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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
  FORM 10-K
 [ ]
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended June 30, 2010
  [ X  ]
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
    For the transition period from 11/1/09 to 6/30/10.
 Commission file number:   001-31265
 AVATECH SOLUTIONS, INC.
  DELAWARE
    
    84-1035353(State or other jurisdiction 
of incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 10715 Red Run Blvd, Suite 101, Owings Mills, Maryland
    
    21117(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code
    
    (410) 581-8080
 None
 Common stock, par value $.01 per share
 X
 X
 X
 
 X
  Large Accelerated Filer
    
    Accelerated FilerNon-Accelerated Filer
    
    Smaller Reporting CompanyX(Do not check if a smaller reporting company)
 X
     
    
    The Registrants Form 10-K for the fiscal year ended June 30, 2010 filed on September
28, 2010 (the FY10 Form 10-K)
    
    The Registrants definitive proxy statement filed on October 7, 2010 (the Proxy
Statement)
    
    The Registrants Form 8-K filed on August 17, 2010
(as amended, the Form 8-K)




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##### 



TABLE OF CONTENTS
 PART I
    
    
    
    
    4ITEM 1.
    
    Business
    
    
    4ITEM 2.
    
    Properties
    
    
    7ITEM 3.
    
    Legal Proceedings
    
    
    7ITEM 4.
    
    (Removed and Reserved)
    
    
    7PART II
    
    
    
    
    8ITEM 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities
    
    
    8ITEM
6.
    
    Selected Financial Data
    
    
    8ITEM 7.
    
    Managements Discussion and Analysis of Financial Condition and Results ofOperations
    
    
    8ITEM 8.
    
    Financial Statements and Supplementary Data
    
    
    22ITEM 9.
    
    Changes in and Disagreements with Accountants on Accounting and FinancialDisclosures
    
    
    22ITEM 9(A).
    
    Controls and Procedures
    
    
    22ITEM 9B.
    
    Other Information
    
    
    22PART III
    
    
    
    
    23ITEM 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    23ITEM 11.
    
    Executive Compensation
    
    
    23ITEM 12.
    
    Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters
    
    
    23ITEM 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    23ITEM 14.
    
    Principal Accounting Fees and Services
    
    
    24PART IV
    
    
    
    
    24ITEM 15.
    
    Exhibits and Financial Statement Schedules
    
    
    24EXHIBIT INDEX
    
    
    25SIGNATURES
    
    
    
    29EX-10.24EX-10.25EX-10.26EX-10.27EX-10.28EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1
  2




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EXPLANATORY NOTE
 st th
  
    
    The Registrants Form 10-K for the fiscal year ended June 30, 2010 filed on September
28, 2010 (the FY10 Form 10-K)
    
    The Registrants definitive proxy statement filed on October 7, 2010 (the Proxy
Statement)
    
    The Registrants Form 8-K filed on August 17, 2010
(as amended, the Form 8-K)
   3




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PART I
 
 ITEM 1.
    
    BUSINESS
   Background
  www.avatech.com
 General
   4




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Business Units
    Services
   Markets and Competition
 IMAGINiT Technologies:
  5




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RPS:
 Arrangements with Principal Suppliers
   Customers
  Intellectual Property
   Employees
  Available Information
 www.avatech.com
 6




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www.sec.gov
 ITEM 1A.
    
    RISK FACTORS
  ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS
  
 ITEM 2.
    
    PROPERTIES
    
 ITEM 3.
    
    LEGAL PROCEEDINGS
  
 ITEM 4.
    
    (REMOVED AND RESERVED.)
 7




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
  
 ITEM 6.
    
    SELECTED FINANCIAL DATA
  
 ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
   Material Subsequent Event
   Overview
  8




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Discontinued Operations
  Critical Accounting Policies
  Revenue Recognition-
 Software-Revenue
Recognition Revenue Recognition
 9




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Allowance
for Doubtful Accounts-
 10




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##### Table of Contents



Income Taxes-
   Recoverability of goodwill and purchased intangible assets- Goodwill and Other Intangible Assets)
 Results of Operations
  Product Sales-
 Service Revenue-
 Commission Revenue-
 Cost of Product Sales-
 Cost of Service Revenue-
 11




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Selling, General and Administrative Expenses-
 Depreciation and Amortization
 Restructuring Charges 
 Impairment of Acquired Intangible Assets 
 Impairment of Goodwill 
 Other Expenses (Income)
 Income Tax Expense (Benefit)
 12




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##### Table of Contents



Selected
Revenue Information for the Eight Months ended June 30, 2010 and
2009 (unaudited)
  Eight Months Ended(Amounts in thousands, except percentages)
    
    June 30,2010
    
    2009(unaudited)RevenueProduct sales
    
    
    51.6
    %
    
    
    52.4
    %Service revenue
    
    
    30.7
    %
    
    
    33.6
    %Commission revenue
    
    
    17.7
    %
    
    
    14.0
    %Total revenue
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenueProduct sales
    
    
    34.2
    %
    
    
    32.4
    %Service revenue
    
    
    23.2
    %
    
    
    28.7
    %Total cost of revenue
    
    
    57.4
    %
    
    
    61.2
    %Gross profit
    
    
    42.6
    %
    
    
    38.8
    %Operating expensesSelling, general and administrative
    
    
    47.5
    %
    
    
    41.2
    %Depreciation and amortization
    
    
    2.2
    %
    
    
    3.0
    %Restructuring charges
    
    
    2.0
    %
    
    
    2.6
    %Impairment of acquired intangible assets
    
    
    0.0
    %
    
    
    0.0
    %Impairment of goodwill
    
    
    0.0
    %
    
    
    0.0
    %Total operating expenses
    
    
    51.7
    %
    
    
    46.7
    %Loss from operations
    
    
    (9.2
    %)
    
    
    (7.9
    %)Other expenses (income)Interest expense
    
    
    3.9
    %
    
    
    2.8
    %Currency exchange losses (gains)
    
    
    0.2
    %
    
    
    0.0
    %Other expense (income)
    
    
    (4.9
    %)
    
    
    0.1
    %Loss from continuing operations before income taxes
    
    
    (8.3
    %)
    
    
    (10.7
    %)Income tax expense (benefit)
    
    
    0.0
    %
    
    
    0.0
    %Loss from continuing operations
    
    
    (8.3
    %)
    
    
    (10.7
    %)
 13




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Eight
Months ended June 30, 2010 compared to Eight Months ended
June 30, 2009 (unaudited)
 Revenue
 Eight Months Ended(Amounts in thousands, except percentages)
    
    June 30,2010
    
    2009
    
    % Change(unaudited)RevenueProduct sales
    
    $
    16,869
    
    
    $
    19,584
    
    
    
    (13.9%)Service revenue
    
    
    10,055
    
    
    
    12,551
    
    
    
    (19.9%)Commission revenue
    
    
    5,786
    
    
    
    5,250
    
    
    
    10.2%Total revenue
    
    
    32,710
    
    
    
    37,385
    
    
    
    (12.5%)
 Revenue:
 Cost of Revenue
 Eight Months Ended(Amounts in thousands, except percentages)
    
    June 30,2010
    
    2009
    
    % Change(unaudited)Cost of revenueProduct sales
    
    
    11,199
    
    
    
    12,130
    
    
    
    (7.7%)Service revenue
    
    
    7,592
    
    
    
    10,746
    
    
    
    (29.4%)Total cost of revenue
    
    
    18,791
    
    
    
    22,876
    
    
    
    (17.9%)Gross profit
    
    
    13,919
    
    
    
    14,509
    
    
    
    (4.1%)
 Cost of Revenue:
 Gross Profit:
 14




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Operating Expenses
 Eight Months Ended(Amounts in thousands, except percentages)
    
    June 30,2010
    
    2009
    
    % Change(unaudited)Operating expensesSelling, general and administrative
    
    
    15,529
    
    
    
    15,401
    
    
    
    0.8%Depreciation and amortization
    
    
    733
    
    
    
    1,105
    
    
    
    (33.7%)Restructuring charges
    
    
    665
    
    
    
    957
    
    
    
    (30.5%)Impairment of acquired intangible assets
    
        -
    
    
        -
    
    
    
    0.0%Impairment of goodwill
    
        -
    
    
        -
    
    
    
    0.0%Total operating expenses
    
    
    16,927
    
    
    
    17,463
    
    
    
    (3.1%)
 Selling,
General and Administrative Expenses:
 Depreciation
and Amortization:
 Restructuring Charge:
 15




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Other Expenses (Income)
 (Amounts in thousands)
    
    Eight Months Ended June 30,2010
    
    2009
    
    % change(unaudited)Other expenses (income)Interest expense
    
    $
    1,260
    
    
    $
    1,033
    
    
    
    22.0%Currency exchange gains
    
    
    51
    
    
    
    6
    
    
    
    750.0%Other
expense (income)
    
    
    (1,600)
    
    
    
    22
    
    
    
    (7372.7%)Total other expense (income)
    
    $
    (289)
    
    
    $
    1,061
    
    
    
    (127.2%)
 Other Expenses (Income):
  Income Tax Expense
 (Amounts in thousands)
    
    Eight Months Ended June 30,2010
    
    2009
    
    % change(unaudited)Income tax expense (benefit)
    
    $
    35
    
    
    $
    20
    
    
    
    75.0%
 Income Tax Expense:
 16




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Selected Revenue Information for Years Ended October 31, 2009 and 2008
  Year endedOctober 31,2009
    
    2008RevenueProduct sales
    
    
    47.9%
    
    
    
    56.1%Service revenue
    
    
    30.5%
    
    
    
    27.4%Commission revenue
    
    
    21.6%
    
    
    
    16.5%Total revenue
    
    
    100.0%
    
    
    
    100.0%Cost of revenueProduct sales
    
    
    32.3%
    
    
    
    38.7%Service revenue
    
    
    25.9%
    
    
    
    25.1%Total cost of revenue
    
    
    58.2%
    
    
    
    63.8%Gross profit
    
    
    41.8%
    
    
    
    36.2%Operating expensesSelling, general and administrative
    
    
    43.1%
    
    
    
    36.5%Depreciation and amortization
    
    
    2.5%
    
    
    
    7.8%Restructuring charges
    
    
    3.3%
    
    
    
    1.5%Impairment of acquired intangible assets
    
    
    0.0%
    
    
    
    15.0%Impairment of goodwill
    
    
    0.0%
    
    
    
    11.7%Total operating expenses
    
    
    48.9%
    
    
    
    72.5%Loss from operations
    
    
    (7.1%)
    
    
    
    (36.3%)Other expenses (income)Interest expense
    
    
    3.8%
    
    
    
    1.8%Currency exchange losses (gains)
    
    
    (0.1%)
    
    
    
    (0.3%)Other expense (income)
    
    
    0.0%
    
    
    
    0.1%Loss from continuing operations before income
taxes
    
    
    (10.8%)
    
    
    
    (37.9%)Income tax expense (benefit)
    
    
    (0.7%)
    
    
    
    0.1%Loss from continuing operations
    
    
    (10.2%)
    
    
    
    (38.0%)
 17




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Year Ended October 31, 2009 Compared to Year Ended October 31, 2008
 Revenue
 Year ended(Amounts in thousands, except percentages)
    
    October 31,2009
    
    2008
    
    % ChangeRevenueProduct sales
    
    $
    25,522
    
    
    $
    44,385
    
    
    
    (42.5%)Service revenue
    
    
    16,236
    
    
    
    21,700
    
    
    
    (25.2%)Commission revenue
    
    
    11,505
    
    
    
    13,083
    
    
    
    (12.1%)Total revenue
    
    
    53,263
    
    
    
    79,168
    
    
    
    (32.7%)
 Revenue:
 Cost of Revenue
 Year ended(Amounts in thousands, except percentages)
    
    October 31,2009
    
    2008
    
    % ChangeCost of revenueProduct sales
    
    
    17,199
    
    
    
    30,653
    
    
    
    (43.9%)Service revenue
    
    
    13,802
    
    
    
    19,832
    
    
    
    (30.4%)Total cost of revenue
    
    
    31,001
    
    
    
    50,485
    
    
    
    (38.6%)
 Cost of Revenue:
 Gross Profit:
 18




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Operating Expenses
 (Amounts in thousands)
    
    Year ended October 31,2009
    
    2008
    
    % changeOperating expensesSelling, General and Administrative
    
    $
    22,942
    
    
    $
    28,915
    
    
    
    (20.7%)Depreciation and Amortization
    
    
    1,333
    
    
    
    6,205
    
    
    
    (78.5%)Restructuring Charge
    
    
    1,740
    
    
    
    1,166
    
    
    
    49.2%Impairment of Acquired Intangible Assets
    
        -
    
    
    
    11,914
    
    
    
    (100.0%)Impairment of Goodwill
    
        -
    
    
    
    9,235
    
    
    
    (100.0%)Total Operating Expenses
    
    $
    26,015
    
    
    $
    57,435
    
    
    
    (54.7%)
 Selling,
General and Administrative Expenses:
 Depreciation and Amortization:
 Restructuring Charges:
 Other Expenses (Income)
 (Amounts in thousands)
    
    Year ended October 31,2009
    
    2008
    
    % changeOther expenses (income)Interest expense
    
    $
    2,049
    
    
    $
    1,409
    
    
    
    45.4%Currency exchange gains
    
    
    (40)
    
    
    
    (227)
    
    
    
    (82.4%)Other expense
    
        -
    
    
    
    40
    
    
    
    (100.0%)Total other expense (income)
    
    $
    2,009
    
    
    $
    1,222
    
    
    
    64.4%
 Other Expenses (Income):
 19




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Income Tax Expense (Benefit)
 (Amounts in thousands)
    
    Year ended October 31,2009
    
    2008
    
    % changeIncome tax expense (benefit)
    
    $
    (348
    )
    
    $
    95
    
    
    
    (466.3
    %)
 Income Tax Expense (Benefit):
 Liquidity and Capital Resources
      20




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Off
Balance Sheet Transactions
  21




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ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
  
 ITEM 9(A).
    
    CONTROLS AND PROCEDURES
  Disclosure Controls and Procedures
  Managements Annual Report on Internal Control over Financial Reporting
  Changes in Internal Control Over Financial Reporting
  
 ITEM 9B.
    
    OTHER INFORMATION
  22




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PART III
 
 ITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11.
    
    EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
   
 ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
   23




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ITEM 14.
    
    Principal Accountant Fees and Services
  11/1/09 - 6/30/10
    
    
    
    11/1/08 - 10/31/09
    
    
    
    11/1/07 - 10/31/08Audit Fees
    
    
    $
    245,000
    
    
    
    $
    281,000
    
    
    
    $
    286,000Audit-Related Fees
    
    
    
    188,000
    
    
    
    
    12,000

    
    
    
    
    12,000Tax Fees
    
    
    
    18,000
    
    
    
    
    127,000
    
    
    
    
    136,000All Other Fees
    
    
    
    2,000
    
    
    
    
    2,000
    
    
    
    
    2,000Total Fees
    
    
    $
    453,000
    
    
    
    $
    422,000
    
    
    
    $
    436,000
 Audit
Fees
 Audit-Related
Fees
 Tax
Fees
 All
Other Fees
 Approval of Independent Auditor Services and Fees
  
 PART IV
 
 ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 (a)
    
    The following documents are filed as part of this Transition Report:
 (1)
    
    Financial Statements: The consolidated balance sheets of Rand Worldwide and
its Subsidiaries as of June 30, 2010; October 31, 2009 and October 31, 2008 and the
related consolidated statements of operations, redeemable preferred stock,
stockholders deficit and cash flows for the transition period and the years ended
October 31, 2008 and 2009 are filed herewith.(2)
    
    Financial Statement Schedules: Financial
Statement Schedules have been omitted because the information
required to be set forth therein is shown in the Notes to the
Consolidated Financial Statements.(3)
    
    Exhibits: The exhibits filed or furnished with this transition report are
listed in the Exhibit Index that immediately follows the Notes to the Consolidated
Financial Statements presented elsewhere in this report, which list is incorporated
herein by reference.
 24




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EXHIBIT INDEX
 Exhibit
    
    Description3.1(i)
    
    Restated Certificate of Incorporation of Spatial Technology, Inc. (incorporated by reference
to Exhibit 3(i).1 to the Registration Statement on Form SB-2 filed by Spatial Technology, Inc.
on November 21, 2000, File No. 333-50426)3.1(ii)
    
    Certificate of Amendment to the Restated Certificate of Incorporation of Spatial
Technology, Inc., changing Spatial Technology, Inc.s name to PlanetCad, Inc. (incorporated by
reference to Exhibit 3(i).2 to the Registration Statement on Form SB-2 filed by PlanetCad,
Inc. on November 21, 2000, File No. 333-50426)3.1(iii)
    
    Certificate of Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 4.2 of the Registration Statement on
Form 8-A filed by PlanetCad, Inc. on March 11, 2002, File No. 001-31265)3.1(iv)
    
    Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock
(incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by
PlanetCad, Inc. on May 28, 2002)3.1(v)
    
    Certificate of Amendment of Restated Certificate of Incorporation of PlanetCad, Inc.
(incorporated by reference to Annex G of the Pre-Effective Amendment No. 2 on Form S-4/A filed
by PlanetCad, Inc. on September 13, 2002, File No. 333-89386)3.1(vi)
    
    Certificate of Amendment of Certificate of Incorporation, changing PlanetCad, Inc.s name
to Avatech Solutions, Inc. (incorporated by reference to
Exhibit 3.1(vi) of the Annual Report on Form 10-k filed by
Avatech Solutions, Inc. on September 28, 2010)3.1(vii)
    
    Certificate of Designations  Series C Convertible Preferred Stock (incorporated by
reference to Exhibit 3.6A of the Pre-Effective Amendment No. 1 on Form S-1/A filed by Avatech
Solutions, Inc. on April 11, 2003, File No. 333-104035)3.1(viii)
    
    Certificate of Amendment to Certificate of Designations  Series C Convertible Preferred
Stock (incorporated by reference to Exhibit 3.8 of the Quarterly Report on Form 10-Q filed by
Avatech Solutions, Inc. on February 13, 2004)3.1(ix)
    
    Certificate of Designations of Series D Convertible Preferred Stock (incorporated by
reference to Exhibit 3.9 of the Quarterly Report on Form 10-Q filed by Avatech Solutions, Inc.
on February 13, 2004)3.1(x)
    
    Certificate of Elimination of Series A Junior Participating Preferred Stock (incorporated by
reference to Exhibit 3.10 of the Quarterly Report on Form 10-Q filed by Avatech Solutions,
Inc. on February 13, 20043.1(xi)
    
    Certificate of Amendment to Certificate of Designation of Series D Convertible Preferred
Stock (incorporated by reference to Exhibit 3.12 of the Quarterly Report on Form 10-Q filed by
Avatech Solutions, Inc. on February 13, 2004)3.1(xii)
    
    Certificate of Elimination of Series C Convertible Preferred Stock (incorporated by
reference to Exhibit 3.11 of the Quarterly Report on Form 10-Q filed by Avatech Solutions,
Inc. on February 13, 2004)3.1(xiii)
    
    Certificate of Amendment to the Restated Certificate of Incorporation of Avatech
Solutions, Inc. (incorporated by reference to Exhibit 3.13 of the Pre-Effective Amendment No.
1 on Form S-1/A filed by Avatech Solutions, Inc. on July 19, 2004, File No. 333-114230)
 25




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3.1(xiv)
    
    Certificate of Designations of Series E Convertible Preferred Stock (incorporated by
reference to Exhibit 3.1 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on
May 9, 2005)3.1(xv)
    
    Certificate of Designation of the Powers, Preferences and Relative, Participating, Optional
and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of Series F 10% Cumulative Convertible Preferred Stock (incorporated by reference to
Exhibit 3.1 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on June 19,
2006)3.2
    
    Bylaws (incorporated by reference to Exhibit 3(ii).1 to the Registration Statement on Form
SB-2 filed by Spatial Technology, Inc. on November 21, 2000, File No. 333-50426)4.1
    
    Form of Amended and Restated Warrant (incorporated by reference to Exhibit 4.1 of the Current
Report on Form 8-K filed by Avatech Solutions, Inc. on August 17, 2010)9.1
    
    Stockholders Agreement by and among Avatech Solutions, Inc., RWWI Holdings LLC and certain
holders of common stock dated as of August 17, 2010 (incorporated by reference to Exhibit 9.1
of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on August 17, 2010)10.1
    
    Lease between Merritt-DM1, LLC and Avatech Solutions, Inc. effective June 1, 2004
(incorporated by reference to Exhibit 10.7 to the Pre-Effective Amendment No. 1 on Form S-1/A
filed by Avatech Solutions, Inc. on July 19, 2004, File No. 333-114230)10.2
    
    Form of Preferred Stock Purchase Agreement for Series D Convertible Preferred Stock
(incorporated by reference to Exhibit 10.13 of the Quarterly Report on Form 10-Q filed by
Avatech Solutions, Inc. on February 13, 2004)10.3
    
    Form of Preferred Stock Purchase Agreement for Series E Convertible Preferred Stock
(incorporated by reference to Exhibit 10.3 of the Annual Report on Form 10-K filed by Avatech
Solutions, Inc. on September 28, 2010)10.4*
    
    Avatech Solutions, Inc. 2002 Stock Option Plan (incorporated by reference to Annex F of the
Registration Statement on Form S-4 filed by Avatech Solutions, Inc. on May 30, 2002, File No.
333-89386)10.5*
    
    Form of First Amendment to Stock Option (incorporated by reference to Exhibit 10.4 of the
Current Report on Form 8-K filed by Avatech Solutions, Inc. on August 17, 2010)10.6*
    
    Avatech Solutions, Inc. Restricted Stock Award Plan, as amended (incorporated by reference to
Exhibit 10.1 to the Registration Statement on Form S-8 filed by Avatech Solutions, Inc. on
February 10, 2006, File No. 333-131721)10.7*
    
    Form of Restricted Stock Award (incorporated by reference to Exhibit 10.1 of the Current
Report on Form 8-K filed by Avatech Solutions, Inc. on January 12, 2009)10.8*
    
    Avatech Solutions, Inc. Employee Stock Purchase Plan, as amended (incorporated by reference
to Exhibit 4 of the Registration Statement on Form S-8 filed by Avatech Solutions, Inc. on
December 4, 2007 File No. 333-147823)10.9*
    
    Employment Agreement between Avatech Solutions, Inc. and George Davis dated 28, 2010
(incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Avatech
Solutions, Inc. on June 29, 2010)10.10*
    
    Employment Agreement between Marc L. Dulude and Rand Worldwide, Inc. dated August 17, 2010
(incorporated by reference to Exhibit 10.5 of the Current Report on Form 8-K filed by Avatech
Solutions, Inc. on August 17, 2010)
 26




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##### Table of Contents



10.11*
    
    Amended and Restated Employment Agreement between Avatech Solutions, Inc. and Lawrence
Rychlak dated August 17, 2010 (incorporated by reference to Exhibit 10.6 of the Current Report
on Form 8-K filed by Avatech Solutions, Inc. on August 17, 2010)10.12*
    
    Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 of the Current
Report on Form 8-K filed by Avatech Solutions, Inc. on August 17, 2010)10.13
    
    Revolving Loan Promissory Note issued by Avatech Solutions Subsidiary, Inc. and Avatech
Solutions Subsidiary, Inc. to Mercantile Safe-Deposit & Trust Co. dated January 27, 2006
(incorporated by reference to Exhibit 10.50 of the Registration Statement on Form S-1 filed by
Avatech Solutions, Inc. on February 10, 2006, File No 333-131720)10.14
    
    Loan and Security Agreement among Avatech Solutions Subsidiary, Inc., Avatech Solutions
Subsidiary, Inc. and Mercantile Safe-Deposit & Trust Co., dated January 27, 2006 (incorporated
by reference to Exhibit 10.51 of the Registration Statement on Form S-1 filed by Avatech
Solutions, Inc. on February 10, 2006, File No 333-131720)10.15
    
    Modification Agreement among Avatech Solutions, Inc., Avatech Solutions Subsidiary, Inc. and
Mercantile Safe-Deposit & Trust Co. dated May 30, 2006 (incorporated by reference to Exhibit
10.57 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on June 8, 2006)10.16
    
    Second Modification Agreement among Avatech Solutions, Inc., Avatech Solutions Subsidiary,
Inc and Mercantile Bank & Trust Co., dated December 31, 2006 (incorporated by reference to
Exhibit 10.16 of the Quarterly Report on Form 10-Q filed by Avatech Solutions, Inc. on
November 14, 2007)10.17
    
    Third Modification Agreement among Avatech Solutions, Inc., Avatech Solutions Subsidiary,
Inc and PNC Bank, National Association, dated December 31, 2008 (incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on January 30,
2009)10.18
    
    Fourth Modification Agreement among Avatech Solutions, Inc., Avatech Solutions Subsidiary,
Inc and PNC Bank, National Association, dated December 23, 2009 (incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on December
30, 2009)10.19
    
    Fifth Modification Agreement among Avatech Solutions, Inc., Avatech Solutions Subsidiary,
Inc and PNC Bank, National Association, dated August 17, 2010 (incorporated by reference to
Exhibit 10.3 of the Current Report on Form 8-K filed by Avatech Solutions, Inc. on August 17,
2010)10.20
    
    Autodesk Authorized Value Added Reseller Agreement between Avatech Solutions Subsidiary,
Inc. and Autodesk, Inc, dated February 1, 2010 (incorporated by reference to Exhibit 10.1 of
the Current Report on Form 8-K filed by Avatech Solutions, Inc. on May 17, 2010)10.21
    
    Registration Rights Agreement between Avatech Solutions, Inc. and RWWI Holdings LLC, dated
August 17, 2010 (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K
of Avatech Solutions, Inc. filed on August 17, 2010)10.22
    
    Omnibus Waiver and Termination Agreement among Avatech Solutions, Inc., Pacific Asset
Partners and Sigma Opportunity Fund, LLC, dated August 17, 2010 (incorporated by reference to
Exhibit 10.22 of the Annual Report on Form 10-K of Avatech Solutions, Inc. filed on September
28, 2010)10.23
    
    Omnibus Waiver and Termination Agreement among Avatech Solutions, Inc., Sigma Opportunity
Fund, LLC, Garnett Y. Clark, Jr., Robert Post and George Davis, dated August 17, 2010
 27




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##### Table of Contents



(incorporated by reference to Exhibit 10.22 of the Annual Report on Form 10-K of Avatech
Solutions, Inc. filed on September 28, 2010)10.24
    
    Autodesk Authorized Value Added Reseller Agreement between Rand Imaginit Technologies, Inc.
and Autodesk, Inc, dated February 1, 2010 (filed herewith)10.25
    
    Revolving Credit and Security Agreement among PNC Bank, National Association and Rand
Worldwide US Holdings, Inc., Rand A Technology Corporation, Rand Technologies of Michigan,
Inc. and Rand IMAGINiT Technologies, Inc., dated August 14, 2009 (filed herewith)10.26
    
    First Amendment to Revolving Credit and Security Agreement by and among PNC Bank, National
Association and Rand Worldwide US Holdings, Inc., Rand A Technology Corporation,
Rand Technologies of Michigan, Inc. and Rand IMAGINiT Technologies, Inc., dated
January 22, 2010 (filed herewith)10.27
    
    Second Amendment to Revolving Credit and Security Agreement by and among PNC Bank, National
Association and Rand Worldwide US Holdings, Inc., Rand A Technology Corporation, Rand
Technologies of Michigan, Inc. and Rand IMAGINiT Technologies, Inc., dated July 23, 2010
(filed herewith)10.28
    
    Third Amendment to Revolving Credit and Security Agreement by and among PNC Bank, National
Association and Rand Worldwide US Holdings, Inc., Rand A Technology Corporation, Rand
Technologies of Michigan, Inc. and Rand IMAGINiT Technologies, Inc., dated July 23, 2010
(filed herewith)13.1
    
    Those portions of the Annual Report on Form 10-K of Avatech Solutions, Inc. for the fiscal
year ended June 30, 2010 filed on September 28, 2010 that are incorporated by reference into
Part I, Items 1 and 2 and Part II, Items 5, 7 and 9(A) of this Transition
Report, respectively.21.1
    
    Subsidiaries of Avatech Solutions, Inc. (filed herewith)23.1
    
    Consent of PricewaterhouseCoopers, LLP (filed herewith)31.1
    
    Rule 15d-14(a) Certifications by Chief Executive Officer (filed herewith)31.2
    
    Rule 15d-14(a) Certifications by Chief Financial Officer (filed herewith)32.1
    
    Section 1350 Certifications (furnished herewith)
  *
    
    Identifies a management contract or compensatory plan or
arrangement in which an executive officer of Avatech or Rand
Worldwide participates.
 28




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##### Table of Contents



AVATECH SOLUTIONS, INC.Date:  November 15, 2010
    By:
    /s/  Marc L. DuludeMarc L. DuludeChief Executive Officer
       (Principal Executive Officer)  By:
    
    /s/ Richard A. Charpie
    
    By:
    
    /s/ George M. DavisRichard A. Charpie
Director
    
    
    
    George M. Davis
DirectorNovember 15, 2010
    
    
    
    November 15, 2010By:
    
    /s/ Marc L. Dulude
    
    By:
    
    /s/ Eugene J. FischerMarc L. Dulude
Director and Chief Executive Officer
    
    
    
    Eugene J. Fischer
DirectorNovember 15, 2010
    
    
    
    November 15, 2010By:
    
    /s/ Suzanne E. MacCormack
    
    By:
    
    /s/ Lawrence RychlakSuzanne E. MacCormack
Director
    
    
    
    Lawrence Rychlak
President and Chief Financial OfficerNovember 15, 2010
    
    
    
    (Principal Financial and Accounting Officer)November 15, 2010By:
    
    /s/ Charles D. YieCharles D. Yie
DirectorNovember 15, 2010
 29




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##### Table of Contents



INDEX TO RAND WORLDWIDE INC. AND SUBSIDIARIES FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets as of October 31, 2008 and 2009 and June 30, 2010
    
    
    F-2Consolidated Statements of Operations for the years ended October 31, 2008 and 2009 and the
eight months ended June 30, 2010
    
    
    F-3Consolidated Statements of Redeemable Preferred Stock and Shareholders Deficit for the years ended
 October 31, 2008 and 2009 and eight months ended June 30, 2010
    
    F-4Consolidated Statements of Cash Flows for the years ended October 31, 2008 and 2009 and the eight
months ended June 30, 2010
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
   /S/ PricewaterhouseCoopers LLP
 Boston, Massachusetts
  F-1




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##### Table of Contents



Rand Worldwide, Inc.
 
 Consolidated Balance Sheets
 
 As of(Amounts in thousands, except share data)
    
    As of October 31,

    
    June 30,2008

    
    2009

    
    2010AssetsCurrent assetsCash and cash equivalents
    
    $
    4,736
    
    
    $
    1,168
    
    
    $
    1,198Accounts receivable, net of allowance for doubtful accounts of $363,
$215 and $390, at October 31, 2008, 2009 and June 30, 2010, respectively
    
    
    12,141
    
    
    
    10,358
    
    
    
    8,203Accounts receivable from related parties (Note 10)
    
    
    1,209
    
    
    
    627
    
    
    
    -Other receivables
    
    
    249
    
    
    
    318
    
    
    
    433Inventory
    
    
    658
    
    
    
    106
    
    
    
    152Prepaid expenses and other current assets
    
    
    1,295
    
    
    
    1,129
    
    
    
    1,030Total current assets
    
    
    20,288
    
    
    
    13,706
    
    
    
    11,016Property and equipment, net (Note 6)
    
    
    1,727
    
    
    
    1,364
    
    
    
    1,823Acquired intangible assets (Note 4)
    
    
    3,200
    
    
    
    2,207
    
    
    
    1,638Goodwill (Note 5)
    
    
    7,023
    
    
    
    7,201
    
    
    
    7,232Other long-term assets
    
    
    136
    
    
    
    441
    
    
    
    406Total assets
    
    $
    32,374
    
    
    $
    24,919
    
    
    $
    22,115Liabilities, Redeemable Preferred Stock and Shareholders DeficitCurrent liabilitiesRevolving line of credit (Note 11)
    
    $
    -
    
    
    $
    4,026
    
    
    $
    3,325Accounts payable
    
    
    6,578
    
    
    
    5,828
    
    
    
    6,307Accrued liabilities (Note 7)
    
    
    5,392
    
    
    
    3,416
    
    
    
    3,684Income taxes payable (Note 9)
    
    
    588
    
    
    
    381
    
    
    
    34Customer advance payments
    
    
    175
    
    
    
    63
    
    
    
    103Deferred revenue
    
    
    4,696
    
    
    
    3,391
    
    
    
    2,479Due to related parties, current portion (Note 10)
    
    
    7,046
    
    
    
    3,540
    
    
    
    6,576Capital lease obligations, current portion
    
    
    45
    
    
    
    50
    
    
    
    55Total current liabilities
    
    
    24,520
    
    
    
    20,695
    
    
    
    22,563Due to related parties, net of debt discount of $215, $162 and $126, at
October 31, 2008, 2009 and June 30, 
2010, respectively (Note 10)
    
    
    8,815
    
    
    
    8,066
    
    
    
    6,061Capital lease obligations
    
    
    70
    
    
    
    74
    
    
    
    35Other long-term liabilities
    
    
    233
    
    
    
    160
    
    
    
    114Total liabilities
    
    
    33,638
    
    
    
    28,995
    
    
    
    28,773Commitments and contingencies (Note 12)Series A redeemable preferred stock, $0.001 par value;31,858,922 shares authorized; 31,000,000 shares issued and outstanding;
liquidation preference of $33,480, $36,158 and $38,086, at October 31,
2008, 2009 and June 30, 2010, respectively
    
    
    33,480
    
    
    
    36,158
    
    
    
    38,086Shareholders deficitCommon stock, $0.001 par value; 11,010,000 shares authorized; 9,500,000
shares issued and outstanding at 
October 31, 2008, 2009 and June 30,
2010, respectively
    
    
    10
    
    
    
    10
    
    
    
    10Accumulated deficit
    
    
    (34,880
    )
    
    
    (40,879
    )
    
    
    (45,528
    )Accumulated other comprehensive income
    
    
    126
    
    
    
    635
    
    
    
    774Total shareholders deficit
    
    
    (34,744
    )
    
    
    (40,234
    )
    
    
    (44,744
    )Total liabilities, redeemable preferred stock and shareholders deficit
    
    $
    32,374
    
    
    $
    24,919
    
    
    $
    22,115
  F-2




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##### Table of Contents



Rand Worldwide, Inc.
 
 Consolidated Statements of Operations
 
 (Amounts in thousands, except per share data)
 EightmonthsYear ended

    
    endedOctober 31,
    
    
    June 30,2008

    
    2009

    
    2010RevenueProduct sales
    
    $
    44,385
    
    
    $
    25,522
    
    
    $
    16,869Service revenue
    
    
    21,700
    
    
    
    16,236
    
    
    
    10,055Commission revenue
    
    
    13,083
    
    
    
    11,505
    
    
    
    5,786Total revenue
    
    
    79,168
    
    
    
    53,263
    
    
    
    32,710Cost of revenueProduct sales
    
    
    30,653
    
    
    
    17,199
    
    
    
    11,199Service revenue
    
    
    19,832
    
    
    
    13,802
    
    
    
    7,592Total cost of revenue
    
    
    50,485
    
    
    
    31,001
    
    
    
    18,791Gross profit
    
    
    28,683
    
    
    
    22,262
    
    
    
    13,919Operating expensesSelling, general and administrative
    
    
    28,915
    
    
    
    22,942
    
    
    
    15,529Depreciation and amortization
    
    
    6,205
    
    
    
    1,333
    
    
    
    733Restructuring charges (Note 8)
    
    
    1,166
    
    
    
    1,740
    
    
    
    665Impairment of acquired intangible assets (Note 4)
    
    
    11,914
    
    
    
    -
    
    
    
    -Impairment of goodwill (Note 5)
    
    
    9,235
    
    
    
    -
    
    
    
    -Total operating expenses
    
    
    57,435
    
    
    
    26,015
    
    
    
    16,927Loss from operations
    
    
    (28,752
    )
    
    
    (3,753
    )
    
    
    (3,008
    )Other expenses (income)Interest expense
    
    
    1,409
    
    
    
    2,049
    
    
    
    1,260Currency exchange losses (gains)
    
    
    (227
    )
    
    
    (40
    )
    
    
    51Other expense (income)
    
    
    40
    
    
    
    -
    
    
    
    (1,600
    )Loss from continuing operations before income taxes
    
    
    (29,974
    )
    
    
    (5,762
    )
    
    
    (2,719
    )Income tax expense (benefit)
    
    
    95
    
    
    
    (348
    )
    
    
    35Loss from continuing operations
    
    
    (30,069
    )
    
    
    (5,414
    )
    
    
    (2,754
    )Loss from discontinued operations, net of tax of $83, $0 and $0, respectively (Note 17)
    
    
    (920
    )
    
    
    (860
    )
    
    
    -Gain (loss) on sale or disposition of discontinued operations, net
  of tax of $0, $380 and $0, respectively (Note 17)
    
    
    (1,342
    )
    
    
    2,914
    
    
    
    -Net loss
    
    $
    (32,331
    )
    
    $
    (3,360
    )
    
    $
    (2,754
    )Net loss from continuing operations
    
    $
    (30,069
    )
    
    $
    (5,414
    )
    
    $
    (2,754
    )Accretion of dividends and issuance costs on Series A Preferred Stock
    
    
    (2,667
    )
    
    
    (2,678
    )
    
    
    (1,928
    )Net loss from continuing operations available to common stock holders
    
    $
    (32,736
    )
    
    $
    (8,092
    )
    
    $
    (4,682
    )Basic and diluted net loss per common share from continuing operations
    
    $
    (3.52
    )
    
    $
    (0.85
    )
    
    $
    (0.49
    )Basic and diluted net income (loss) per common share from discontinued operations
    
    
    (0.24
    )
    
    
    0.22
    
    
    
    -Basic and diluted net loss per common share
    
    $
    (3.76
    )
    
    $
    (0.63
    )
    
    $
    (0.49
    )Diluted net loss per common share from continuing operations
    
    $
    (3.52
    )
    
    $
    (0.85
    )
    
    $
    (0.49
    )Diluted net loss per common share from discontinued operations
    
    
    (0.24
    )
    
    
    0.22
    
    
    
    -Diluted net loss per common share
    
    $
    (3.76
    )
    
    $
    (0.63
    )
    
    $
    (0.49
    )Weighted average shares used in computing losses per common share:Basic
    
    
    9,313
    
    
    
    9,500
    
    
    
    9,500Diluted
    
    
    9,313
    
    
    
    9,500
    
    
    
    9,500
  F-3




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##### Table of Contents



Rand Worldwide, Inc.
 
 Consolidated Statements of Redeemable Preferred Stock and Shareholders Deficit
 
 (Amounts in thousands, except share data)AccumulatedSeries A

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherRedeemable Preferred

    
    
    
    
    
    
    
    
    
    
    Additional

    
    Compre-

    
    
    
    
    
    Total

    
    Compre-Stock

    
    
    Common Stock

    
    Paid-in

    
    hensive

    
    Accumulated

    
    Shareholders

    
    hensiveShares

    
    Amount

    
    
    Shares

    
    Par value

    
    Capital

    
    Income

    
    Deficit

    
    Deficit

    
    LossBalance at October 31, 2007
    
    
    31,000,000
    
    
    $
    30,813
    
    
    
    
    8,500,000
    
    
    $
    9
    
    
    $
    -
    
    
    $
    -
    
    
    $
    (9
    )
    
    $
    -Issuance of fully vested common stock to consultants and others
    
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    1
    
    
    
    121
    
    
    
    
    
    
    
    
    
    
    
    122Share-based compensation for awards granted to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6Accretion of dividends and issuance costs on Series A preferred stock
    
    
    
    
    
    
    2,667
    
    
    
    
    
    
    
    
    
    
    
    
    (127
    )
    
    
    
    
    
    
    (2,540
    )
    
    
    (2,667
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,331
    )
    
    
    (32,331
    )
    
    $
    (32,331
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126
    
    
    
    
    
    
    
    126
    
    
    
    126Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (32,205
    )Balance at October 31, 2008
    
    
    31,000,000
    
    
    
    33,480
    
    
    
    
    9,500,000
    
    
    
    10
    
    
    
    -
    
    
    
    126
    
    
    
    (34,880
    )
    
    
    (34,744
    )Share-based compensation for awards granted to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    39Accretion of dividends on Series A preferred stock
    
    
    
    
    
    
    2,678
    
    
    
    
    
    
    
    
    
    
    
    
    (39
    )
    
    
    
    
    
    
    (2,639
    )
    
    
    (2,678
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,360
    )
    
    
    (3,360
    )
    
    $
    (3,360
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    509
    
    
    
    
    
    
    
    509
    
    
    
    509Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (2,851
    )Balance at October 31, 2009
    
    
    31,000,000
    
    
    
    36,158
    
    
    
    
    9,500,000
    
    
    
    10
    
    
    
    -
    
    
    
    635
    
    
    
    (40,879
    )
    
    
    (40,234
    )Share-based compensation for awards granted to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    33Accretion of
dividends on Series A preferred stock
    
    
    
    
    
    
    1,928
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    
    
    
    
    (1,895
    )
    
    
    (1,928
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,754
    )
    
    
    (2,754
    )
    
    $
    (2,754
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    
    
    
    
    139
    
    
    
    139Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (2,615
    )Balance at June 30, 2010
    
    
    31,000,000
    
    
    $
    38,086
    
    
    
    
    9,500,000
    
    
    $
    10
    
    
    $
    -
    
    
    $
    774
    
    
    $
    (45,528
    )
    
    $
    (44,744
    )
  F-4




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##### Table of Contents



Rand Worldwide, Inc.
 
 Consolidated Statements of Cash Flows
 
 Eight monthsYears Ended October 31,

    
    ended June 30,(Amounts in thousands)
    
    2008

    
    2009

    
    2010Cash flows from operating activitiesNet loss
    
    $
    (32,331
    )
    
    $
    (3,360
    )
    
    $
    (2,754
    )Loss from discontinued operations
    
    
    (920
    )
    
    
    (860
    )
    
    
    -Gain (loss) on sale or disposition of discontinued operations
    
    
    (1,342
    )
    
    
    2,914
    
    
    
    -Loss from continuing operations
    
    
    (30,069
    )
    
    
    (5,414
    )
    
    
    (2,754
    )Adjustments to reconcile loss from continuing operations to net cash provided by
(used in) operating activitiesAmortization of acquired intangible assets
    
    
    5,310
    
    
    
    993
    
    
    
    569Depreciation of property and equipment
    
    
    1,336
    
    
    
    781
    
    
    
    457Impairment of acquired intangible assets and goodwill
    
    
    21,149
    
    
    
    -
    
    
    
    -Share-based compensation
    
    
    128
    
    
    
    39
    
    
    
    33Provision for doubtful accounts
    
    
    92
    
    
    
    14
    
    
    
    238Non-cash portion of restructuring charge
    
    
    161
    
    
    
    -
    
    
    
    -Loss on dispostion of equity-method investments
    
    
    40
    
    
    
    -
    
    
    
    -Gain on sale of investment
    
    
    -
    
    
    
    -
    
    
    
    (1,600
    )Changes in operating assets and liabilities, net of acquisition and divestituresAccounts receivable, including amounts due from related parties
    
    
    826
    
    
    
    1,648
    
    
    
    2,475Inventory
    
    
    1,369
    
    
    
    558
    
    
    
    (88
    )Prepaid expenses, other receivables and other assets
    
    
    26
    
    
    
    (470
    )
    
    
    245Accounts payable, accrued and other liabilities
    
    
    (3,681
    )
    
    
    (3,892
    )
    
    
    558Income taxes payable
    
    
    20
    
    
    
    (208
    )
    
    
    (348
    )Due to related parties
    
    
    817
    
    
    
    (104
    )
    
    
    1,020Deferred revenue and customer advance payments
    
    
    2,973
    
    
    
    (743
    )
    
    
    (842
    )Net cash provided by (used in) operating activities of continuing operations
    
    
    497
    
    
    
    (6,798
    )
    
    
    (37
    )Net cash used in operating activities of discontinued operations
    
    
    (686
    )
    
    
    (854
    )
    
    
    -Net cash used in operating activities
    
    
    (189
    )
    
    
    (7,652
    )
    
    
    (37
    )Loss from continuing operations before income taxesAcquisition of Rand A Technology Corporation, net of cash acquired
    
    
    (38,543
    )
    
    
    -
    
    
    
    -Purchases of property and equipment
    
    
    (711
    )
    
    
    (498
    )
    
    
    (902
    )Proceeds from sale of investment
    
    
    -
    
    
    
    -
    
    
    
    1,600Net cash used in investing activities of continuing operations
    
    
    (39,254
    )
    
    
    (498
    )
    
    
    698Net cash provided by (used in) investing activities of discontinued operations
    
    
    (184
    )
    
    
    2,902
    
    
    
    -Net cash provided by (used in) investing activities
    
    
    (39,438
    )
    
    
    2,404
    
    
    
    698Cash flows from financing activitiesProceeds from issuance of preferred stock
    
    
    31,000
    
    
    
    -
    
    
    
    -Proceeds from issuance of common stock
    
    
    1
    
    
    
    -
    
    
    
    -Proceeds
from revolving line of credit
    
    
    -
    
    
    
    16,967
    
    
    
    31,549Repayments on revolving line of credit
    
    
    -
    
    
    
    (12,941
    )
    
    
    (32,250
    )Proceeds from issuance of notes to related party
    
    
    17,118
    
    
    
    2,000
    
    
    
    -Repayment of notes to related party
    
    
    (3,336
    )
    
    
    (4,653
    )
    
    
    -Increase in (repayment of) obligations under capital leases
    
    
    (10
    )
    
    
    24
    
    
    
    (40
    )Net cash provided by (used in) financing activities of continuing operations
    
    
    44,773
    
    
    
    1,397
    
    
    
    (741
    )Net cash provided by financing activities of discontinued operations
    
    
    404
    
    
    
    -
    
    
    
    -Net cash provided by (used in) financing activities
    
    
    45,177
    
    
    
    1,397
    
    
    
    (741
    )Effect of exchange rate changes on cash from continuing operations
    
    
    (1,028
    )
    
    
    267
    
    
    
    110Effect of exchange rate changes on cash from discontinued operations
    
    
    214
    
    
    
    16
    
    
    
    -Weighted average shares used in computing losses per common share:
    
    
    4,988
    
    
    
    (5,632
    )
    
    
    30Net cash provided by (used in) used in discontinued operations
    
    
    (252
    )
    
    
    2,064
    
    
    
    -Net increase (decrease) in cash and cash equivalents
    
    
    4,736
    
    
    
    (3,568
    )
    
    
    30Cash and cash equivalents, beginning of period
    
    
    -
    
    
    
    4,736
    
    
    
    1,168Cash and cash equivalents, end of period
    
    $
    4,736
    
    
    $
    1,168
    
    
    $
    1,198Supplemental disclosures of cash flow informationInterest paid
    
    $
    50
    
    
    $
    2,316
    
    
    $
    240Income taxes paid
    
    $
    297
    
    
    $
    208
    
    
    $
    357Non-cash investing and financing activitiesProperty and equipment acquired under capital leases
    
    $
    155
    
    
    $
    13
    
    
    $
    -Accretion of dividends on redeemable preferred stock
    
    $
    2,480
    
    
    $
    2,678
    
    
    $
    1,928Accretion of issuance cost on redeemable preferred stock
    
    $
    187
    
    
    $
    -
    
    
    $
    -
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##### Table of Contents



Rand Worldwide, Inc.
 
 Notes to Consolidated Financial Statements
 
 1.
    
    Nature of Business and Basis of PresentationNature of the BusinessRand Worldwide, Inc. (collectively with its subsidiaries referred to as the Company) is a
leading provider of design automation solutions to various manufacturing and engineering
industries. The Company also specializes in providing value-added services, such as
technical support, training, and consulting aimed at improving the design efficiencies of its
customers. These solutions and services enable the Companys customers to enhance their
productivity, profitability and overall competitive position.The Company is organized into two divisions: the IMAGINiT division (IMAGINiT) and the Rand
Professional Services division (RPS). The IMAGINiT division is the largest licensed
value-added reseller of Autodesk, Inc. (Autodesk) products in North America, providing
Autodesk solutions and value-added services to customers in the manufacturing,
infrastructure, building, and media and entertainment industries. RPS is a reseller of
product lifecycle management (PLM) products and a provider of services related to solutions
sold by Dassault Systèmes S.A. (Dassault), Autonomy
PLC. (Autonomy) and other software vendors. RPS
also sells its own proprietary software products and related services, enhancing its total
client solution offerings.Formation of Rand Worldwide, Inc.The Company, a corporation registered in the state of Delaware, was formed in August 2007 and
was later capitalized on October 31, 2007 and November 1, 2007 with an aggregate investment
of $44.5 million by certain limited partnerships of a domestic private investment firm
(collectively the Stockholder) in exchange for preferred stock with a purchase price of
$31.0 million less cost of issuance of $187,000 and notes with a $13.5 million principal
amount (Notes 10 and 13). Immediately thereafter, the Company acquired all of the
outstanding shares of Rand A Technology Corporation, a publicly traded Canadian corporation,
for $44.5 million (Note 3). That business combination created a new basis of accounting for
Rand A Technology, which has been reflected as of November 1, 2007 in these consolidated
financial statements.Recapitalization and MergerOn August 17, 2010, the Company was acquired by Avatech Solutions, Inc. (Avatech) in a
reverse merger transaction (the Merger).Immediately prior to the Merger, the Company was recapitalized. The holders of the common
stock, redeemable preferred stock and term notes of the Company exchanged their respective
securities for a commensurate number of membership interests in RWWI Holdings LLC (RWWI),
formerly a subsidiary of the Company. Simultaneously, the Company merged with a subsidiary
of RWWI, with the Company being the surviving entity and RWWI being the sole stockholder of
the Company. Immediately following, RWWI caused the Company to merge with a subsidiary of
Avatech with the Company again being the surviving entity as a subsidiary of Avatech.In consideration for the Merger, RWWI received shares of Avatech common stock representing
approximately 66.1% of the outstanding shares of Avatech common stock and Avatechs
stockholders retained approximately 33.9% of the outstanding shares of Avatech common stock.
When calculated based on the number of shares of Avatech common stock outstanding on a fully
diluted basis, the common stock issued to RWWI is equal to approximately 59.3% of the total
common equivalent shares as of the date of the Merger. As RWWI acquired more than 50% of the
outstanding shares of Avatech common stock, RWWI was deemed, for accounting and SEC reporting
purposes to be the continuing reporting entity. As such, the historical financial results of
the merged entity will reflect those of RWWI, which are, in substance, those of the Company.
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##### Table of Contents



Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 As a result of all such transactions: the Companys common stock, its redeemable preferred
stock and its term notes are no longer outstanding. The Company has no remaining financial
obligations pursuant to these items, including the cumulative dividends related to its
formerly outstanding redeemable preferred stock and the unpaid interest related to its
formerly outstanding term notes. The operations of the Company continue as a subsidiary of
Avatech and RWWI is a controlling shareholder of Avatech but not part of the ongoing Avatech
consolidated reporting entity.Basis of PresentationEffective with the Merger, the Company elected to change its fiscal year end from October 31
to June 30. References to 2008 and 2009 mean the twelve month periods ended October 31, 2008
and 2009, respectively. References to 2010 mean the eight-month period ended June 30, 2010.On February 12, 2008, the Company affected a 10,000-for-1 stock split of its shares of common
stock. All references in these consolidated financial statements to shares of common stock
have been retroactively adjusted to reflect this stock split.The accompanying financial statements have been prepared on a basis that contemplates the
realization of assets and the satisfaction of liabilities and commitments in the normal
course of business. The Companys long-term viability is dependent on its ability to
generate sufficient product revenue, net income and cash flows from operations to support its
business as well as its ability to obtain additional financing, if needed. The Company has a
working capital deficit as of June 30, 2010 and, for its liquidity, relies on a bank
revolving credit facility that expires on August 13, 2012 (Note 11). As of September 30,
2010, borrowings against the facility were $3.2 million, with permitted additional borrowings
of $2.6 million. In conjunction with its merger with Avatech, the Company is negotiating a
revised credit facility with the same bank. Management believes that the Companys existing
cash together with cash generated from future operations and borrowings available under the
current or revised revolving credit facility will be sufficient to meet its working capital
and capital expenditure requirements through at least June 30, 2011.Certain prior period balances have been reclassified to conform to the current period
presentation.2.
    
    Summary of Significant Accounting PoliciesPrinciples of ConsolidationThe consolidated financial statements include the accounts of the Company and its
subsidiaries, including those in Canada, Australia, Singapore and Malaysia. All significant
intercompany accounts and transactions have been eliminated.Discontinued OperationsDuring 2008 and 2009, the Company restructured certain of its operations, which included the
sale or closure of several subsidiaries. The Company determined these disposed subsidiaries
to be discontinued operations under the provisions of Accounting Standards Codification
(ASC) No. 360-10, Accounting for the Impairment or Disposal of Long-lived Assets. In
accordance with ASC No. 360-10, the Company has determined that its subsidiaries are the
lowest level for which the results of operations and cash flows can be clearly distinguished.
Any gain or loss resulting from disposal of a subsidiary, together with the results of its
operations up to the date of disposal, is reported separately as a discontinued operation.
The financial information of a discontinued operation is excluded from the respective
captions in the consolidated financial statements and related notes and is reported
separately.
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##### Table of Contents



Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires the Company to make estimates and judgments that
affect the reported amount 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. On an ongoing basis, the Company evaluates these
estimates and judgments, including those related to revenue recognition, the valuation of
accounts receivable and inventory, the useful lives and realizability of intangible assets
and goodwill, contingencies, the fair value of share-based compensation and income taxes.
The Company bases these estimates on historical and anticipated results and trends and on
various other assumptions that the Company believes are reasonable under the circumstances,
including assumptions as to future events. These estimates form the basis for making
judgments about the carrying value of assets and liabilities that are not readily apparent
from other sources. By their nature, estimates are subject to an inherent degree of
uncertainty. Estimates are periodically reviewed in light of changes in circumstances, facts
and experience. Actual results may differ from the Companys estimates.Revenue RecognitionThe Company generates revenue from three principal sources: (i) license fees for packaged
software products; (ii) service fees from installation, training and consulting engagements,
telephone support contracts, and maintenance and support contracts; and (iii) commission fees
from the resale of Autodesk software support agreements and from the referral of customers to
Autodesk.Product SalesFor revenue derived from license fees for packaged software products, the Company follows ASC
985-605 Software-Revenue Recognitionand 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 RevenueRevenue 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.
Revenue from telephone support contracts and maintenance and support contracts is recognized
ratably over the contract period, which is typically twelve months. Maintenance and support
services typically include only telephone and internet-based support, but in limited
circumstances include software updates, when and if available, provided by the vendor of the
software. 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.
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##### Table of Contents



Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 Commission RevenueFees 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.Commissions revenue also includes referral fees paid by Autodesk for certain types of
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.Multiple-Element ArrangementsThe Companys arrangements with its customers typically 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 uses the residual method to recognize revenues from
such arrangements with one or more elements that are to be delivered at a future date,
provided that evidence of the fair value of all undelivered elements exists. Under the
residual method, the fair value of the undelivered elements, such as installation and
software support services, is deferred at date of product shipment and the remaining portion
of the total arrangement fee is recognized as revenue. The Company determines
vendor-specific objective evidence (VSOE) of the fair value of undelivered services based
on the prices that are charged when the same element is sold separately to customers. If the
fair value of each undelivered element in a multiple-element arrangement cannot be determined
based on VSOE, all revenue under the arrangement is deferred until those undelivered elements
are later delivered or until such time as the only remaining undelivered element is software
support, at which time total revenue is recognized ratably over the remaining software
support period.Fixed or Determinable FeeManagement 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 CriteriaIf 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.
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 Deferred RevenueDeferred 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 or training services that have not yet been provided.Product ReturnsThe 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 October 31, 2008 and 2009 and June 30, 2010, the Company had no reserve
recorded for product returns because such returns have been insignificant.Shipping and Handling FeesThe Company records as revenue any amounts billed to customers for shipping and handling
costs and records as cost of revenue its actual shipping costs incurred.Cost of RevenueCost of product revenue consists of the cost of purchasing products from software suppliers
as well as any associated shipping and handling costs. Cost of service revenue includes the
direct costs and personnel costs associated with the implementation of software solutions as
well as training, support services, and consulting services provided to customers. These
costs include employee compensation, travel, printed materials, and the costs of third-party
contractors engaged by the Company.Earnings Per Common ShareBasic earnings per common share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding. Diluted earnings per common share is
computed by dividing net income (loss) by the weighted-average number of common shares
outstanding and, when dilutive, all potential common equivalent shares outstanding including
options and unvested restricted stock. The dilutive effect of options and unvested
restricted stock to purchase common stock is determined under the treasury stock method using
the average fair value of common stock for the period.Cash, Cash Equivalents and InvestmentsThe Company considers all highly liquid investments with an original maturity of 90 days or
less at the date of purchase to be cash equivalents. Cash equivalents are stated at cost
plus accrued interest, if any, which approximates their fair value. At October 31, 2008 and
2009 and June 30, 2010, the Companys holdings of cash equivalents were not material. In
addition, as of that date, the Company had no amounts classified as short-term or long-term
investments.Concentrations of Credit RiskFinancial instruments that potentially expose the Company to concentrations of credit risk
consist primarily of accounts receivable. The Company provides credit to customers in the
ordinary course of business. The Company performs ongoing evaluations of its customers for
potential credit losses, and management believes its credit policies are prudent and reflect
industry practices and business risk. The Company does not invest any of its excess cash.
Accordingly, the Company believes that its financial instruments are not subject to any
material credit or market risk.Fair Value of Financial InstrumentsThe carrying values of the Companys financial instruments, including cash equivalents,
accounts receivable,
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##### Table of Contents



Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 and accounts payable, approximate their fair values due to their short-term maturities. In
addition, the carrying value of the Companys related-party notes approximates their fair
values because borrowing costs currently available to the Company approximate those reflected
in the related-party debt.InventoryInventory consists of packaged computer software and is stated at the lower of cost or market
value. Cost is determined by the first-in, first-out method, and market value represents the
lower of replacement cost or estimated net realizable valueProperty and EquipmentProperty and equipment are recorded at cost and depreciated over their estimated useful lives
using the straight-line method. Leasehold improvements are amortized over the shorter of the
lease term or the estimated useful life of the related asset. Upon retirement or sale, the
cost of assets disposed of and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is credited or charged to operations. Repairs and
maintenance costs are expensed as incurred.Business CombinationsThe Company allocates the purchase price of acquired companies to the tangible and intangible
assets acquired and liabilities assumed as well as to in-process research and development
based upon their estimated fair values at the acquisition date. The purchase price
allocation process requires management to make significant estimates and assumptions,
especially at acquisition date with respect to intangible assets, software support
obligations assumed, estimated restructuring liabilities and pre-acquisition contingencies.Although the Company believes the assumptions and estimates that have been made in the past
are reasonable and appropriate, they are based in part on historical experience and
information obtained from the management of the acquired companies and are inherently
uncertain. Examples of critical estimates used in valuing certain of the intangible assets
the Company has acquired or may acquire in the future include but are not limited to (i)
future expected cash flows from software license sales, support agreements, consulting
contracts, other customer contracts and acquired developed technology; (ii) expected costs to
develop in-process research and development projects into commercially viable products and
the estimated cash flows from the projects; (iii) the acquired companys brand and
competitive position, as well as assumptions about the period of time the acquired brand will
continue to be used in the combined companys product portfolio; and (iv) discount rates used
to determine the present value of expected future cash flows. Unanticipated events and
circumstances may occur which may affect the accuracy or validity of such assumptions,
estimates or actual results.In connection with the purchase price allocations for the Companys acquisitions, management
estimates the fair market value of legal performance commitments to customers, which are
classified as deferred revenue.For a given acquisition, the Company may identify certain pre-acquisition contingencies. If,
during the purchase price allocation period, the Company is able to determine the fair value
of a pre-acquisition contingency, this amount will be included in the purchase price
allocation. If, as of the end of the purchase price allocation period, the Company is unable
to determine the fair value of a pre-acquisition contingency, evaluation will be made whether
to include an amount in the purchase price allocation based on whether it is probable that a
liability had been incurred and whether an amount can be reasonably estimated. After the end
of the purchase price allocation period, any adjustment to amounts recorded for a
pre-acquisition contingency will be included in the Companys operating results in the period
in which the adjustment is determined.
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##### Table of Contents



Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 Goodwill and Other Intangible AssetsThe Company accounts for its goodwill and intangible assets in accordance with ASC No.
350-30, Goodwill and Other Intangible Assets(ASC No. 350-30). Goodwill is assessed for
impairment at least annually as of October 31, on a segment basis, or more frequently when
events and circumstances occur indicating that the recorded goodwill may be impaired. Such
events or conditions could include an economic downturn in the industries to which the
Company provides products and services; increased competition; an increase in operating or
other costs; or the pace of technological improvements. When the Company determines that the
carrying value of goodwill may not be recoverable based upon one or more of these indicators
of impairment, the Company initially assesses any impairment using fair value measurements
based on projected discounted cash flow valuation models. If the book value of a segment
exceeds its fair value, the implied fair value of goodwill is compared with the carrying
amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an
impairment loss is recorded in an amount equal to that excess.Intangible assets other than goodwill are amortized over their estimated useful economic
lives and are carried at cost less accumulated amortization. In accordance with ASC No.
360-10, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews
long-lived assets for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the long-lived assets may not be fully recoverable or
that the useful lives of these assets are no longer appropriate. Factors that could lead to
an impairment of acquired customer relationships include a worsening in customer attrition
rates compared to historical attrition rates, or lower than initially anticipated cash flows
associated with customer relationships. Each impairment test is based on a comparison of the
estimated undiscounted cash flows to the recorded value of the asset. If impairment is
indicated, the asset is written down to its estimated fair value based on a discounted cash
flow analysis. The cash flow estimates used to determine the impairment, if any, contain
managements best estimates using appropriate assumptions and projections at that time.Research and Development and Software Development CostsCosts incurred in the research and development of the Companys products are expensed as
incurred, except for certain software development costs. Costs associated with the
development of computer software to be licensed to customers are expensed prior to
establishment of technological feasibility and are capitalized thereafter until the product
is available for general release to customers. No software development costs have been
capitalized to date since costs incurred between the establishment of technological
feasibility and the available-for-sale date of the software have been immaterial.Accounting for Share-Based CompensationThe Company applies ASC No. 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, which were considered as follows:
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 Eight monthsYear ended October 31,
    
    ended June 30,2008
    
    2009
    
    2010Fair value of common stock
    
    $0.31
    
    $0.26
    
    $0.26Share price volatility
    
    41%
    
    41%
    
    50%Expected Life
    
    4 years
    
    4 years
    
    4 yearsRisk-free interest rate
    
    3.62% to 3.64%
    
    3.00% to 3.62%
    
    3.00% to 3.50%Dividend yield
    
    0%
    
    0%
    
    0%
 Common Stock Fair ValueAs there has been no public market for the Companys common stock historically, the fair
value of the Companys common stock for 2008 and 2009 and the eight-month period ended June
30, 2010 was estimated by considering a number of objective and subjective factors, including
peer-group company trading multiples, the amount of preferred stock liquidation preference,
the illiquid nature of common stock, the size of the Company and the Companys lack of
historical profitability. At the midpoint of the 2008 and 2009 fiscal years, independent
valuations were obtained to provide additional support for estimates of the fair value of the
Companys common stock. Under the probability-weighted expected return method used in that
valuation, the fair market value of common stock was estimated based upon an analysis of the
future values for the Company, assuming various outcomes. The share value was based on the
probability-weighted present value of expected future investment returns considering each of
the possible outcomes available to the Company as well as the rights of each share class.
The possible outcomes considered were a sale of the Company, an initial public offering of
the Companys stock, dissolution, and continued operation as a private company. The
resulting values represent the Companys estimate of fair market value of common stock at
that date, which is then reconsidered at each valuation date.Share Price VolatilityThe Company determined the share price volatility for stock options granted in 2008, 2009 and
2010 based on an analysis of reported data for a peer group of companies that granted options
with substantially similar terms. The expected volatility of options granted was determined
using an average of the historical volatility measures of this peer group of companies for a
period equal to the expected life of each option.Expected Life of Options, Risk-Free Interest Rate and Dividend YieldThe Company determined the expected life of options based on the period of time that the
options are expected to be outstanding until a future liquidity event, such as a sale of the
Company or an initial public offering of the Companys stock. The risk-free interest rate is
based on the daily treasury yield curve rate whose term is consistent with the expected life
of the stock options. The Company has not paid, and does not anticipate paying, cash
dividends on its shares of common stock; therefore, the expected dividend yield was assumed
to be zero.Non-employee Stock-Based Awards
For stock options granted to non-employees, the Company recognizes compensation expense in
accordance ASC No. 718-10, Stock Compensationand ASC No. 505-50, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods and Services, which require each such equity award to be recorded at its fair
value on the measurement date. The measurement of share-based compensation is subject to
periodic adjustment as the underlying stock options vest. The Company records compensation
expense related to these nonemployee share-based awards in accordance with the expense
attribution model as prescribed in ASC No. 718-10.
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 Redeemable Preferred Stock
The Company accounts for the difference between the initial carrying value of redeemable
preferred stock and the redemption amount payable on that stock through recognition of
accretion adjustments (including stated unpaid cumulative dividends) over the period from
date of issue to the first redemption date, such that the carrying amount of the preferred
stock will equal the redemption amount at the redemption date. These increases in carrying
value were recorded initially through charges against additional paid-in capital and then to
accumulated deficit if the balance of additional paid-in capital is reduced to zero. As the
Companys Series A preferred stock was mandatorily redeemable upon request of the holders of
at least a majority of such stock, the carrying value of the Series A preferred stock equals
its redemption amount at each balance sheet date (Note 13).As a result of the Merger, the Companys redeemable preferred stock is no longer outstanding
and the Company has no remaining financial obligations relative to the redeemable preferred
stock or its related formerly accruing dividends.Advertising Costs
Advertising costs are expensed as incurred and consist primarily of promotional expenditures.
Advertising costs incurred in 2008, 2009 and the eight-month period ending June 30, 2010
were immaterial.Comprehensive Loss
Comprehensive loss is comprised of two components: net loss and foreign currency translation
adjustments. In 2008, 2009 and the eight-month period ending June 30, 2010, unrealized
currency translation gains of $126,000, $509,000 and $139,000 respectively, were recorded in
accumulated other comprehensive income within shareholders deficit.Income Taxes
Income taxes are accounted for under the liability method, under which deferred tax assets
and liabilities are determined based on the difference 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 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 uncertain tax positions in accordance with ASC 740-10 Income Taxes(FIN 48).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 shareholders 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, in 2008, 2009 and 2010, realized currency transaction gains from continuing
operations of $227,000 and $40,000, as well as realized currency transaction loss of $51,000,
respectively, were recorded in the statement of operations and realized currency translation
gains from discontinued operations of $1.4 million, $6,000 and $0 respectively, were recorded
in the statement of operations within gain (loss) on sale or disposition of discontinued
operations, net of tax.
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 Investments Accounted for Using the Equity Method
The Company uses the equity method of accounting for its investments in companies in which it
owns 50% or less and over which it exercises significant influence. Under this method, the
Company includes in net earnings its proportional share of the net earnings or losses of
these associated companies, net of any cash distributions or dividends. When net losses from
an equity-method investment exceed the carrying value recorded by the Company, the investment
balance is maintained at zero and additional losses are not recognized, as the Company is not
committed to provide financial support to the investee. The Company resumes accounting for
the investment under the equity method when the entity subsequently reports net income and
the Companys share of that net income exceeds the share of net losses not recognized during
that period that the equity-method loss recognition had been suspended.Investments in Majority-Owned Entities
In 2008 and for a portion of 2009, the Company held a 60% ownership interest in Sigmetrix
L.L.C. (Sigmetrix) and an 80% ownership interest in Rand Technologies Singapore PTE Ltd
(Rand Singapore). The Company consolidated these entities in its financial statements as
if it owned 100% of each entity, and did not present minority-interest amounts in its
statement of operations and its balance sheet, because these entities were in a net
shareholder deficit position and because the minority interest holders were not required to
fund the net losses of these entities.On July 1, 2009, the Company sold its 60% ownership interest in Sigmetrix, to Cybernet
Systems Holdings U.S. Inc. (Cybernet) for cash consideration of $122,000 and repayment of
intercompany accounts payable of $3.1 million. On September 11, 2009, the Company completed
the sale of its 80% ownership interest in Rand Singapore to an individual for cash
consideration of one Singapore dollar (Note 17).Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by
the lessor are classified as operating leases. Payments made under operating leases are
recognized in the statement of operations on a straight-line basis over the term of the
lease. Leases in which the Company has substantially all the risk and rewards of ownership
are classified as capital leases. Capital leases are recorded at commencement of the lease
at the lower of the fair value of the leased property and the present value of the minimum
lease payments. Property and equipment acquired under capital leases are depreciated over
the shorter of the useful life of the assets and the lease term.In January 2010, the Company signed a new lease for its head office space for a term of sixty
five months, commencing in May 2010, with an annual base rent ranging between $192,000 and
$248,000. The lease contains a renewal option for an additional five-year term. The Company
does not expect to incur additional obligations as a result of entering into a new lease.
The security deposit of $175,000 reduces the amount of the borrowing available to the Company
on its revolving line of credit.As a result of the signed lease, the landlord has made certain leasehold improvements in May
2010 that approximated $175,000. The Company has adopted a policy of recording these
incentives as leasehold improvements and amortizing them over the course of the leaseRecent Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance
related to subsequent events, which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before the financial
statements are issued or are available to be issued. This guidance is set forth in Topic 855
in the Accounting Standards Codification (ASC 855). ASC 855 provides guidance on the period
after the balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in the
financial
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements and the
disclosures that an entity should make about events or transactions that occurred after the
balance sheet date. The adoption of this accounting guidance did not impact on the Companys
consolidated financial statements. The Company has performed an evaluation of subsequent
events through the date these financial statements were issued.In June 2009, the FASB issued the FASB Accounting Standards Codification (ASC or the
Codification). The Codification became the single source for all authoritative generally
accepted accounting principles, or GAAP, recognized by the FASB and is required to be applied
to financial statements issued for interim and
annual periods ending after September 15, 2009. The Codification does not change GAAP and
did not impact the Companys financial position or results of operations.In September 2009, the FASB issued new accounting guidance related to the revenue recognition
of multiple element arrangements as well as certain revenue arrangements that include
software elements. The new guidance states that if vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined, companies will
be required to develop a best estimate of the selling price to separate deliverables and
allocate arrangement consideration using the relative selling price method. The accounting
guidance will be applied prospectively and will become effective during the 2011 fiscal year.
Early adoption is allowed. The adoption of this accounting guidance is not expected to
materially impact the Companys financial statements.In January 2010, the FASB issued new accounting guidance related to the disclosure
requirements for fair value measurements and provides clarification for existing disclosure
requirements. This guidance clarifies existing disclosure requirements for the level of
disaggregation used for classes of assets and liabilities measured at fair value and requires
disclosures about the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements. Those disclosure requirements are
effective for fiscal years ending after October 31, 2010. The adoption of this accounting
guidance is not expected to materially impact the Companys financial statements.On November 1, 2009, the Company adopted ASC 740-10 Income Taxes(FIN 48). ASC 740-10
prescribes a recognition threshold that a tax position is required to meet before being
recognized in the financial statements and provides guidance on de-recognition, measurement,
classification, interest and penalties, accounting in interim periods, disclosure and
transition issues. At the adoption date for the Company, there were no gross unrecognized
tax affected amounts, and there was no impact on the Company as a result of adopting ASC
740-10. We had no adjustments to retained earnings at the adoption of ASC 740-10. The
Company records interest and penalties relating to unrecognized tax benefits as part of its
income tax expense recorded in the accompanying financial statements. It is reasonably
possible that the total amount of unrecognized tax benefits will increase or decrease in the
next twelve months.
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 3.
    
    Acquisition of Rand A Technology Corporation
 On November 1, 2007, the Company acquired all of the outstanding capital stock of Rand A
Technology Corporation (RATC) to serve as its primary business. RATC was acquired for cash
of $44.5 million plus related transaction costs incurred by the Company of $805,000. No
stock options of the Company were issued in connection with the acquisition. The results of
operations of the acquired business have been included in the consolidated financial
statements of the Company since the date of acquisition.The purchase price allocation for the acquisition of RATC was based on the fair values of
assets acquired and liabilities assumed as of November 1, 2007, summarized as follows (in
thousands):
 Total purchase consideration:Cash paid
    
    $
    44,509Transaction costs
    
    
    805Total purchase consideration
    
    $
    45,314Allocation of the purchase consideration:Assets:Cash
    
    $
    5,967Accounts receivable
    
    
    14,408Inventory
    
    
    2,080Prepaid expenses and other assets
    
    
    1,814Due from related parties
    
    
    1,538Property and equipment
    
    
    2,440Equity-method investments
    
    
    201Deferred tax assets
    
    
    26,976Valuation allowance related to deferred tax assets
    
    
    (19,386
    )Acquired intangible assets
    
    
    20,424Goodwill
    
    
    16,639Total assets acquired
    
    
    73,101Liabilities:Accounts payable and accrued liabilities
    
    
    16,062Deferred revenue
    
    
    2,066Customer advance payments
    
    
    323Income taxes payable
    
    
    568Other current liabilities
    
    
    844Deferred tax liability related to nondeductible
acquired intangible assets
    
    
    7,590Due to related parties
    
    
    334Total liabilities assumed
    
    
    27,787Total purchase consideration
    
    $
    45,314
 Identifiable intangible assets acquired consisted of customer relationships, with a value of
$17.6 million; trademarks and trade names, with a value of $1.5 million; and intellectual
property related to the training business, with a value of $1.3 million. Customer
relationship intangibles represent the underlying relationships and agreements with RATCs
customers. Of the amount recorded for customer relationships, $14.7 million related to the
Companys IMAGINiT segment and $2.9 million related to the Companys RPS segment. Of the
amount recorded for trademarks and trade names, $1.2 million related to the IMAGINiT
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 segment and $300,000 related to the RPS segment. Of the amount recorded for intellectual property,
$662,000 related to the IMAGINiT segment and $662,000 related to the RPS segment.Deferred revenue recorded in the acquisition reflects an amount equivalent to the estimated
cost plus a reasonable profit margin to fulfill the remaining service obligations of RATCs
software support agreements.In the acquisition, the Company acquired approximately $27.0 million of net deferred tax
assets of RATC, which consisted primarily of net operating loss carryforwards. However, the
Company recorded such assets with a full valuation allowance due to the significant
uncertainty about whether those deferred tax assets will
be realized, particularly due to the Companys history of losses and limitations that will be
imposed on the amount of net operating losses which may be used annually to offset any
taxable income the Company may generate in the future. If and when such acquired deferred
tax assets are realized, the release of the associated valuation allowance will be recorded
as a tax benefit in the consolidated statement of operations, pursuant to new business
combination rules effective for the Company as of November 1, 2009. None of the intangible
assets acquired in the acquisition is deductible for income tax purposes. As a result, and
in accordance with ASC 740-10, Income Taxes, the Company recorded in the purchase accounting
a deferred tax liability of $7.6 million, equal to the tax effect of the amount of the
acquired intangible assets other than goodwill. As a result of recording that deferred tax
liability, the Company also reduced the valuation allowance recorded against net deferred tax
assets by a corresponding amount. In addition, $14.0 million of the goodwill amount is not
deductible for income tax purposes.This transaction resulted in $16.6 million of purchase price that exceeded the estimated fair
values of tangible assets and identifiable intangible assets and liabilities, which was
allocated to goodwill. The Company attributes the high amount of goodwill relative to
identifiable tangible and intangible assets to its assertion that the implementation of a
revised corporate strategy for RATC would be more profitable over the longer-term life of the
business than was the strategy that had been employed prior to the acquisition. Of the
amount recorded for goodwill in the acquisition, $12.3 million was assigned to the Companys
IMAGINiT segment and $4.4 million was assigned to the Companys RPS segment. In 2008, the
Company recorded a goodwill impairment charge of $9.2 million, including the full impairment
of goodwill of the Companys RPS segment (refer to Note 5).
 4.
    
    Acquired Intangible Assets
 Acquired intangible assets result from the Companys acquisition of RATC on November 1, 2007
(Note 3). Customer relationship intangible assets, which represent the underlying
relationships and agreements with RATCs customers, are amortized based upon patterns in
which their economic benefits are expected to be realized and over a weighted-average
expected life of eight years. Other finite-lived identifiable intangible assets are
amortized on a straight-line basis, including trademarks and trade names, which are being
amortized over a weighted-average useful life of ten years, and intellectual property related
to the training business, which is being amortized over a useful life of three years. The
following is a summary of intangible assets acquired, amortization expense and asset
impairment charges recorded and the resulting carrying values of the acquired intangible
assets (in thousands):
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 2008Acquisition value
    
    
    Amortization
    
    
    
    
    
    
    
    
    
    
    Weightedon November 1,
    
    
    expense for the
    
    
    Impairment
    
    
    Net book value at
    
    
    average life (in2007
    
    
    period
    
    
    charge recorded
    
    
    October 31, 2008
    
    
    years)Customer relationships
    
    $
    17,600
    
    
    $
    4,719
    
    
    $
    11,696
    
    
    $
    1,185
    
    
    
    8Trademarks and trade
names
    
    
    1,500
    
    
    
    150
    
    
    
    218
    
    
    
    1,132
    
    
    
    10Intellectual property
    
    
    1,324
    
    
    
    441
    
    
    
    -
    
    
    
    883
    
    
    
    3$
    20,424
    
    
    $
    5,310
    
    
    $
    11,914
    
    
    $
    3,200
 2009Amortization
    
    
    
    
    
    
    
    
    
    
    WeightedNet book value at
    
    
    expense for the
    
    
    Impairment
    
    
    Net book value at
    
    
    average life (inOctober 31, 2008
    
    
    period
    
    
    charge recorded
    
    
    October 31, 2009
    
    
    years)Customer relationships
    
    $
    1,185
    
    
    $
    426
    
    
    $
    -
    
    
    $
    759
    
    
    
    8Trademarks and trade
names
    
    
    1,132
    
    
    
    126
    
    
    
    -
    
    
    
    1,006
    
    
    
    10Intellectual property
    
    
    883
    
    
    
    441
    
    
    
    -
    
    
    
    442
    
    
    
    3$
    3,200
    
    
    $
    993
    
    
    $
    -
    
    
    $
    2,207
 2010Amortization
    
    
    
    
    
    
    
    
    
    
    WeightedNet book value at
    
    
    expense for the
    
    
    Impairment
    
    
    Net book value at
    
    
    average life (inOctober 31, 2009
    
    
    period
    
    
    charge recorded
    
    
    June 30, 2010
    
    
    years)Customer relationships
    
    $
    759
    
    
    $
    190
    
    
    $
    -
    
    
    $
    569
    
    
    
    8Trademarks and trade
names
    
    
    1,006
    
    
    
    86
    
    
    
    -
    
    
    
    920
    
    
    
    10Intellectual property
    
    
    442
    
    
    
    293
    
    
    
    -
    
    
    
    149
    
    
    
    3$
    2,207
    
    
    $
    569
    
    
    $
    -
    
    
    $
    1,638
 Amortization expense of intellectual property, totaling $441,000 for each of 2008 and
2009 and $293,000 for the eight months ended June 30, 2010, is included as a component of
cost of service revenue in the consolidated statement of operations. Amortization expense
for all other acquired intangible assets is included in operating expenses in the
consolidated statement of operations.The Company experienced a significant decline in demand for its products and services during
the second half of 2008 and concluded that the decline was not anticipated to recover in the
short term. As a result, the Company determined that such decline was an indication that the
carrying value of its long-lived intangible assets may not be recoverable and, accordingly,
conducted recoverability tests in accordance with ASC No. 360-10. The Company performed its
assessment at the asset group level, which represented the lowest level of cash flows that
are largely independent of cash flows of other assets and liabilities. In performing the
assessment, when it was determined that the undiscounted cash flows were lower than the
carrying value of any asset group, the Company compared the fair value of each long-lived
asset to its carrying value.As a result of performing those tests as of October 31, 2008, the Company recorded an
impairment charge totaling $11.9 million in 2008, which reduced the carrying value of
intangible assets to $3.2 million, as indicated in the table above. The Company also
reassessed the amortization method and remaining amortization period for the assets, and
determined that the method utilized was appropriately matching the expected economic benefit
of use of the customer relationship asset, and that the overall expected life of the asset
was still appropriate.In the original purchase accounting, total acquired intangible assets recorded for the
Companys IMAGINiT segment were $16.6 million and for the RPS segment were $3.9 million.
After the impairment charges and regular amortization expense recorded in 2008, the book
value of acquired intangible assets of the IMAGINiT segment were reduced to $2.3 million and
the acquired intangible assets of the RPS segment were reduced to $900,000.
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 Future estimated amortization expense for the acquired intangibles assets remaining as of
June 30, 2010 is as follows: $494,000 in fiscal 2011, $268,000 in fiscal 2012, $218,000 in
fiscal 2013, $187,000 in fiscal 2014, $166,000 in 2015 and $305,000 thereafter.
 5.
    
    Goodwill
 The Company typically performs an annual impairment test of its goodwill on October 31 and
whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. ASC No. 350-30 requires that the impairment test be performed through the
application of a two-step process. The first step compares the carrying value of the
Companys segments to their estimated fair values as of the test date. If
fair value is less than carrying value, a second step is performed to quantify the amount of
the impairment, if any.The Company performs its annual goodwill impairment assessment as of June 30, 2010, using the
two-step process required by ASC No. 350-30. The Company estimates the fair value of its two
segments, IMAGINiT and RPS, using an income approach, which estimates fair value of each
segment based upon future cash flows discounted to their present value. If step one of this
assessment results in the carrying value of a segment exceeding its fair value, accordingly,
the Company performs the second step to determine the implied fair value of goodwill by
comparing the fair value of the segment to the aggregate fair value of all the assets and
liabilities of the segment. In step two of the impairment analysis, the Company compared the
implied fair value of goodwill in the segment to its carrying value.As a result of performing those tests as of June 30, 2010 and October 31, 2009, there was no
impairment. As a result of performing those tests as of October 31, 2008, the Company
recorded an impairment charge of $9.2 million, including the full write-down of goodwill of
the Companys RPS segment. Assessing the impairment of goodwill requires the Company to make
certain significant assumptions, estimates and judgments, including future revenue, expenses,
cash flows and discount rates. The actual results may differ from these assumptions and
estimates and it is possible that such differences could have a material impact on the
Companys financial statements. The Company based the valuations of its segments, in part,
on its actual historical performance and its estimate of the future performance of the
segments. The Company attributes the goodwill impairment that resulted from its assessment
in 2008 to the significant decline in demand for its products and services experienced during
the second half of 2008, which was not anticipated to recover in the short term.
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 Carrying values of goodwill were as follows (in thousands):
 Imaginit

    
    RPSreporting

    
    reportingunit

    
    unit

    
    TotalGoodwill balance at October 31, 2007, gross
    
     $
    -
    
    
     $
    -
    
    
     $
    -Acquisition of Rand A Technology
    
    
    12,280
    
    
    
    4,359
    
    
    
    16,639Impairment charge
    
    
    (4,876
    )
    
    
    (4,359
    )
    
    
    (9,235
    )Currency translation effects
    
    
    (381
    )
    
    
    -
    
    
    
    (381
    )Goodwill balance at October 31, 2008, net
    
     $
    7,023
    
    
     $
    -
    
    
     $
    7,023Goodwill balance at October 31, 2008, gross
    
     $
    12,280
    
    
     $
    4,359
    
    
     $
    16,639Accumulated impairment
    
    
    (4,876
    )
    
    
    (4,359
    )
    
    
    (9,235
    )Currency translation effects
    
    
    (203
    )
    
    
    -
    
    
    
    (203
    )Goodwill balance at October 31, 2009, net
    
     $
    7,201
    
    
     $
    -
    
    
     $
    7,201Goodwill balance at October 31, 2009, gross
    
     $
    12,280
    
    
     $
    4,359
    
    
     $
    16,639Accumulated impairment
    
    
    (4,876
    )
    
    
    (4,359
    )
    
    
    (9,235
    )Currency translation effects
    
    
    (172
    )
    
    
    -
    
    
    
    (172
    )Goodwill balance at June 30, 2010, net
    
     $
    7,232
    
    
     $
    -
    
    
     $
    7,232
 6.
    
    Property and EquipmentProperty and equipment consisted of the following (in thousands):
 EstimatedUseful Life

    
    As of October 31,

    
As of June 30,(Years)

    
    2008

    
    2009

    
    2010Computer and office equipment
    
    
    3 to 5
    
    
     $
    2,610
    
    
     $
    2,964
    
    
     $
    3,623Furniture and fixtures
    
    
    10
    
    
    
    269
    
    
    
    344
    
    
    
    425Motor vehicles
    
    
    3
    
    
    
    5
    
    
    
    5
    
    
    
    5Leasehold improvements
    
    
    2 to 5
    
    
    
    212
    
    
    
    201
    
    
    
    3803,096
    
    
    
    3,514
    
    
    
    4,433Less accumulated
depreciation and
amortization
    
    
    
    
    
    
    (1,369
    )
    
    
    (2,150
    )
    
    
    (2,610
    )$
    1,727
    
    
     $
    1,364
    
    
     $
    1,823


Depreciation and amortization expense for both continuing and discontinuing operations
in 2008, 2009 and the eight-month period ended June 30, 2010 was $1.3 million, $781,000 and
$457,000 respectively. For 2008, 2009 and the eight-month period ended June 30, 2010 the net
book value of assets under capital lease obligations was $115,000, $66,000 and $90,000
respectively.
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 7.
    
    Accrued LiabilitiesAccrued liabilities consisted of the following (in thousands):
 As of October 31,

    
    As of June 30,2008

    
    2009

    
    2010Accrued compensation and benefits
    
     $
    2,361
    
    
     $
    1,430
    
    
     $
    1,219Inventory received but not yet invoiced
    
    
    1,211
    
    
    
    196
    
    
    
    815Accrued professional fees
    
    
    832
    
    
    
    653
    
    
    
    622Accrued capital and property taxes
    
    
    471
    
    
    
    304
    
    
    
    -Accrued sales taxes
    
    
    459
    
    
    
    190
    
    
    
    -Accrued marketing expenses
    
    
    -
    
    
    
    314
    
    
    
    454Accrued facilities expenses
    
    
    -
    
    
    
    205
    
    
    
    352Accrued other liabilities
    
    
    58
    
    
    
    124
    
    
    
    222$
    5,392
    
    
     $
    3,416
    
    
     $
    3,684
 8.
    
    Restructuring ChargesThe Company accounts for charges resulting from operational restructuring actions in
accordance with ASC No. 420-10, Accounting for Costs Associated with Exit or Disposal
Activities, which addresses financial accounting reporting associated with certain exit or
disposal activities. Under ASC No. 420-10, costs associated with certain exit or disposal
activities are recognized and measured at their fair value in the period in which the
liability is incurred rather than at the date of a commitment to an exit or disposal plan.
The determination of restructuring charges requires managements judgment and may include
such costs and charges as those related to employee severance, termination benefits, the
write-off of assets, professional service fees and costs for future lease commitments on
excess facilities, net of any estimated income from subleases. All such judgments and
related estimates are reviewed and, if necessary, revised on an annual basis, which may
result in adjustments to previously recorded liability accruals.In 2008, the Company incurred and recorded restructuring charges of $1.2 million, consisting
primarily of termination benefits paid to two employees whose positions were eliminated as a
result of commencement of a plan to relocate the Companys corporate headquarters and certain
senior management positions from Canada to the United States. Of that charge, $161,000 was a
non-cash expense related to the transfer to an employee of shares held of an equity-method
investment of the Company and $78,000 was share-based compensation expense related to the
issuance of common stock. Of the total restructuring charge, $53,000 was recorded in the RPS
segment, and $1.1 million was unallocated. As of October 31, 2008, all of the severance
costs had been paid and no restructuring accrual existed in connection with this plan.In 2009, the Company implemented a series of restructuring actions to right-size its
operations, to relocate its corporate headquarters and to reduce expenses. As a result of
these activities, the Company reduced its headcount by 126 employees and incurred
severance-related expenses of approximately $1.7 million. Of the total restructuring charge,
$1.1 million was recorded in the IMAGINiT segment, $79,000 was recorded in the RPS segment,
and $577,000 was unallocated. As of October 31, 2009, there were $12,000 of
workforce-related unpaid severance costs and $205,000 of accrued restructuring costs related
to facility closures, primarily in the IMAGINiT segment.In 2010, the Company continued to implement certain actions to restructure its operations.
During the eight-month period, these actions resulted in the involuntary termination of 31
employees which resulted in
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 severance-related expenses of $616,000 as well as $55,000 in
facility lease terminations. Of the total restructuring charge, $70,000 was recorded in the
IMAGINiT segment, $562,000 was recorded in the RPS segment, and $33,000 was unallocated.
 The following table summarizes the merger and restructuring reserve activity for 2008, 2009
and 2010 respectively (in thousands):
 Year ended

    
    Year ended

    
    Eight monthsOctober 31,

    
    October

    
    ended June2008

    
    31, 2009

    
    30, 2010Beginning balance
    
     $
    -
    
    
     $
    -
    
    
     $
    217Restructuring charges recorded
for employee severance
    
    
    1,166
    
    
    
    1,529
    
    
    
    616Cash payments related to
liabilities recorded for
employee severance
    
    
    (1,166
    )
    
    
    (1,728
    )
    
    
    (344
    )Restructuring charges recorded
for facility lease
terminations
    
    
    -
    
    
    
    211
    
    
    
    55Cash payments
    
    
    (1,005
    )
    
    
    (1,523
    )
    
    
    (628
    )Settlement of non-cash charges
related to restructuring
    
    
    (161
    )
    
    
    -
    
    
    
    (6
    )Effect of exchange rate changes
    
    
    -
    
    
    
    -
    
    
    
    (25
    )Ending balance
    
     $
    -
    
    
     $
    217
    
    
     $
    229
 The ending balance of all such items has been included as a
component of accrued liabilities at each balance sheet date.
 9.
    
    Income TaxesThe components of losses from continuing operations before income taxes for the years ended
October 31, 2008 and 2009 and for the eight month period ended June 30, 2010 were as follows
(in thousands):
 Year ended

    
    Eight months endedOctober 31,

    
    June 30,2008

    
    2009

    
    2010Domestic
    
    $
    (26,571
    )
    
    $
    (7,023
    )
    
    $
    (2,732
    )Foreign
    
    
    (3,403
    )
    
    
    1,261
    
    
    
    13$
    (29,974
    )
    
    $
    (5,762
    )
    
    $
    (2,719
    )
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 For 2008, 2009 and for the eight month period ended June 30, 2010 the provision for
income taxes for continuing operations consisted of the following (in thousands):
 Eight monthsYear ended

    
    endedOctober 31,

    
    June 30,2008

    
    2009

    
    2010Current tax provision (benefit):Federal
    
     $
    -
    
    
    $
    (394
    )
    
     $
    35State
    
    
    86
    
    
    
    32
    
    
    
    -Foreign
    
    
    9
    
    
    
    14
    
    
    
    -$
    95
    
    
    $
    (348
    )
    
     $
    35
 There was no deferred tax provision or benefit recorded in either year.
 A reconciliation of the statutory income tax rates to the Companys effective income tax
rates for the years ended October 31, 2008 and 2009 and eight months ended June 30, 2010 was
as follows:
 October 31,

    
    June 30,2008

    
    2009

    
    2010Statutory federal income tax rate
    
    
    (34.0
    )%
    
    
    (34.0
    )%
    
    
    (34.0
    )%State taxes, net of federal tax benefit
    
    
    (2.2
    )
    
    
    (3.5
    )
    
    
    (6.1
    )Foreign tax rate and law differential
    
    
    6.6
    
    
    
    (0.5
    )
    
    
    -Nondeductible goodwill impairment
    
    
    8.2
    
    
    
    -
    
    
    
    -Change in valuation allowance
    
    
    (32.5
    )
    
    
    8.4
    
    
    
    58.9Liquidation adjustments
    
    
    16.7
    
    
    
    (1.9
    )
    
    
    1.3Nondeductible expenses
    
    
    37.7
    
    
    
    25.5
    
    
    
    (18.8
    )Effective income tax rate
    
    
    0.5
    %
    
    
    (6.0
    )%
    
    
    1.3
    %
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 The components of the Companys net deferred tax asset and the related valuation
allowance were as follows (in thousands):
 October 31,

    
    June 30,2008

    
    2009

    
    2010Net operating loss carryforwards
    
     $
    16,098
    
    
     $
    15,848
    
    
     $
    16,259Expenses not currently deductible
    
    
    386
    
    
    
    311
    
    
    
    363Capital loss carryforwards
    
    
    -
    
    
    
    -
    
    
    
    1,610Accrued expenses
    
    
    759
    
    
    
    504
    
    
    
    85Property and equipment
    
    
    180
    
    
    
    346
    
    
    
    442Intangible assets
    
    
    500
    
    
    
    171
    
    
    
    424Deferred revenue
    
    
    7
    
    
    
    7
    
    
    
    4Translation effects
    
    
    -
    
    
    
    -
    
    
    
    399Total deferred tax assets
    
    
    17,930
    
    
    
    17,187
    
    
    
    19,586Acquired intangible assets not deductible
    
    
    (1,180
    )
    
    
    (610
    )
    
    
    (620
    )Total deferred tax assets
    
    
    16,750
    
    
    
    16,577
    
    
    
    18,966Valuation allowance
    
    
    (16,750
    )
    
    
    (16,577
    )
    
    
    (18,966
    )Net deferred tax assets
    
     $
    -
    
    
     $
    -
    
    
     $
    -
 On November 1, 2009 the Company adopted the provisions of ASC 740-10 Income Taxes(FIN
48). As a result of the implementation, the Company recognized no material adjustment in the
liability for unrecognized income tax benefits.As of October 31, 2008 and 2009 and June 30, 2010, the Company has U.S. federal net operating
loss carryforwards available to reduce future taxable income of approximately $17.1 million,
$22.8 million and $27.8 million, respectively. Under IRC 382 certain changes in the Companys
ownership structure may result in a limitation on the amount of net operating loss
carryforwards that may be used in future years. These carryforwards expire between 2009 and
2029. As of October 31, 2008 and 2009 and June 30, 2010, the Company also has foreign net
operating loss carryforwards of approximately $31.8 million, $24.7 million and $18.2 million,
respectively, available to reduce future taxable income. These carryforwards expire between
2009 and 2028 for some jurisdictions, and for other jurisdictions, the losses may be carried
forward indefinitely.As of October 31, 2008 and 2009 and June 30, 2010, the Company has established a full
valuation allowance against the amount of its net deferred tax assets, in all jurisdictions
including the United States, because it believes that it is more likely than not that the tax
assets in those jurisdictions will not be realized prior to their expiration.During 2008 and 2009, the Company disposed of several of its subsidiaries (Note 17). As a
result of those dispositions or closures, deferred tax assets of $4.3 million for 2008 and
$1. 5 million for 2009 for foreign net operating loss carryforwards recorded in the
acquisition of RATC with a full valuation allowance were removed from the accounts as they
are no longer available for use by the Company. For the years ended
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 October 31, 2008 and
2009, the income tax provision for discontinued operations was $83,000 and $380,000,
respectively.
 The Company conducts business globally and, as a result, it or one or more of its
subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. In the normal course of business, the Company is subject to
examination by taxing authorities throughout the world. With few exceptions, the Company is
no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for
years before fiscal 2002. Carryforward attributes that were generated prior to 2002 may still
be adjusted upon examination by tax authorities if they have been or will be used in the
future. Similar tax laws may also apply for state and international tax purposes.At June 30, 2010, United States income taxes were not provided on permanently undistributed
earnings for certain non-US subsidiaries as the Company will
reinvest these earnings indefinitely in its operations outside of the United States.At June 30, 2010, the Company had no accrual for uncertain tax positions. It is reasonably
possible that the total amount of unrecognized tax benefits will increase or decrease in the
next 12 months, and as of the filing date of this Form 10-K, an estimate of the possible
change cannot be made. The Company recognizes interest and penalties related to income taxes
as a component of the provision for income tax expense on the consolidated statement of
operations.
 10.
    
    Debt and Other Related-Party TransactionsStockholder loansOn October 31, 2007, the Company entered into a term loan agreement (the Term Loan) with
the Stockholder, which owned 100% of the outstanding preferred stock and 89% of the
outstanding common stock of the Company as of October 31, 2009 and 2008. The Term Loan
consisted of two promissory notes: one for $10.0 million bearing interest of 10% or 12% per
year based upon the timing of repayments, and another for $3.5 million bearing interest of
10% or 14% per year based upon the timing of repayments. Per the original terms of the
promissory notes, all principal and interest were to be fully repaid by November 1, 2012,
with scheduled principal and interest payments beginning in December 2007. The Company
incurred issuance costs related to the Term Loan of $269,000, which was recorded as a
discount on the carrying value of the debt and will be amortized as additional interest
expense over the term of the debt through November 1, 2012. Amortization of debt issuance
cost recognized as interest expense was $54,000 in each of 2008 and 2009 and $36,000 for the
eight-months ended June 30, 2010.Between November 1, 2007 and February 14, 2008, the Company repaid $2.3 million of principal
and paid $50,000 of interest under the Term Loan.On February 14, 2008, the Term Loan was amended to reflect the amalgamation of all amounts
outstanding under the two original promissory notes as well as the inclusion of $2.3 million
of new borrowings. In addition, accrued interest of $309,000 was converted to principal,
resulting in a revised principal balance of $13.8 million as of that date. Of this amount,
$1.7 million was required to be repaid on September 1, 2008, and thereafter payments of
$242,000 were to be made monthly through November 1, 2012, at which time all remaining
principal and interest were due. Unpaid principal balances were to incur interest of 10% per
year; however, that rate was increased to 12% per year retroactive to February 14, 2008
because the entire principal balance was not repaid by August 31, 2008, which date was later
amended to be September 30, 2009. The amended Term Loan contained covenants that prevented
the Company from incurring additional debt or creating other liens, except for those arising
in the normal course of business; entering into sale-leaseback transactions; making
investments; selling assets; making acquisitions or other business
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 combinations; paying
dividends; or repurchasing stock. The Term Loan also specified events of default, including
among other circumstances the Companys failure to make payments of principal or interest
when due and its failure to maintain certain non-financial covenants, in case of which the
Stockholder could have required immediate repayment of all outstanding principal and
interest.On July 30, 2008, the Company entered into a series of unsecured, demand promissory notes
with the Stockholder, receiving proceeds of $1.0 million. Unpaid principal balances on these
notes incurred interest of 10% per year. The $1.0 million of borrowings under these notes
was repaid in full in 2008 by the Company.On September 4, 2008 and October 23, 2008, the Term Loan was further amended, resulting in
revised payment terms that required a principal repayment of $2.6 million on December 20,
2008 and monthly payments of principal of $242,000 thereafter through November 1, 2012.As of October 31, 2008, the Term Loan had a principal balance of $13.8 million, which was
required to be repaid as follows: $4.8 million in fiscal 2009, $2.9 million in fiscal 2010,
$2.9 million in fiscal 2011 and $3.2 million in fiscal 2012. Accordingly, $9.0 million of
the principal balance of the Term Loan had been classified as the long-term portion of
amounts due to related parties in the consolidated balance sheet, net of remaining debt
issuance costs of $215,000. As of October 31, 2008, the current portion of the amounts due
to related parties in the consolidated balance sheet, totaling $7.0 million, consisted of the
$4.8 million of principal due to the Stockholder under the Term Loan, $1.0 million of accrued
interest under the Term Loan, and $1.3 million due to the Stockholder for reimbursement of
professional fees incurred by the Company in connection with its acquisition of RATC (Note 3)
as well as other fees due to the Stockholder.On January 10, 2009, the Term Loan was amended, resulting in revised payment terms that
required a principal repayment of $4.8 million on October 1, 2009 and thereafter principal
repayments of $242,000 monthly through November 1, 2012, at which time all principal and
accrued interest are due.On April 29, 2009, the Company entered into a series of unsecured, demand promissory notes
with the Stockholder receiving proceeds of $2.0 million. Unpaid principal balances on these
notes incurred interest of 10% per year, until they were repaid in full on August 14, 2009.On August 14, 2009, the Company made a series of payments totaling $8.1 million for the
amounts owed to the Stockholder, including $1.1 million primarily related to reimbursement of
transaction fees paid in connection with the RATC acquisition and the Companys issuance of
preferred stock; $2.1 million for all principal and interest amounts then outstanding in
relation to the unsecured, demand promissory notes; $2.3 million for unpaid interest accrued
on the Term Loan; and $2.7 million of principal repayments under the Term Loan. As a result
of these payments, the principal balance of the Term Loan was reduced to $11.1 million on
that date.In conjunction with the establishment of the revolving line of credit (Note 11), the
Stockholder entered into a subordination agreement with the domestic bank that prioritized
the guarantees and security interest associated with the revolving line of credit in advance
of those included in the Companys Term Loan. In addition, the Term Loan was modified to
conform its payment terms to those permitted under the bank revolving line of credit
agreement. The revolving line of credit agreement allows the Company to make periodic
repayments of amounts due under the Term Loan as long as certain financial covenants are
maintained by the Company. Absent satisfying those covenants, no repayments under the Term
Loan are permitted. The Term Loan modification removes the obligation of the Company to pay
the amounts due under the existing payment schedule of the Term Loan if such payments would
violate the terms of the revolving credit agreement. Further, delays in payments under the
Term Loan that arise from this
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 prioritization of the bank revolving line of credit are not deemed to be events of default under the modified Term Loan agreement.As the entire principal balance of the Term Loan was not repaid prior to September 30, 2009,
the interest rate of the loan increased to 12% retroactive to February 14, 2008 on all unpaid
principal balances.As June 30, 2010, the Company was in compliance with the terms of the Term Loan agreement and
there existed no default or events of default under the Term Loan agreement.As a result of the Merger, the Companys Term Loan is no longer outstanding and the Company
has no remaining financial obligations relative to its Term Loan or the related
formerly-accruing interest.Rand North AmericaRand North America (RNA) is a business that purchases services from the Company and was
formed in 2004 as a joint venture that, during 2008 and 2009, was 30% owned by the Company
and 70% owned by Dassault. During 2008 and 2009, the Company provided various training and
consulting services to RNA, which resulted in $4.1 million and $2.4 million of related party
revenue, respectively. As of October 31, 2008 and 2009, accounts receivable due from RNA
related to purchases of those services totaled $1.2 million and $627,000, respectively.
During 2008 and 2009, the Company also purchased various consulting services from RNA
totaling $175,000 and $35,000, respectively. No amount was payable to RNA as of October 31,
2008 or 2009 for these purchases.In April 2010, the Company sold its ownership interest in RNA to Dassault for proceeds of
approximately $1.6 million. As the carrying value of the ownership interest was zero, the
full value of the proceeds were recorded as a gain on sale of an investment in the eight
months ended June 30, 2010. After the transaction, RNA was no longer a related party and all
accounts receivable due from RNA ceased to be classified as such.
 11.
    
    Revolving Line of CreditOn August 14, 2009, the Company entered into a three-year revolving credit and security
agreement with a domestic bank. The primary use of this facility was to allow the Company to
repay a portion of its Term Loan and to fund regular working capital requirements. The
facility permits borrowing by the Company of up to $10.0 million against eligible accounts
receivable and up to an additional $2.5 million supported by a guarantee provided by the
Stockholder. The applicable interest rate under this facility is either (i) the banks daily
set rate plus specified margins, determined based on the Companys operating performance, or
(ii) the banks lending rate. As of October 31, 2009, and June 30, 2010 the applicable
interest rate under the facility was 6.0%. The bank also charges the Company a monthly
facility fee of 50 basis points of the outstanding balance, a collateral evaluation and
monitoring fee, and a fee for each letter of credit. Borrowings under this new revolving
line of credit are collateralized by substantially all of the assets of the Company. Upon
execution of the facility, the Company borrowed $8.4 million, of which $8.1 million was used
to repay amounts then due to the Stockholder and $314,000 was used to pay transaction costs
associated with the facility.Several affirmative and negative covenants are associated with the facility. The most
restrictive of these covenants are minimum operating performance requirements that became
effective during the three-months ended April 30, 2010. In addition, the covenants establish
limits on annual capital expenditures and limit the Companys ability to acquire or divest of
certain assets.As of October 31, 2009 and June 30, 2010, the outstanding principal balance under this credit
facility was $4.0 million and $3.3 million, respectively. As of those dates, the Company was
in compliance with the
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 terms of the credit agreement and its covenants and there existed no
default or events of default under the credit agreement.In conjunction with its merger with Avatech, the Company is negotiating a revised credit
facility with the same bank.
 12.
    
    Commitments and ContingenciesLease CommitmentsThe Company leases its office space and certain office equipment under non-cancelable
operating leases that expire at various dates through 2015. Rent expenses under operating
leases during 2008, 2009 and 2010 were $3.0 million, $2.2 million and $1.3 million,
respectively. Future minimum lease payments under non-cancelable operating and capital
leases as of June 30, 2010 are as follows (in thousands):
 Operating

    
    CapitalFiscal year
    
    Leases

    
    Leases2011
    
     $
    2,001
    
    
     $
    592012
    
    
    1,219
    
    
    
    312013
    
    
    808
    
    
    
    22014
    
    
    705
    
    
    
    22015
    
    
    553
    
    
    
    2Thereafter
    
    
    822
    
    
    
    -$
    6,108
    
    
    
    96Less: amount representing interest
    
    
    
    
    
    
    6Present value of minimum lease payments
    
    
    
    
    
    
    90Less: amounts due within one year
    
    
    
    
    
    
    55Long-term portion of capital
lease obligations
    
    
    
    
    
     $
    35
 LitigationThe Company is party to various litigation matters that management considers routine and
incidental to the Companys business. As of October 31, 2008 and 2009, the Company had
accrued no material amounts related to these matters.In November 2010, the Company agreed to settle a lawsuit for $350,000 that alleged it
breached certain clauses of an asset purchase agreement entered in 2006. The full amount of
the settlement was accrued as of June 30, 2010 and is included
as a component of accrued professional fees.GuaranteesIn 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: lenders in connection with the
Term Loan; 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
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 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, Inc., 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, 2010.
 13.
    
    Redeemable Preferred StockOn November 1, 2007, the Company issued 31,000,000 shares of Series A redeemable preferred
stock (Series A) for $1.00 per share. At October 31, 2008 and 2009, and June 30, 2010,
31,858,922 shares of Series A were authorized and designated, of which 31,000,000 shares were
issued and outstanding.In conjunction with its August 2010 recapitalization and Merger, the Companys redeemable
preferred stock is no longer outstanding.Series A Preferred StockThe Series A preferred stock had the following characteristics:VotingEach holder of Series A preferred stock was entitled to vote together with the holders of
common stock and was entitled to one vote per share of Series A preferred stock held by such
holder. In addition, holders of the Series A preferred stock, as a separate class, were
entitled to elect three members of the Companys Board of Directors.DividendsDividends accrued from the date of issuance of the Series A preferred stock at a rate of 8%
per year (the Accruing Dividends). The Accruing Dividends accrued whether or not declared,
are cumulative and compounded annually. However, the Accruing Dividends were payable in cash
only when and if declared by the Board of Directors. The Company could not declare or pay
any dividends on shares of any other class unless all accrued and unpaid dividends were paid
in full to the holders of Series A preferred stock. As of October 31, 2008 and 2009, accrued
but unpaid cumulative dividends totaled $2.7 million and $5.3 million, respectively. As of
June 30, 2010, accrued but unpaid cumulative dividends totaled $7.3 million and were recorded
as an increase in the carrying value of the preferred stock, based on the redemption amount
of the stock.RedemptionSeries A preferred stock was mandatorily redeemable upon request of the holders of at least a
majority of such stock at a price equal to the original price of $1.00 per share (adjusted to
reflect subsequent stock dividends, stock splits or other recapitalizations) plus any
Accruing Dividends accrued but unpaid thereon, whether or not declared. As the Series A
preferred stock was mandatorily redeemable upon request of the holders of at least a majority
of such stock, the carrying value of the Series A preferred stock was accreted to its
then-determined redemption amount at each balance sheet date.ConversionThe holders of the Series A preferred stock were not entitled to convert their preferred stock into shares of common stock.
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 Liquidation PreferenceIn the event of any liquidation, dissolution or winding-up of the affairs of the Company,
whether voluntary or involuntary, the holders of the then outstanding Series A preferred
stock were entitled, before any payment was made to the holders of the common stock, to
receive an amount per share equal to the original issue price of $1.00 per share (adjusted to
reflect subsequent stock dividends, stock splits or other recapitalizations) plus any
Accruing Dividends accrued but unpaid thereon. In the event that the assets to be
distributed were not sufficient to permit payment in full of such liquidation payments, the
entire assets of the Company were to be distributed ratably to the holders of Series A
preferred stock. After the holders of the then outstanding Series A preferred stock had been
paid in full their liquidation payments, the remaining assets of the Company were to be
distributed to the holders of the common stockholders on a pro rata basis.
 14.
    
    Common Stock and Stock Option Plan
 As a result of the Merger, the Companys common stock and stock-based awards are no longer
outstanding.Common StockEach share of common stock was entitled to one vote. The voting, dividend and liquidation
rights of the holders of common stock were subject to and qualified by the rights and
preferences of the holders of the Companys preferred stock.Prior to and through October 31, 2007, the Company issued to the Stockholder (Note 10) an
aggregate of 8,500,000 shares of common stock for nominal consideration in connection with
the formation and capitalization of the Company.During 2008, the Company also issued 1,000,000 shares of common stock to consultant and a
former employee. In December 2007, the Company issued 750,000 fully vested shares of common
stock, with a fair value of $0.06 per share, and recorded stock-based compensation expense of
$44,000. In May 2008, the Company issued 250,000 fully vested shares of common stock, with a
fair value of $0.31 per share, and recorded stock-based compensation expense of $78,000.Stock Option Plan
Under the Companys Amended and Restated 2007 Equity Incentive Plan (the Plan), an
aggregate of 770,000 shares of the Companys common stock were reserved for issuance to
employees, directors and consultants. Options granted under the Plans may be incentive stock
options (ISOs) or nonstatutory stock options (NSOs). ISOs may only be granted to
employees. The Board of Directors of the Company determines the period over which options
become exercisable. Options granted to date become exercisable over a four-year period at
each anniversary date of the date of grant at a rate of 25% per year. The exercise price of
ISOs shall be no less than the fair market value per share of the Companys common stock on
the grant date (or 110% of fair market value for ISOs granted to holders of more than 10% of
the voting stock of the Company). The exercise price of each NSO shall be determined by the
Board of Directors. The term of the options is determined by the Board of Directors, but in
the case of ISOs the term may not exceed 10 years from date of grant.In March 2009, the Company amended the Plan, increasing the aggregate number of shares of the
Companys common stock reserved for issuance to employees, directors and consultants from
770,000 to 1,070,000.
 F-31




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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 In December 2009, the Company amended the Plan, increasing the Companys common stock
reserved for issuance to employees, directors and consultants from 1,070,000 to 1,130,000.In conjunction with the recapitalization of the Company (Note 1), the Plan was transferred
and became an arrangement of RWWI. As a result, no further shares of the Company can be
issued pursuant to the Plan.Restricted Common Stock
The Plan also permits in certain circumstances the issuance of common stock subject to
certain restrictions, including forfeitures and the Companys right to repurchase such shares. These restrictions will be determined by the Board of Directors.Share-Based Compensation
In 2008, 2009 and for the eight-month period ended June 30, 2010, the Company recorded
compensation expense of $128,000, $39,000 and $33,000, respectively in connection with
employee share-based awards. As of October 31, 2008 and 2009 and for the eight-months period
ended June 30, 2010, unrecognized share-based compensation for non-vested stock options
totaled $44,000, $125,000 and $154,000, respectively, (net of expected forfeitures) and was
expected to be recognized as future expense using the straight-line method over a
weighted-average period of 3.8 years, 3.2 years and 2.7 years, respectively.The following table summarizes the activity under the Plan.
 2008

    
    2009

    
    2010Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageNumber of
    
    Exercise
    
    Number of
    
    Exercise
    
    Number of
    
    ExerciseShares

    
    Price

    
    Shares

    
    Price

    
    Shares

    
    PriceOutstanding at beginning of period
    
    
    -
    
    
    $
    -
    
    
    
    317,025
    
    
    $
    0.31
    
    
    
    1,011,780
    
    
    $
    0.31Granted
    
    
    317,025
    
    
    
    0.31
    
    
    
    694,755
    
    
    
    0.31
    
    
    
    101,829
    
    
    
    0.26Exercised
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Canceled/forfeited
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (130,000
    )
    
    
    0.31Outstanding at end of period
    
    
    317,025
    
    
    $
    0.31
    
    
    
    1,011,780
    
    
    $
    0.31
    
    
    
    983,609
    
    
    $
    0.30Exercisable at end of period
    
    
    -
    
    
    $
    -
    
    
    
    79,256
    
    
    $
    0.31
    
    
    
    272,201
    
    
    $
    0.31Weighted-average remaining
contructual life of outstanding
options
    
    
    
    
    
    9.8 years
    
    
    
    
    
    9.15 years
    
    
    
    
    
    9.15 years
 All options granted have an exercise price equal to the fair value of the Companys
common stock on the date of grant. Exercise prices for options outstanding as of June 30,
2010 ranged from $0.26 to $0.31 as follows:
 Weighted
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Weigted
    
    AverageWeighted
    
    Remaining
    
    
    
    
    
    Average
    
    RemainingAverage Exercise
    
    Contractual Life
    
    
    
    
    
    Exercise Prices
    
    Contractual LifeOption
    
    
    
    Options
    
    Prices of Options
    
    of Options
    
    Options
    
    of Options
    
    of OptionsPrices

    
    
    
    Outstanding

    
    Outstanding

    
    Outstanding

    
    Exercisable

    
    Exercisable

    
    Exercisable$
    0.31
    
    
    
    
    
    884,780
    
    
    $
    0.31
    
    
    
    8.53
    
    
    
    272,201
    
    
    $
    0.31
    
    
    
    8.530.26
    
    
    
    
    
    98,829
    
    
    
    0.26
    
    
    
    9.39
    
    
    
    -
    
    
    
    -
    
    
    
    -983,609
    
    
    
    
    
    
    
    
    
    
    
    272,201
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##### Table of Contents



Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 For the years ended October 31, 2008 and 2009, and eight month period ending June 30,
2010 the weighted average grant-date fair value of options determined by the use of the
Black-Scholes option pricing model was $0.16, $0.17 and $0.15 per share, respectively.As a result of the Merger, the Companys common stock and stock-based awards are no longer
outstanding (Note 1).
 15.
    
    Net Income/(Loss) per Common Share
 The following table sets forth the computation of basic and diluted net income/(loss) per
common share (in thousands):
 Year ended October 31,

    
    Eight monthsended June 30,2008

    
    2009

    
    2010Net loss from continuing operations
    
    $
    (30,069
    )
    
    $
    (5,414
    )
    
    $
    (2,754
    )Loss from discontinued operations, net of tax
    
    
    (920
    )
    
    
    (860
    )
    
    
    -Gain (loss) on sale or disposition of discontinued operations, net of tax
    
    
    (1,342
    )
    
    
    2,914
    
    
    
    -Net loss
    
    $
    (32,331
    )
    
    $
    (3,360
    )
    
    $
    (2,754
    )Net loss from continuing operations
    
    $
    (30,069
    )
    
    $
    (5,414
    )
    
    $
    (2,754
    )Accretion of dividends and issuance costs on Series A Preferred Stock
    
    
    (2,667
    )
    
    
    (2,678
    )
    
    
    (1,928
    )Net loss from continuing operations available to common stock holders
    
    $
    (32,736
    )
    
    $
    (8,092
    )
    
    $
    (4,682
    )Weighted average shares used in computing basic net loss per share:
    
    
    9,313
    
    
    
    9,500
    
    
    
    9,500Effect of dilutive securities:
    
    
    -
    
    
    
    -
    
    
    
    -Weighted average shares used in computing diluted net loss per share:
    
    
    9,313
    
    
    
    9,500
    
    
    
    9,500Basic net loss per common share from continuing operations
    
    $
    (3.52
    )
    
    $
    (0.85
    )
    
    $
    (0.49
    )Basic net loss per common share from discontinued operations
    
    
    (0.24
    )
    
    
    0.22
    
    
    
    -Basic net loss per common share
    
    $
    (3.76
    )
    
    $
    (0.63
    )
    
    $
    (0.49
    )Diluted net loss per common share from continuing operations
    
    $
    (3.52
    )
    
    $
    (0.85
    )
    
    $
    (0.49
    )Diluted net loss per common share from discontinued operations
    
    
    (0.24
    )
    
    
    0.22
    
    
    
    -Diluted net loss per common share
    
    $
    (3.76
    )
    
    $
    (0.63
    )
    
    $
    (0.49
    )Shares used in computing net loss per common share:Basic
    
    
    9,313
    
    
    
    9,500
    
    
    
    9,500Diluted
    
    
    9,313
    
    
    
    9,500
    
    
    
    9,500
 Weighted average common stock equivalents related to stock options of 95,000, 758,000
and 976,000 were outstanding as of the years ended October 31, 2008 and 2009 and the eight
months ended June 30, 2010, respectively, but were not included in the calculation of diluted
loss per share as the Companys losses in those respective periods would render their
inclusion antidilutive.
 16.
    
    Significant Customers and Suppliers
 For the years ended October 31, 2008 and 2009, and the eight-month period ended June 30, 2010
no single customer or account receivable balance accounted for greater than 10% of the
Companys total revenue. For the fiscal years ended October 31, 2009 and 2008, and the
eight-month period ended June 30, 2010, the
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 Companys inventory purchases from Autodesk,
Synnex, Inc., Autonomy and Techdata, Inc. combined were approximately 93%,100% and 100%
respectively. The Companys product revenue related to the resale of
products from these combined suppliers for the years ended October 31, 2008 and 2009 and the
eight-month period ended June 30, 2010 was approximately 90%, 100% and 100% respectively.
 17.
    
    Discontinued Operations
 2009Sale of Sigmetrix, L.L.C.
On July 1, 2009, the Company sold its 60% ownership interest in Sigmetrix to Cybernet for
cash consideration of $122,000 and repayment of intercompany accounts payable of $3.1
million. The cash consideration of $122,000 to be received is subject to possible adjustment
for qualified claims made by Cybernet through December 31, 2010 against indemnification
guarantees made by the Company in the transaction. The operating results through July 1,
2009 and the related gain on sale of Sigmetrix have been presented as a discontinued
operation in the consolidated statements of operations.Closure of Subsidiary in Belgium
On August 6, 2009, the Companys Belgium subsidiary, Axis S.A. (Belgium), filed for
bankruptcy protection and was closed. The operating results through the closure date and the
loss on disposition of the entity have been presented as discontinued operations in the
consolidated statements of operations.Sale of Rand Technologies Singapore PTE Ltd.
On September 11, 2009, the Company completed the sale of its 80% ownership interest in Rand
Singapore to an individual for cash consideration of one Singapore dollar. The operating
results through September 11, 2009 and the related gain on the sale of Rand Singapore have
been presented as a discontinued operation in the consolidated statements of operations.2008The Netherlands
In July 2008, the Company completed the sale of its 100% ownership interest in its Dutch
subsidiary (Rand B.V.) to H&P Structured B.V. for cash consideration of $28.9 million.
Upon receipt, the Company also paid a liability of Rand B.V. of $28.7 million. The operating
results through July 2008 and the related loss on the sale of Rand B.V. have been presented
as a discontinued operation in the consolidated statements of operations. During 2009, the
Company received $115,000 of tax refunds related to the sale transaction. These refunds were
recorded as a reduction of closing costs.Japan
In July 2008, the Company completed the sale of its 100% ownership interest in its Japanese
subsidiary (Rand Japan) for cash consideration of $791,000. The operating results through
July 2008 and the related gain on the sale of Rand Japan have been presented as a
discontinued operation in the consolidated statements of operations.Spain, Slovakia, the Czech Republic, Poland and Ireland (collectively Rand Europe)
During 2008, the Company closed its subsidiaries in Rand Europe. Operating results for these
entities in 2008 consisted solely of currency exchange gains totaling $57,000. The operating
results through the closure date in 2008 and the loss on disposition of each of these
entities have been presented as discontinued operations in the consolidated statements of
operations.
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##### Table of Contents



Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 The following tables summarize the operating results of all operations discontinued during
2008 and 2009 through their disposition dates as well as the gain (loss) that resulted from
sale or disposition of each operation, net of tax (in thousands):
 Year ending October 31, 2008Netherlands

    
    Japan

    
    Rand Europe

    
    Sigmetrix

    
    Belgium

    
    Singapore

    

TotalIncome (loss) from discontinued operationsRevenue
    
    $
    10
    
    
    $
    1,020
    
    
    $
    -
    
    
    $
    2,264
    
    
    $
    1,667
    
    
    $
    741
    
    
    $
    5,702Cost of revenue
    
    
    (5
    )
    
    
    (467
    )
    
    
    -
    
    
    
    (156
    )
    
    
    (968
    )
    
    
    (440
    )
    
    
    (2,036
    )Operating expenses and currency gain (loss)
    
    
    (22
    )
    
    
    (1,067
    )
    
    
    57
    
    
    
    (2,277
    )
    
    
    (802
    )
    
    
    (475
    )
    
    
    (4,586
    )Income (loss) from discontinued operations, net
of tax provision of $83
    
    $
    (17
    )
    
    $
    (514
    )
    
    $
    57
    
    
    $
    (169
    )
    
    $
    (103
    )
    
    $
    (174
    )
    
    $
    (920
    )Gain (loss) on sale or disposition of
discontinued operationsCash consideration received
    
    $
    28,895
    
    
    $
    791
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    29,686Carrying value of net assets (liabilities) disposed
    
    
    28,680
    
    
    
    (446
    )
    
    
    (158
    )
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    28,076Gain (loss) before disposal cost
    
    
    215
    
    
    
    1,237
    
    
    
    158
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    1,610Cost of disposal, including currency gain (loss)
    
    
    (1,540
    )
    
    
    (1,006
    )
    
    
    (406
    )
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (2,952
    )Gain (loss) on sale or disposition, net of tax
    
    $
    (1,325
    )
    
    $
    231
    
    
    $
    (248
    )
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    (1,342
    )
 Year ending October 31, 2009Sigmetrix
    
    
    Belgium
    
    
    Singapore
    
    
    Netherlands
    
    
    TotalIncome (loss) from discontinued operationsRevenue
    
    $
    1,172
    
    
    $
    721
    
    
    $
    437
    
    
    $
    -
    
    
    $
    2,330Cost of revenue
    
    
    (16
    )
    
    
    (573
    )
    
    
    (370
    )
    
    
    -
    
    
    
    (959
    )Operating expenses and currency gain (loss)
    
    
    (1,597
    )
    
    
    (364
    )
    
    
    (270
    )
    
    
    -
    
    
    
    (2,231
    )Income (loss) from discontinued operations, net of tax provision of $0
    
    $
    (441
    )
    
    $
    (216
    )
    
    $
    (203
    )
    
    $
    -
    
    
    $
    (860
    )Gain (loss) on sale or disposition of
discontinued operationsCash consideration received
    
    $
    -
    
    
    $
    -
    
    
    $
    1
    
    
    $
    -
    
    
    $
    1Consideration receivable
    
    
    122
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    122Carrying value of net assets (liabilities) disposed
    
    
    (3,192
    )
    
    
    (279
    )
    
    
    (209
    )
    
    
    -
    
    
    
    (3,680
    )Gain (loss) before disposal cost
    
    
    3,314
    
    
    
    279
    
    
    
    210
    
    
    
    -
    
    
    
    3,803Cost of disposal, including currency gain (loss)
    
    
    (818
    )
    
    
    (146
    )
    
    
    (40
    )
    
    
    115
    
    
    
    (889
    )Gain (loss) on sale or disposition, net of tax
    
    $
    2,496
    
    
    $
    133
    
    
    $
    170
    
    
    $
    115
    
    
    $
    2,914
 There were no discontinued operations in the eight months ended June 30, 2010.
 18.
    
    Equity-Method Investments
 Equity-method investments held by the Company during 2008 consisted of ownership interests in
Rand North America, Inc. (RNA) of 30% and Engineering.com of 28% of the fully diluted shares of each company, respectively. In May 2008, the Company divested its ownership in
Engineering.com. At that time, the investment had a fair value of $161,000 and a carrying
value of $201,000, resulting in a loss of $40,000 being recorded in the statement of
operations for 2008. The Companys investment in RNA was recorded at zero value in
connection with its purchase price allocation for RATC (Note 3), and no change was
subsequently recorded in that investment balance during 2008 and 2009.In April 2010, the Company sold its ownership interest in RNA to Dassault for proceeds of
approximately $1.6 million.
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 19.
    
    Savings Plan
 The Company has a defined contribution savings plan under Section 401(k) of the Internal
Revenue Code. This plan covers substantially all employees who meet minimum age and service
requirements and allows participants to defer a portion of their annual compensation on a
pretax basis. Company contributions to the plan may be made at the discretion of the Board
of Directors. The Company made contributions of $0, $163,000 and $132,000 to the plan in
2008, 2009 and for the eight-month period ending June 30, 2010, respectively.
 20.
    
    Segment Information
 The Company provides design automation solutions and related services to various
manufacturing and engineering industries. The Company serves these industries through two
operating segments: IMAGINiT,
which services customers who primarily utilize Autodesk solution platforms, and RPS, which
services customers who primarily utilize other vendors solution platforms. These operating
segments are considered reportable segments as defined by ASC 280-10, Segment Reporting.
There are significant functions, and therefore costs, that are considered corporate expenses
and are not allocated to the divisions for the purposes of assessing performance and making
operating decisions. These unallocated corporate expenses include certain marketing and
general and administrative costs. Costs and expenses of each division include direct costs
associated with selling, supporting, developing and marketing the products and services sold
by each division, as well as amortization of acquired intangible assets and restructuring
charges.Asset information by reportable segment is not reported as the Company does not accumulate
such information internally. The accounting policies of the segments are the same as those
described in Note 2 to these consolidated financial statements. The products and services
sold by the segments are described in Note 1. The following table summarizes financial
information about the Companys reportable segments (in thousands):
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 EightmonthsYear ended
    
    endedOctober 31,

    
    June 30,2008

    
    2009

    
    2010Revenue:Product sales:IMAGINiT
    
    $
    43,025
    
    
    $
    21,730
    
    
    $
    15,894RPS
    
    
    1,360
    
    
    
    3,791
    
    
    
    974Total Product sales
    
    $
    44,385
    
    
    $
    25,522
    
    
    $
    16,869Service revenue:IMAGINiT
    
    $
    10,077
    
    
    $
    8,479
    
    
    $
    5,249RPS
    
    
    11,623
    
    
    
    7,757
    
    
    
    4,805Total Service revenue
    
    $
    21,700
    
    
    $
    16,236
    
    
    $
    10,055Commission revenue:IMAGINiT
    
    $
    13,083
    
    
    $
    11,505
    
    
    $
    5,787Total Commission revenue
    
    $
    13,083
    
    
    $
    11,505
    
    
    $
    5,787Total Revenue
    
    $
    79,168
    
    
    $
    53,263
    
    
    $
    32,710Cost of revenue:Cost of Product sales:IMAGINiT
    
    $
    29,709
    
    
    $
    16,186
    
    
    $
    10,952RPS
    
    
    944
    
    
    
    1,013
    
    
    
    247Total Cost of product sales
    
    $
    30,653
    
    
    $
    17,199
    
    
    $
    11,199Cost of Service revenue:IMAGINiT
    
    $
    10,232
    
    
    $
    6,486
    
    
    $
    3,456RPS
    
    
    9,600
    
    
    
    7,317
    
    
    
    4,136Total Cost of Service revenue
    
    $
    19,832
    
    
    $
    13,802
    
    
    $
    7,592Gross ProfitIMAGINiT
    
    $
    26,245
    
    
    $
    19,043
    
    
    $
    12,521RPS
    
    
    2,439
    
    
    
    3,219
    
    
    
    1,397Total Gross Profit
    
    $
    28,683
    
    
    $
    22,262
    
    
    $
    13,919Operating expenses:IMAGINiT
    
    $
    38,788
    
    
    $
    15,318
    
    
    $
    9,038RPS
    
    
    11,063
    
    
    
    2,834
    
    
    
    1,976Unallocated
    
    
    7,585
    
    
    
    7,863
    
    
    
    5,624Total operating expenses
    
    $
    57,435
    
    
    $
    26,015
    
    
    $
    16,638Income (loss) from operations:IMAGINiT
    
    $
    (12,543
    )
    
    $
    3,725
    
    
    $
    3,484RPS
    
    
    (8,624
    )
    
    
    385
    
    
    
    (580
    )Unallocated
    
    
    (7,585
    )
    
    
    (7,863
    )
    
    
    (5,624
    )Total loss from operations
    
    $
    (28,752
    )
    
    $
    (3,753
    )
    
    $
    (2,719
    )
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Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 Geographic Information
The Companys continuing operations conduct business in the United States, Canada, Australia,
Singapore and Malaysia. For internal reporting purposes, the results of the Companys
Australian, Singaporean and Malay subsidiaries are combined and reported under the category
of Rest of World. Revenue for any particular geographic region is determined by sales made
by the company to the customers in that particular region. The following table illustrates
certain financial information about these geographies in the corresponding fiscal periods:
 EightmonthsYear ended
    
    endedOctober 31,

    
    June 30,2008

    
    2009

    
    2010Revenue:US:IMAGINiT Product sales
    
    $
    27,347
    
    
    $
    12,432
    
    
    $
    8,157IMAGINiT Service revenue
    
    
    6,056
    
    
    
    5,374
    
    
    
    3,129IMAGINiT Commission revenue
    
    
    9,918
    
    
    
    8,340
    
    
    
    4,012RPS Product sales
    
    
    1,097
    
    
    
    3,436
    
    
    
    837RPS Service revenue
    
    
    9,026
    
    
    
    5,773
    
    
    
    4,156Total US revenue:
    
    $
    53,443
    
    
    $
    35,355
    
    
    $
    20,292Canada:IMAGINiT Product sales
    
    $
    9,377
    
    
    $
    5,483
    
    
    $
    4,619IMAGINiT Service revenue
    
    
    2,886
    
    
    
    2,357
    
    
    
    1,995IMAGINiT Commission revenue
    
    
    2,519
    
    
    
    2,611
    
    
    
    1,659RPS Product sales
    
    
    264
    
    
    
    355
    
    
    
    137RPS Service revenue
    
    
    2,597
    
    
    
    1,984
    
    
    
    649Total Canada revenue:
    
    $
    17,643
    
    
    $
    12,790
    
    
    $
    9,058Rest of World:IMAGINiT Product sales
    
    $
    6,301
    
    
    $
    3,816
    
    
    $
    3,118IMAGINiT Service revenue
    
    
    1,135
    
    
    
    748
    
    
    
    126IMAGINiT Commission revenue
    
    
    646
    
    
    
    554
    
    
    
    116Total Rest of World revenue:
    
    $
    8,082
    
    
    $
    5,118
    
    
    $
    3,360Total revenue:IMAGINiT Product sales
    
    $
    43,025
    
    
    $
    21,730
    
    
    $
    15,894IMAGINiT Service revenue
    
    
    10,077
    
    
    
    8,479
    
    
    
    5,249IMAGINiT Commission revenue
    
    
    13,083
    
    
    
    11,505
    
    
    
    5,787RPS Product sales
    
    
    1,360
    
    
    
    3,791
    
    
    
    974RPS Service revenue
    
    
    11,623
    
    
    
    7,757
    
    
    
    4,805Total revenue:
    
    $
    79,168
    
    
    $
    53,263
    
    
    $
    32,710
 As of October 31,

    
    As of June 30,2008

    
    2009

    
    2010Long lived assetsUS
    
    $
    708
    
    
    $
    483
    
    
    $
    1,123Canada
    
    
    864
    
    
    
    751
    
    
    
    590Rest of World
    
    
    155
    
    
    
    130
    
    
    
    110Total
    
    $
    1,727
    
    
    $
    1,364
    
    
    $
    1,823
 F-38




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##### Table of Contents



Rand Worldwide, Inc.
Notes to Consolidated Financial Statements
 
 21.
    
    Comparable Period Data

(unaudited)
 The following table contains the unaudited information relating to the Companys statement of
operations for the eight months ended June 30, 2009 (unaudited) and 2010:
 (Amounts in thousands, except per share data)
 Eight months ended June 30,2009

    
    2010(unaudited)RevenueProduct sales
    
    $
    19,584
    
    
    $
    16,869Service revenue
    
    
    12,551
    
    
    
    10,055Commission revenue
    
    
    5,250
    
    
    
    5,786Total revenue
    
    
    37,385
    
    
    
    32,710Cost of revenueProduct sales
    
    
    12,130
    
    
    
    11,199Service revenue
    
    
    10,746
    
    
    
    7,592Total cost of revenue
    
    
    22,876
    
    
    
    18,791Gross profit
    
    
    14,509
    
    
    
    13,919Operating expensesSelling, general and administrative
    
    
    15,401
    
    
    
    15,529Depreciation and amortization
    
    
    1,105
    
    
    
    733Restructuring charges
    
    
    957
    
    
    
    665Total operating expenses
    
    
    17,463
    
    
    
    16,927Loss from operations
    
    
    (2,954
    )
    
    
    (3,008
    )Other expenses (income)Interest expense
    
    
    1,033
    
    
    
    1,260Currency exchange losses (gains)
    
    
    6
    
    
    
    51Other expense (income)
    
    
    22
    
    
    
    (1,600
    )Loss from continuing operations before income taxes
    
    
    (4,015
    )
    
    
    (2,719
    )Income tax expense (benefit)
    
    
    20
    
    
    
    35Loss from continuing operations
    
    $
    (4,035
    )
    
    $
    (2,754
    )Net loss from continuing operations
    
    $
    (4,035
    )
    
    $
    (2,754
    )Accretion of dividends and issuance costs on Series A Preferred Stock
    
    
    (1,786
    )
    
    
    (1,928
    )Net loss from continuing operations available to common stock holders
    
    $
    (5,821
    )
    
    $
    (4,682
    )Basic and diluted net loss per common share from continuing operations
    
    $
    (0.61
    )
    
    $
    (0.49
    )Weighted average shares used in computing losses per common share:Basic
    
    
    9,500
    
    
    
    9,500Diluted
    
    
    9,500
    
    
    
    9,500
 F-39




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##### Table of Contents



22.
Valuation and Qualifying Accounts
 Eight monthsYear ended October 31,
    
    
    ended June 30,2008
    
    
    2009
    
    
    2010Valuation Allowance for Deferred Tax AssetsBeginning balance
    
    $
    
    
    
    $
    16,751
    
    
    $
    16,577Allowance for acquired losses
    
    
    19,386
    
    
    
    
    
    
    
    Increase (decrease) net of temporary
differences
    
    
    (2,636)
    
    
    
    (174
    )
    
    
    2,389Ending balance
    
    $
    16,750
    
    
    $
    16,577
    
    
    $
    18,966
 Eight monthsYear ended October 31,
    
    
    ended June 30,2008
    
    
    2009
    
    
    2010Allowance
for Doubtful AccountsBeginning balance
    
    $
    
    
    
    $
    363
    
    
    $
    215Allowance for acquired accounts receivable
    
    
    271
    
    
    
    
    
    
    
    Write-offs
    
    
    
    
    
    
    (162
    )
    
    
    (63
    )Charges to costs and expenses
    
    
    92
    
    
    
    14
    
    
    
    238Ending balance
    
    $
    363
    
    
    $
    215
    
    
    $
    390
 F-40