Gross margins are up, although revenue is still lagging from a year ago. The engineering tools vendor and reseller is ignoring a group of former executives who are banding together to agitate for change. In an update from our March coverage, we report on a redemption of preferred stock.

March 12, 2010–Avatech Solutions, Inc. (OTCBB: AVSO), engineering tools vendor and reseller, has reported financial results for the company’s second fiscal quarter of 2010, ending December 31, 2009.

Avatech reported total revenues of $7.7 million for the quarter, compared to $9.5 million a year earlier. The company’s overall gross margin percentage increased to 59.2% for the three months ended December 31, 2009 compared to 43.6% the quarter ended December 31, 2008.

Despite realizing lowered revenues from the prior year, Avatech increased its operating income by $1.2 million to $861,000 for the three months ended December 31, 2009 when compared to the same period in the prior fiscal year.

Net income for the quarter was $482,000, as compared with a net loss of $223,000 a year earlier.

The Avatech balance sheet is positive: cash of $3.2 million, working capital in excess of $1.8 million, and only $98,000 of long-term liabilities. The
company continues to maintain a $5 million line of credit but has not needed to use any of the financing capacity during fiscal 2010.

Six Months Revenues
For the first half of fiscal 2010:

• Product revenue was $7.8 million, down from $10.9 million a year earlier
• Service revenue was $4.1 million, down from $5.1 million a year earlier
• Commission revenue was $3.7 million, down from $4.3 million a year earlier.

Cash per share on December 31, 2009 was $0.19, the lowest of any company we cover.

Former management forms stockholder group
Three former Avatech executives have joined their shares with the intention of pushing for changes. W. James Hindman, Donald Walsh, and Henry Felton have formed a 13D shareholders group, and hold a 17.2% stake in Avatech. According to their filing, the group has three possible intentions:

• To effect a sale of all shares of Avatech owned by members of the group;
• To influence, and if possible work with, Avatech management to pursue strategies with the purpose of enhancing shareholder value, including but not
  limited to a merger, sale or reorganization; or
• To engage in discussions with third parties with respect to those above-mentioned purposes.

According to an Avatech representative, “there is really no story here.” Current management does not have a relationship with anyone in this group, and the group does not have influence with the management team or the Board of Directors. They were required to file an SEC Form 13D as their collective interest exceeds 5% of Avatech shares.

Hindman, now retired, owns 783,125 shares, or 4.6% of Avatech. He was a co-founder and board member of the company from its inception until he resigned for personal reasons in August 2009. He served as chairman from 2002 until 2007. The Hindman Family Dynasty Trust also is part of the group, as a 3% stakeholder.

Based on the current price of Avatech stock, 90 cents, the value of Hindman’s personal stake is about $704,813. The trust’s stake is worth about $409,633.

Walsh, CEO of Avatech from December 2002 through July 2007. He owns 650,000 shares, or 3.8% of the company, for a value of $585,000. Felton, chairman and CEO of Avatech before Hindman and Walsh, is now retired. He owns 990,420 shares, or 5.8%,worth $891,378.

Redemption of Preferred Stock Completed
On April 1, 2010 Avatech announced it completed the redemption of its Series F Convertible Preferred Stock offering (“Series F”). Avatech issued $4 million of the preferred stock June 2006,  as part of the funding of an acquisition. The Series F issuance provided for a 10% dividend payment, 800,000 common stock warrants and could have been converted into 2,055,000 shares of common stock. Included in the final redemption payment was also the final dividend payment due under the issuance and with the redemption completed, the conversion rights no longer exist. The common stock warrants have an exercise price of $2.30 per share and will expire on June 12, 2010.

The Final Analysis
2Q10 was the second consecutive quarter of positive net income and improvement in the bottom line when compared to the previous year. The company says it remains “cautiously optimistic about the continuing recovery.” Before the recession hit, CEO George Davis led a significant reorganization of operations that now allows the company to be profitable at lower revenue levels.

We agree with current management, the shareholder group is just sour grapes. Publicly traded VARs generally lag behind the software vendors in the rise and fall of their share price. As the primary engineering software vendors see their value improve, so also in time will Avatech. Patience is a virtue. §