liabilities stated in a currency other than the functional currency are included in the Company’s results of operations.
In addition, for the years ended June 30, 2014 and June 30, 2013, realized currency transaction losses from operations of $70,000 and $110,000, respectively, were recorded in the statement of operations.
2. Supplemental Disclosure of Cash Flow Information
The Company paid interest of approximately $32,000 and $81,000, and paid federal and state taxes of approximately $182,000 and $124,000, respectively, for the years ended June 30, 2014 and June 30, 2013.
In connection with the acquisition of Informative Design Partners (“IDP”) on July 31, 2012, the Company issued 497,512 shares of its common stock with a value of $400,000.
3. Business Combinations
Acquisition of Informative Design Partners
On July 31, 2012, the Company acquired certain assets of Informative Design Partners for an initial payment of $1 million, comprised of $600,000 in cash and $400,000 in common stock, plus contingent consideration to be paid over three years based on earnings achieved from the acquired business.
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 Company had no outstanding borrowings under its credit line as of June 30, 2014 and June 30, 2013. The Company has pledged its U.S. trade accounts receivable as collateral to secure payment under the line of credit. The line expires on November 30, 2014.
5. Preferred Stock
The Company’s preferred stock included in the equity section of the accompanying consolidated balance sheets consists of the following as of June 30, 2014 and 2013:
Convertible Preferred Stock
In 2004, the Company issued 813,050 shares of Series D Convertible Preferred Stock for cash proceeds totaling $330,000 and a reduction in notes payable to a related party of $98,000. At June 30, 2014 and 2013, 384,495 shares of Series D Convertible Preferred Stock were outstanding with the following terms:
Redemption Feature- The Series D shares are redeemable in the event that the Company is engaged in a business combination that is approved by the Board of Directors and subsequently submitted and approved by a vote of the Company’s stockholders. The 2010 merger with pre-merger 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 June 30, 2014, the conversion rate would yield approximately 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 $0.30 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.
In July 2005, the Company issued 1,191 shares of Series E Convertible Preferred Stock which raised $1,191,000 for working capital purposes. At June 30, 2014 and 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 a business combination that is approved by the Board of Directors and subsequently submitted and approved by a vote of the Company’s stockholders. The 2010 merger with pre-merger 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.
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 June 30, 2014, 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.
6. 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. Such outstanding shares include those issued through equity compensation plans, Board compensation, and the exercise of stock warrants. 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. As of June 30, 2014 and 2013, 5,407,529 and 5,584,413 shares of common stock, respectively, were issuable upon the conversion or exercise of options and preferred stock. For the years ended June 30, 2014 and 2013, 272,750 and 1,850,651 shares of common stock equivalents, respectively, were excluded from the computation of diluted earnings per share because their effect would have been antidilutive. The following summarizes the computations of basic and diluted earnings per common share:
7. Intangible Assets
The following is a summary of the carrying amount, accumulated amortization and the resulting net book value of intangible assets:
June 30, 2014
June 30, 2013
While the CFD business is consistently profitable and experiencing growth in revenue, its earnings have been less than the levels forecasted at the time of the acquisition. Following an assessment of the fair value of the CFD business, impairment charges were recorded to reduce the book value of goodwill and the value of the acquired customer list.
Amortization expense for intangible assets for the years ended June 30, 2014 and June 30, 2013 was $828,000 and $845,000, respectively. Future estimated amortization expense for intangibles assets is as follows: $781,000 in 2015, $752,000 in 2016, $709,000 in 2017, $431,000 in 2018, $377,000 in 2019 and $2,313,000 thereafter.
8. Director and Employee Stock Compensation Plans
Employee Stock Option 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. Although the term of the 2002 Option Plan has expired, it will continue to govern all options granted thereunder until such options are exercised, expire or are forfeited in accordance with their terms.
The Company recorded and included in selling, general and administrative expenses, $297,000 and $261,000 of stock compensation expense for the years ended June 30, 2014 and June 30, 2013, respectively.
The following are the assumptions made in computing the fair value of stock-based awards:
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 year ended June 30, 2014 and related information is included in the table below:
The aggregate intrinsic value of options exercised was $204,000 and $4,000 during the years ended June 30, 2014 and 2013, respectively.
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 June 30, 2014 ranged from $0.50 to $1.71 as follows:
Assuming that no additional share-based payments are granted after June 30, 2014, $556,000 of compensation expense will be recognized in the consolidated statement of operations over a weighted-average period of 2.5 years.
9. Shares Reserved for Future Issuance
At June 30, 2014, the Company has reserved 1,388,641 shares of common stock for future issuance upon the exercise of stock options granted under the Stock Option Plan, the vesting of restricted stock awards and the conversion of Series D Stock, and Series E Stock.
10. Fair Value Measurements
Our balance sheets include non-financial assets and liabilities that are measured at fair value on a non-recurring basis. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers include:
Level 1 - defined as observable inputs such as quoted prices in active markets for identical assets;
Level 2 - defined as observable inputs other than Level I prices such as quoted prices for similar assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, we perform a detailed analysis of our assets and liabilities that are measured at fair value. All assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
We have no non-financial assets and liabilities that are measured at fair value on a recurring basis. Property and equipment, intangible assets and goodwill are measured at fair value on a non-recurring basis (upon impairment). The intangible assets in the table below are measured at fair value on a non-recurring basis and are presented at fair value as of the date of impairment.
On July 31, 2012, the Company acquired certain assets of Informative Design Partners, a CFD consulting business. While the CFD business is consistently profitable and experiencing growth in revenue, its earnings have been less than the levels forecasted at the time of the acquisition. As a result, the Company concluded that the carrying value of the CFD business exceeded its fair value as of June 30, 2014 and recorded an impairment charge of approximately $1.0 million to reduce the book value of goodwill and the value of the acquired customer list. The Company used several methods to calculate the fair values, including discounted projected cash flows and multiples of historical earnings (all of which are Level 3 inputs according to FASB ASC 820, Fair Value Measurement).
Part of the acquisition price for the CFD consulting business includes contingent consideration to be paid in future years based upon whether the CFD business achieves certain earnings targets in those years. At the time of the acquisition, the Company estimated the value of future contingent consideration payments. Because the historical earnings of the CFD business have been less than those earnings targets, the Company reduced its estimate of the remaining liability for contingent consideration recorded and recorded an adjustment during the current fiscal year to reflect the reduced liability for contingent consideration
The following table represents the fair value hierarchy for non-financial assets measured at fair value on a non-recurring basis at June 30, 2014:
The carrying fair value of the Company’s CFD related customer list reflects a reduction in value of approximately $80,000, as a result of an impairment loss recognized in the year ended June 30, 2014. This asset is included in “Customer list” in the accompanying consolidated balance sheets.
11. Income Taxes
The components of income from continuing operations before income taxes are as follows:
The components of the income tax provision (benefit) are as follows:
Significant components of the Company’s deferred tax assets and liabilities are as follows:
The Company’s provision for income taxes resulted in effective tax rates attributable to loss from continuing operations that varied from the statutory federal income tax rate of 34%, as summarized in the table below.
As of June 30, 2014, the Company had U.S. federal net operating loss carryforwards available to reduce future taxable income of approximately $30.3 million; however, $23.3 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. For tax year June 30, 2014, it is projected that approximately $2.4 million of net operating loss carryforwards will be utilized to offset taxable income. The remaining $4.6 million will be carried forward and will begin to expire in 2019.
In addition, as of June 30, 2014, the Company had foreign net operating loss carryforwards of approximately $14.8 million available to reduce future taxable income; however, approximately $4.0 million of these loss carryforwards is expected to expire by December 31, 2014 and the balance will expire between 2028 and 2031.
The United States entities maintain a valuation allowance of $9.7 million due to expiration of net operating losses carryforward prior to utilization, capital losses and a portion of state net operating loss carryforwards. The valuation allowances are evaluated quarterly to determine the appropriate allowance amount.
Rand Worldwide’s Canadian subsidiary, Rand A Technology Corporation, underwent an audit by the Canadian Revenue Authority for tax years 2005 through 2009. The audit has been concluded and adjustments resulting from the audit were not material to the financial statements.
12. Commitments and Contingencies
Operating Leases
The Company leases certain office space and equipment under noncancellable operating lease agreements that expire in various years through 2021, and generally do not contain significant renewal options. Rent expense under operating leases for the years ended June 30, 2014 and June 30, 2013 was $2.3 million and $2.2 million, respectively. Future minimum payments under all noncancellable operating leases with initial terms of one year or more consisted of the following at June 30, 2014:
Capital Leases
The Company leases computer equipment used in training facilities and by employees throughout its office locations. These capital lease obligations totaled $335,000 as of June 30, 2014, with approximately $188,000 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 $363,000 as of June 30, 2014. Future minimum payments consisted of the following at June 30, 2014:
Litigation
The Company is party to various litigation matters that management considers routine and incidental to the Company’s business. As of June 30, 2014 and June 30, 2013, the Company had accrued no material amounts related to these matters.
Guarantees
In the normal course of business, the Company indemnifies third parties and enters into commitments and guarantees (“Agreements”) under which it may be required to make payments. These Agreements include indemnities to the following parties: lessors in connection with facility leases; customers in relation to the performance of services; vendors in connection with guarantees of expenses incurred by employees in the normal course of business; former employees in connection with their prior services as a director or officer of the Company or its subsidiary companies; vendors or principals in connection with performance under asset or share purchase and sale agreements and performance under credit facilities and other agreements of the Company’s subsidiaries. The duration of these Agreements varies, and in certain cases, is indefinite. Furthermore, the majority of these Agreements do not limit the Company’s maximum potential payment exposure. In addition, the Company is party to a guarantee with its largest vendor, Autodesk, in relation to all of the Company’s subsidiaries’ obligations to Autodesk. The Company has recorded no accrued liability related to these Agreements, based on its historical experience and information known as of June 30, 2014.
13. Employee Benefit Plans
The Company has a defined contribution savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan is a defined contribution plan, which covers substantially all U.S.-based employees of the Company, or its wholly-owned subsidiaries, who have completed three months of service. Participants may elect a pre-tax payroll deduction up to IRS maximums. As amended, the 401(k) Plan provides that the Company will match 100% of the participant salary deferrals up to 3% of a participant’s compensation and 50% of the next 2% of a participant’s compensation, or a total possible maximum matching contribution of 4% of a participant’s compensation, for all participants. The Company may also make discretionary profit-sharing contributions to the 401(k) Plan for all participants who are employed on the last day of the plan year but has not done so for the plan year ended December 31, 2013. The Company also has a retirement savings plan (“RSP”) that covers substantially all Canadian-based employees of the Company and its wholly-owned subsidiaries. Upon hire, participants may elect a pre-tax payroll deduction, subject to limitations as prescribed by the Canadian Revenue Agency. The RSP provides that the Company will match 100% of the participant salary deferrals up to 3% of a participant’s compensation and 50% of the next 2% of a participant’s compensation, for a total possible maximum matching contribution of 4% of a participant’s compensation, for all participants who have completed 12 months of service. The total amount recorded by the Company as expense, under both plans, during the years ended June 30, 2014 and June 30, 2013 was approximately $900,000 and $787,000, respectively.
14. Significant Supplier
Approximately 96% and 97%, respectively, of the Company’s inventory purchases for the years ended June 30, 2014 and 2013 were from one vendor and its distributors, and approximately 89% of accounts payable at June 30, 2014 and 2013 were due to this vendor and its distributors. Approximately 95% of the Company’s total product revenues are related to this supplier’s products. The Company is a party to a Value Added Reseller Agreement with Autodesk effective February 1, 2013. The agreement has a term of three years and 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.
15. Discontinued Operations
During the fourth quarter of 2013, the Company disposed of its operations in Australia, Singapore and Malaysia because those divisions did not align with the current strategic direction of the Company. The following table summarizes the financial results of the entities which have been reclassified as discontinued operations for the periods presented:
16. Liquidity and Capital Resources
The Company had a working capital surplus of $13,013,000 and $6,617,000 as of June 30, 2014 and June 30, 2013, respectively.
17. Segment Information
The Company’s chief operating decision maker, its chief executive officer, reviews operating results and analyses and makes resource allocation decisions between its three divisions: IMAGINiT, Enterprise Applications, and ASCENT. The Company does not separately accumulate and report asset information by segment, nor does it have any material inter-segment revenue.
The IMAGINiT division provides Autodesk solutions and value-added services to customers in the manufacturing, infrastructure, building, and media and entertainment industries.
The Enterprise Applications offers various products and services including data governance solutions, facilities management solutions and 3DExperience products from Dassault Systèmes as well as training solutions for Dassault Systèmes and PTC products.
ASCENT is the courseware division of Rand Worldwide and is a leading developer of professional training materials and knowledge products for engineering software tools.
The following tables illustrate certain financial information about these segments in the corresponding fiscal periods:
Year Ended June 30, 2014:
Year Ended June 30, 2013:
18. Subsequent Events
Recapitalization
On September 29, 2014, the Company’s Board of Directors approved a planned recapitalization of its balance sheet in order to provide liquidity to its shareholders and to maximize shareholder value. This planned recapitalization process will be accomplished through a tender offer whereby the Company will offer to buy back up to 27,530,816 common shares from its current shareholders for a price of $1.20 per share. The repurchase will be financed through new bank loans as well as the Company’s existing cash surplus. The Company has received a commitment letter from JP Morgan Chase Bank (“Chase”) to lend up to $35 million to fund the buy back.
The new debt from Chase will be comprised of two credit facilities. The first is a five-year $10 million line of credit, secured by all assets of the Company with borrowing levels subject to borrowing base limits. The interest rate on the line of credit will be the LIBOR rate, plus a margin of 2.5%. The second facility is a five-year term loan of up to $25 million, based upon the final financing requirements of the tender offer. The interest rate on the term loan will be the LIBOR rate, plus a margin of 3.15%. The new loans will contain certain financial covenants including a maximum leverage ratio, a maximum fixed charge coverage ratio, and minimum adjusted earnings before interest, taxes, depreciation and amortization.
Sale of Rand Secure Data Division
During September of 2014, the Company spun off its Rand Secure Data division into a separate subsidiary and sold the stock of the newly formed subsidiary for $500,000 in cash, resulting in an estimated loss of $1.1 million.
EXHIBIT INDEX