UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
Commission File No. 000-50038
ARADYME CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 33-0619254
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1255 North Research Way, Building Q
Orem, Utah 84097
(Address of principal executive offices)
(801) 705-5000
(Issuer's telephone number)
n/a
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. The number of shares of $0.001 par
value common stock outstanding as of August 10, 2006, was 33,329,546.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB pursuant to the
rules and regulations of the Securities and Exchange Commission and, therefore,
do not include all information and footnotes necessary for a complete
presentation of our financial position, results of operations, cash flows, and
stockholders' equity (deficit) in conformity with generally accepted accounting
principles. In the opinion of management, all adjustments considered necessary
for a fair presentation of the results of operations and financial position have
been included and all such adjustments are of a normal recurring nature.
Our unaudited consolidated balance sheet at June 30, 2006, our audited
consolidated balance sheet at September 30, 2005, and the related unaudited
consolidated statements of operations for the three- and nine-month periods and
cash flows for the nine-month periods ended June 30, 2006 and 2005, are attached
hereto.
2
ARADYME CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
June 30, September 30,
2006 2005
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 54,998 $ 84,485
Accounts receivable, net of allowance 164,044 335,499
Prepaid expenses 17,750 68,288
------------ ------------
Total Current Assets 236,792 488,272
------------ ------------
PROPERTY AND EQUIPMENT, NET 146,421 138,313
------------ ------------
OTHER ASSETS
Prepaid license fees 89,912 78,662
Deposits 21,580 21,580
------------ ------------
Total Other Assets 111,492 100,242
------------ ------------
TOTAL ASSETS $ 494,705 $ 726,827
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 191,888 $ 134,147
Accrued expenses 537,699 347,940
Notes payable - related party 266,373 100,794
Notes payable 165,373 499,896
------------ ------------
Total Current Liabilities 1,161,333 1,082,777
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock: 1,000,000 shares authorized of $0.001
par value, 0 shares issued and outstanding, respectively -- --
Common stock: 50,000,000 shares authorized of $0.001
par value, 33,329,546 and 25,229,546 shares issued and
outstanding, respectively 33,330 25,230
Additional paid-in capital 7,887,095 6,209,794
Accumulated deficit (8,587,053) (6,590,974)
------------ ------------
Total Stockholders' Equity (Deficit) (666,628) (355,950)
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 494,705 $ 726,827
============ ============
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
ARADYME CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
June 30, June 30,
----------------------------- -------------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
REVENUES $ 209,798 $ 552,671 $ 677,689 $ 808,770
OPERATING EXPENSES
Wages and payroll taxes 583,505 644,940 2,008,667 1,608,966
Contract services 96,882 94,866 209,236 416,103
Rent 44,819 11,667 105,531 49,498
Depreciation and amortization 19,744 10,521 55,897 26,444
Other operating expenses 69,894 88,906 248,376 245,959
----------- ----------- ----------- -----------
Total Operating Expenses 814,844 850,900 2,627,707 2,346,970
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (605,046) (298,229) (1,950,018) (1,538,200)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (24,325) (76,102) (46,061) (208,529)
Loss on disposal of assets -- -- -- (39,892)
----------- ----------- ----------- -----------
Total Other Expense (24,325) (76,102) (46,061) (248,421)
----------- ----------- ----------- -----------
NET LOSS $ (629,371) $ (374,331) $(1,996,079) $(1,786,621)
=========== =========== =========== ===========
BASIC LOSS PER SHARE $ (0.02) $ (0.02) $ (0.07) $ (0.07)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 32,333,808 24,438,337 29,015,436 24,034,453
=========== =========== =========== ===========
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
ARADYME CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
June 30,
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,996,079) $ (1,786,621)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 55,897 26,444
Loss on disposal of assets -- 39,892
Common stock issued for services 16,000 96,000
Common stock issued for line of credit -- 20,000
Warrants issued for services 41,958 --
Warrants issued for line of credit -- 174,442
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable 171,455 (431,600)
Decrease in prepaids 39,288 15,514
(Increase) in deposits -- (20,578)
Increase in accounts payable and
related party payables 57,741 73,990
Increase in accrued expenses 189,760 261,974
(Decrease) in interest payable 11,202 --
------------ ------------
Net Cash Used by Operating Activities (1,412,778) (1,530,543)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (64,005) (84,935)
------------ ------------
Net Cash Used by Investing Activities (64,005) (84,935)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related-party notes payable 525,000 200,000
Payments on related-party notes payable (370,000) --
Proceeds from notes payable 150,000 366,459
Payments on notes payable (285,147) (58,089)
Common stock issued for cash 1,500,000 1,229,120
Offering costs (72,557) --
------------ ------------
Net Cash Provided by Financing Activities 1,447,296 1,737,490
------------ ------------
NET (DECREASE) IN CASH (29,487) 122,012
CASH AT BEGINNING OF PERIOD 84,485 265,259
------------ ------------
CASH AT END OF PERIOD $ 54,998 $ 387,271
============ ============
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
ARADYME CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the Nine Months Ended
June 30,
2006 2005
------------ ------------
CASH PAID FOR:
Interest $ 9,601 $ 5,633
Income taxes $ -- $ --
NON-CASH TRANSACTIONS:
Common stock issued for conversion of debt $ 200,000 $ --
Common stock issued for services $ 16,000 $ 96,000
Common stock issued for subscription receivable $ -- $ 150,000
Common stock issued for line of credit $ -- $ 20,000
Warrants issued for services $ 41,958 $ --
Warrants issued for line of credit and promissory note $ -- $ 174,452
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
ARADYME CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
June 30, 2006 and September 30, 2005
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Aradyme Corporation and Subsidiary (the Company) have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted in accordance with such rules and regulations. The
information furnished in the interim condensed consolidated financial statements
includes normal recurring adjustments and reflects all adjustments that, in the
opinion of management, are necessary for a fair presentation of such
consolidated financial statements. Although management believes the disclosures
and information presented are adequate to make the information not misleading,
it is suggested that these interim condensed consolidated financial statements
be read in conjunction with the Company's most recent audited consolidated
financial statements and notes included in its annual report on Form 10-KSB for
the fiscal year ended September 30, 2005, filed January 13, 2006. Operating
results for the three and nine months ended June 30, 2006, are not necessarily
indicative of the results that may be expected for longer periods or the entire
year.
NOTE 2 - MATERIAL EVENTS
a. Common Stock
On April 17, 2006, the Company revised and restated the terms of the investment
agreements signed on December 12, 2005, between the Company and Eagle Rock
Capital, LLC. Under the revised agreement, the Company has agreed to sell to
Eagle Rock Capital, in a series of tranches, up to 15,000,000 shares of common
stock at $0.20 per share and warrants to purchase up to an additional 18,750,000
shares of common stock with an exercise price of $0.40 per share. The warrant to
purchase 5,000,000 shares issued December 12, 2005, has been canceled and
replaced with a warrant to purchase 5,000,000 shares under the revised and
restated agreement. The warrant issued December 12, 2005, had an exercise price
of $0.50 per share and was exercisable any time after granted, not later than
December 11, 2010. The warrants granted, or to be granted, under the revised and
restated agreement are exercisable any time on or after December 12, 2006, and
expire on December 12, 2011. At that time, $500,000 provided by Eagle Rock
Capital was applied to fund the second tranche under the revised and restated
agreement. If the remaining tranches are fully funded, the Company will receive
an aggregate $3,000,000 without regard to any additional amounts that would be
received if any of the warrants are exercised.
The agreement obligates the Company to file a registration statement with the
Securities and Exchange Commission, within 30 days after its certificate of
incorporation is amended to increase its capitalization from 50,000,000 shares
of common stock to 100,000,000 shares of common stock, registering the resale of
both the shares of common stock and the shares of common stock issuable upon the
exercise of the warrants acquired under the agreement as well as certain other
shares designated by Eagle Rock Capital. The agreement also provides Eagle Rock
Capital with a right of first refusal to provide additional equity financing for
a period of 18 months after the closing date.
7
ARADYME CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
June 30, 2006 and September 30, 2005
NOTE 2 - MATERIAL EVENTS (continued)
b. Promissory Notes
In June 2006, the Company borrowed $50,000 from a stockholder, evidenced by a
promissory note secured by accounts receivable of the Company. The note has a
one-month term, extendable by the Company to two months. An interest payment of
10% of the principal outstanding was due in 30 days, and interest of 10%
calculated on the principal outstanding is due on repayment of the principal
amount of the note.
In June 2006, the Company borrowed $150,000 from EnviroFresh, Inc., an affiliate
of an employee and officer of the Company, evidenced by a promissory note
between the Company and EnviroFresh, Inc. The note has a one-month term,
extendable at the option of the noteholder for two 30-day periods. Interest on
the note is at a rate of 12% per annum, with two percentage points due for the
initial 30-day term and for each 30-day extension. As an additional term of the
loan, the Company agreed to update and keep current a copy of the Company's
current technology, which may be made available to EnviroFresh, Inc., under
certain conditions pursuant to that Modification and Documentation of
Obligations Agreement dated September 29, 2003.
In June 2006, the Company borrowed $5,000 from an officer of the company. This
loan is non interest bearing and is unsecured.
NOTE 3 - STOCK OPTIONS AND WARRANTS
The Company grants options to purchase shares of the Company's common stock to
employees of the Company and other service providers in order to provide
incentive and to retain the services of the grantees. The options vest over
either three or four years and have 10-year expirations. The Company estimated
the fair value of stock options at the date of grant by using the Black-Scholes
option pricing model. Stock options are typically issued at the fair value of
the Company's common stock on the date of issuance; therefore, no compensation
expense is generally recognized.
In the three-month period ended June 30, 2006, the Company did not grant any
options to purchase shares of the Company's common stock.
On April 17, 2006, the Company granted a warrant to purchase 5,000,000 shares of
the Company's common stock, at an exercise price of $0.40 per share and
exercisable through December 12, 2011, to an investor to replace a warrant
previously granted on December 12, 2005, then cancelled, as explained in Note
2a. Also on April 17, 2006, upon receipt of the second tranche of funding under
the terms of the revised and restated agreement referenced in Note 2a, the
Company granted an additional warrant to the same investor, to purchase
3,125,000 shares of the Company's common stock, with an exercise price of $0.40
per share and exercisable through December 12, 2011. The market price on the day
the warrants were granted was $0.28 per share.
8
ARADYME CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
June 30, 2006 and September 30, 2005
NOTE 3 - STOCK OPTIONS AND WARRANTS (continued)
On May 18, 2006, the Company granted two warrants, each to purchase 250,000
shares of the Company's common stock, with exercise prices of $0.24 and $0.40
per share and exercisable for a period of three years, to an investor relations
consultant, under the terms of a consulting agreement signed in May 2006 between
the consultant and the Company. The Company estimated the fair value of these
warrants at the date of grant by using the Black-Scholes option pricing model
based on the following assumptions: risk-free interest rate of 4.97%; expected
life of three years; expected volatility of 104%; and a dividend yield of 0.00%.
Based on these assumptions, $41,958 was charged to contract services expense as
the fair value of the warrants in the quarter ended June 30, 2006.
A summary of the status of the Company's stock options and warrants as of June
30, 2006, and September 30, 2005, and changes during the nine-month period ended
June 30, 2006, and the twelve-month period ended September 30, 2005, is
presented below:
June 30, 2006 September 30, 2005
----------------------------- -----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------- ----------- ------------- ------------
Outstanding, beginning of period 8,525,500 $0.54 4,695,384 $0.45
Granted 8,625,000 0.40 4,210,000 0.66
Canceled (392,500) 0.55 (372,384) 0.92
Exercised -- -- (7,500) 0.42
---------- ---------
Outstanding, end of period 16,758,000 $0.46 8,525,500 $0.54
========== =========
Exercisable, end of period 7,128,625 $0.52 6,492,500 $0.52
=========== =========
Weighted average fair value of options
and warrants granted during the period $0.21 $0.56
9
ARADYME CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
June 30, 2006 and September 30, 2005
NOTE 3 - STOCK OPTIONS AND WARRANTS (continued)
Outstanding Exercisable
----------------------------------------- --------------------------------
Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Exercise Price at 6/30/06 Life Price at 6/30/06 Price
- -------------- ----------- ----------- --------- ----------- --------
Stock Options - $ 0.42 3,765,000 4.84 $0.42 3,598,750 $0.42
$ 0.48 643,500 9.14 0.48 - 0.48
$ 0.50 475,000 1.65 0.50 437,500 0.50
$ 0.64 2,025,000 8.35 0.64 1,461,250 0.64
$ 0.80 124,500 8.85 0.80 31,125 0.80
---------- ---------
Total Outstanding Options 7,033,000 6.10 $0.50 5,528,625 $0.48
========== =========
Warrants - $ 0.24 250,000 2.88 $0.24 250,000 $0.24
$ 0.40 8,375,000 4.41 0.40 250,000 0.40
$ 0.75 900,000 2.00 0.75 900,000 0.75
$ 0.80 200,000 0.38 0.80 200,000 0.80
------- -------
Total Outstanding Warrants 9,725,000 4.10 0.44 1,600,000 $0.62
========== =========
Total Outstanding Options
and Warrants 16,758,000 4.94 $0.46 7,128,625 $0.52
========== =========
NOTE 4 - SUBSEQUENT EVENTS
In July 2006, the Company borrowed $125,000 from EnviroFresh, Inc., an affiliate
of an employee and officer of the Company, evidenced by a promissory note. The
note has a one-month term, extendable at the option of the noteholder for two
30-day periods. Interest on the note is at a rate of 12% per annum, with two
percentage points due for the initial 30-day term and for each 30-day extension.
As an additional term of the loan, the Company agreed to update and keep current
a copy of the Company's current technology, which may be made available to
EnviroFresh, Inc., under certain conditions pursuant to that Modification and
Documentation of Obligations Agreement dated September 29, 2003.
NOTE 5 - GOING CONCERN
The Company's financial statements are prepared using accounting principles
generally accepted in the United States of America applicable to a going concern
that contemplates the realization of assets and liquidation of liabilities in
the normal course of business. The Company has not yet established an ongoing
10
ARADYME CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
June 30, 2006 and September 30, 2005
NOTE 5 - GOING CONCERN (continued)
source of revenues sufficient to cover its operating costs and allow it to
continue as a going concern. The ability of the Company to continue as a going
concern is dependent on the Company obtaining adequate capital to fund operating
losses until it becomes profitable.
In order to continue as a going concern, develop a reliable source of revenues,
and achieve a profitable level of operations, the Company will need, among other
things, additional capital resources. Management has been successful negotiating
contracts that are expected to increase revenue significantly, is in the process
of negotiating additional contracts, and plans to raise at least $3,000,000
through private placement of its preferred and/or common stock to sustain
operations until revenues are sufficient to cover costs.
In December 2005, the Company executed an agreement to secure at least $1.0
million in new equity financing from an affiliated investor, with provisions for
the affiliated investor to provide $2.0 million in additional equity financing
through the purchase of additional common stock. Additional funds may be
provided through the exercise of warrants granted under the agreement. That
agreement was revised and restated in April 2006, at which time the investor
provided an additional $500,000. Even if the balance of $1.5 million is funded
under the agreement however, the Company will require additional capital in the
future to meet its ongoing cash requirements until it is able to generate
sufficient revenues from the commercialization of its technology and delivery of
its services to fund its anticipated operations and expansion. However,
management cannot provide any assurances that the Company will be successful in
accomplishing any of these plans.
The ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph, eventually secure other sources of financing, and attain profitable
operations. The accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
We provide data management solutions and services based on our unique database
management system, or DBMS, the proprietary base development platform from which
we derive our solutions, services, and additional technology products. Our
principal products and services include database migration/conversion services,
data extraction, transformation and loading (ETL) solutions, and application
development, together with the training and support services associated with the
delivery of these products and services.
Some of our initial revenue-producing business activities using our DBMS
technology have included custom database application development, custom
database migrations/conversions, and data integration projects. Due to the
versatility and capability of our products and services, we are currently
working to exploit revenue opportunities related to database
migration/conversion and data ETL solutions, and plan to continue to
commercialize our technologies and expand our solutions into additional areas as
our capital and internally-generated funds permit.
Because of the relatively short period on which we are reporting, results for
any given interim period may not be indicative of comparative results for longer
periods or for the entire year.
11
During the nine-month period ending June 30, 2006, we successfully completed, or
are near to completing, the delivery of our technology solutions on many of the
initial data migration projects for which we initially contracted. The successes
we have experienced in providing our technology, solutions, and processes in the
voter registration database migration and conversion area has helped us attract
additional relationships, contracts, and partners in other markets. As we have
been completing these projects, our personnel have been working to increase
market interest and relationships in the following two additional significant
market areas by developing and introducing solutions based on our technology:
(1) Extraction, translation, and loading (ETL) solutions that help
states better manage school and student performance by
enabling them to collect and manage data for education
reporting and performance analysis purposes more efficiently.
In July 2006, International Business Machines Corporation
("IBM") announced that it has joined forces with us to provide
solutions to help state education reporting agencies comply
with "No Child Left Behind" and other reporting requirements.
(2) Solutions for independent software vendors (ISVs) that enable
them to standardize the database migration/conversion
processes involved in implementing the applications they
develop for customers.
In June, we signed a master service agreement with Caselle,
Inc., a leader in local governmental financial application
software solutions, to use its ISV solution to perform data
migration and conversion to enhance Caselle's existing
application implementation projects. These projects will
involve Caselle's general ledger, accounts payable, payroll,
and utility billing software applications.
Management feels that our technology is adaptable and applicable to virtually
any source database or format, allowing us migration opportunities and abilities
that we feel are not within other providers' technological capabilities. As
evidenced by these agreements, as well as the subcontract agreement that we
recently signed to provide data migration/conversion services to support the
implementation of the State of Nevada's "Offender Tracking Information System,"
our technology enables us to evaluate and pursue potential contracts and data
migration projects in many areas including: (1) addressing state and federal
initiatives such as department of corrections, motor vehicle registration,
retirement benefits, "no child left behind," and other governmental database
needs within the public sector, and (2) a wide scope of data migration projects
within the private sector.
Management notes the significant downward trend in revenues for both the
three-month and nine-month periods ended June 30, 2006, which management
attributes largely to delays and cancellations in projects for which we have
been contracted to provide solutions. This has resulted in recent downward
trends in cash balances, net working capital, stockholders' equity, and accounts
receivable, and upward trends in accounts payable, accrued expenses, and
short-term debt obligations.
Because of the lower than expected quarterly revenues, management implemented a
significant cost reduction program that took effect in the quarter ended June
30, 2006, that has resulted in reduced operating expenses. The operating expense
levels of prior quarters were necessary to support ongoing projects and to
continue the development of our technology offerings.
12
Results of Operations
Our net loss increased from $1,786,621 in the nine-month period ended June 30,
2005, to $1,996,079 in the nine-month period ended June 30, 2006; and increased
from $374,331 in the three-month period ended June 30, 2005, to $629,371 in the
three-month period ended June 30, 2006.
Our revenues decreased 16%, from $808,770 in the nine-month period ended June
30, 2005, to $677,689 in the nine-month period ended June 30, 2006; and
decreased 62%, from $552,671 for the three months ended June 30, 2005, to
$209,798 for the three months ended June 30, 2006. Revenue in the recent nine-
and three-month periods were lower than management expected due to delays or
cancellations in several of the projects for which we have been contracted to
provide solutions, and our revenue from the commercialization of our database
management system is not yet sufficient to cover our operating expenses. Because
further growth in our revenue is needed to approach profitability, we have been
focusing much of our sales and marketing resources on the development of
relationships and new sales leads. Any future revenue increases will be
dependent on our ability to attract new contracts and to deliver acceptable work
according to the terms of the contracts; however, management expects that our
increased marketing and sales efforts, as well as our strategic alliances with
major integrators, will result in new significant contracts within both the
public and private sectors.
The major elements of our operating expenses are employee wages, benefits and
payroll taxes, and consultant contract charges for those providing technical and
other services. To support the commercialization of our products and services,
to deliver our solutions on contracts that have been signed, and to further the
development of our technology offerings, we expanded our staff in 2005 compared
to prior periods. Total operating expenses decreased by 4% and increased by 12%
for the three- and nine-month periods ending June 30, 2006, when compared to the
three- and nine-month periods ended June 30, 2005, as we increased our efforts
to bring our initial products to market, increased our product development
activity, and expanded our marketing and sales activities in the eGovernment and
the energy and utility markets. However, correspondent with the delay or failure
to recognize increased revenues in the quarter ended June 30, 2006, our
management formulated a cost savings program that involved a reduction in force
of 15 of our personnel. With these changes, management believes that staffing is
in line with current development and operations activities. We expect that we
may implement additional cost reduction measures, including further employee
reductions, salary reductions or deferrals, or meeting a portion of our salary
expenses through equity compensation arrangements, particularly with
executive-level employees. Operating expenses for the three- and nine-month
periods ending June 30, 2006, include a $57,858 noncash charge to contract
services to recognize the deemed value of warrants and common stock granted to a
consultant that we engaged in May to provide investor relations services.
Management expects that operating expenses will decrease in the next quarter as
cost reduction initiatives take full effect, but likely will increase beyond
that quarter, if contract activity increases, requiring additional employee
resources to support growth in data migration/conversion and data integration
services.
Our early stage of business development makes revenue and operating expense
comparisons between various interim periods difficult, and they may not be
indicative of expected future results of operations. Generally, we expect that
operating expenses will grow somewhat to support our ongoing marketing efforts,
and that to increase sales we will need to make additional expenditures for
sales, marketing, and implementation services. It may be some time before our
sales, marketing, and implementation resources are capable of supporting
substantially expanded sales without corresponding increases in operating
expenses.
13
Other income and expenses during the nine-month period ended June 30, 2006,
includes interest accrued on borrowings and notes payable to finance insurance
premiums. Interest expense decreased from $208,529 in the nine-month period
ended June 30, 2005, to $46,061 in the nine-month period ended June 30, 2006,
and from $76,102 in the three-month period ended June 30, 2005, to $24,325 in
the three-month period ended June 30, 2006, mainly due to the higher debt
balance carried by us in the prior year. However, interest expense in the
nine-month period and three-month periods ended June 30, 2005, included the
expensing of the deemed fair values of $107,787 and $66,655, respectively of
noncash interest expense derived from the valuation of warrants issued in
conjunction with debt instruments placed during those periods.
Liquidity and Capital Resources
As of June 30, 2006, we had a working capital deficit of $924,541, as compared
to a working capital deficit of $594,505 as of September 30, 2005. At June 30,
2006, we had an accumulated deficit of $8,587,053 and total stockholders'
deficit of $666,628, compared to an accumulated deficit of $6,590,974 and
stockholders' deficit of $355,950 at September 30, 2005. The auditors' report
for the year ended September 30, 2005, as with previous years, contained an
explanatory paragraph regarding our ability to continue as a going concern.
Since inception, we have relied principally on proceeds from the sale of
securities and advances from related parties to fund our activities. During the
nine months ended June 30, 2006, we used $1,412,778 in cash for operating
activities and $64,005 for investing activities, which was provided by net cash
of $1,447,296 from financing activities, resulting in a $29,487 decrease in cash
during the period. Financing activities provided cash of $1,500,000 from the
sale of restricted common stock and proceeds of $655,147 from notes payable,
primarily made up of short-term loans from our stockholders or affiliates.
Currently, portions of our accounts payable and payroll taxes are past due and
some payroll amounts due to our employees have not been paid. Although we have
signed several new contracts, these contracts together with our accounts
receivable are not expected to generate sufficient cash to fund our operations
in the near future and so we continue to work with our current and future
funding partners to seek the additional capital necessary to commercialize our
products and services. We estimate that we will require approximately an
additional $3,000,000 in cash, which we have sought to obtain principally
through the sale of securities, to fund our activities until revenues are
sufficient to cover costs.
In December 2005, we executed an agreement to secure at least $1,000,000 in new
equity financing from an affiliated investor, with provisions for the investor
to provide up to $2,000,000 in additional equity financing through the purchase
of additional common stock, in tranches, between now and March 2007. This
agreement was revised and restated in April 2006 to provide for earlier funding,
and an additional $500,000 was provided to us under the agreement. Additional
funds may also be provided through the exercise of warrants granted under this
agreement. Additional capital will be required in future fiscal years if we are
unable to generate sufficient revenues from commercialization of our database
management systems.
Other Items
We have reviewed other recently issued, but not yet adopted, accounting
standards in order to determine their effects, if any, on our results of
operations or financial position.
14
On December 16, 2004, the Financial Accounting Standards Board, or FASB,
published its Statement of Financial Accounting Standards, or SFAS, No. 123
(Revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R requires that
compensation cost related to share-based payment transactions be recognized in
the financial statements. Share-based payment transactions within the scope of
SFAS 123R include stock options, restricted stock plans, performance-based
awards, stock appreciation rights, and employee share purchase plans. The
provisions of SFAS 123R are effective beginning with the first interim or annual
reporting period of the first fiscal year beginning on or after December 15,
2005. Accordingly, we will implement the revised standard in the first quarter
of fiscal year 2007. Currently, we account for our share-based payment
transactions under the provisions of Accounting Principles Board, or APB,
Opinion 25, by making pro forma disclosures of net loss and loss per share as if
the fair value method of valuing stock options had been applied to employee
stock options. Management is assessing the implications of this revised standard
and believes that the adoption of SFAS 123R could have a significant impact on
our financial position, results of operations, or cash flow.
In May 2005, FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections-a Replacement of APB Opinion No. 20 and FASB Statement No. 3." This
statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine the period-specific effects or the cumulative effect of the change.
This pronouncement was effective December 15, 2005. Currently, we have not made
any changes in accounting principles; therefore, the adoption of SFAS No. 154
will not impact our financial position or results of operations.
Critical Accounting Policies
Software Development Costs
Development costs related to software products are expensed as incurred until
technological feasibility of the product has been established. Based on our
product development process, technological feasibility is established upon
completion of a working model. Costs incurred by us between completion of the
working model and the point at which the product is ready for general release
have not been significant. Accordingly, no costs have been capitalized to date.
Revenue Recognition
Revenues are primarily derived from providing data services, developing custom
software, and selling software licenses and related services, which include
maintenance, support, consulting and training services. Revenues from data
services, custom software development, and license arrangements and related
services are recognized in accordance with the American Institute of Certified
Public Accountants' Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," as amended by SOP 98-9. We generally recognize revenue when all of
the following criteria are met, as set forth in paragraph 8 of SOP 97-2: (i)
persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii)
the fee is fixed or determinable; and (iv) collectibility is probable. The third
and fourth criteria may require us to make significant judgments or estimates.
We define each of these four criteria as follows:
Persuasive evidence of an arrangement exists. It is our customary
practice to have a written contract, which is signed by both the
customer and us, defining services to be provided or software licenses
to be supplied by us and all other key terms of the arrangement. In the
event of a standard license arrangement that has been previously
negotiated with us, a purchase order from the customer is required.
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Delivery has occurred or services have been rendered. Data services are
provided by us to customer specifications and, in the case of software
licensing, our software is physically delivered to the customer. If an
arrangement includes undelivered products or services that are
essential to the functionality of the delivered product, delivery is
not considered to have occurred until these products or services are
delivered.
The fee is fixed or determinable. Our policy is not to provide
customers the right to a refund of any portion of their data services
fees or license fees paid. Generally, 100% of the invoiced fees are due
within 30 days. Payment terms extending beyond these customary payment
terms are considered not to be fixed or determinable, and revenues from
such arrangements are recognized as payments become due and payable.
Collectibility is probable. Collectibility is assessed on a
customer-by-customer basis. If it is determined from the outset of an
arrangement that collectibility is not probable, revenues would be
recognized as cash is collected.
For data services and custom software development contracts, generally revenue
is previously agreed upon as a fixed price in the customer contract. Some
contracts may include a definition of progress milestones or phases with
corresponding revenue elements established for each milestone or phase. The
standard contract defines that, if we have met all of the conditions and
requirements of that milestone or phase, then revenue is earned and billable by
us.
For contracts with multiple elements (e.g., license and maintenance), revenue is
allocated to each component of the contract based on vendor specific objective
evidence ("VSOE") of its fair value, which is the price charged when the
elements are sold separately. Since VSOE has not been established for license
transactions, the residual method is used to allocate revenue to the license
portion of multiple-element transactions. Therefore, we recognize the difference
between the total arrangement fee and the amount deferred for the undelivered
items as revenue.
We sell many of our products to end users under license agreements. The fee
associated with such agreements is allocated between software license revenue
and maintenance revenue based on the residual method. Software license revenue
from these agreements is recognized upon receipt and acceptance of a signed
contract and delivery of the software, provided the related fee is fixed and
determinable, collectibility of the revenue is probable, and the arrangement
does not involve significant customization of the software. If an acceptance
period is required, revenue is recognized upon the earlier of customer
acceptance or the expiration of the acceptance period, as defined in the
applicable software license agreement.
We recognize maintenance revenue ratably over the life of the related
maintenance contract. Maintenance contracts on perpetual licenses generally
renew annually. We typically invoice and collect maintenance fees on an annual
basis at the anniversary date of the license. Deferred revenue represents
amounts received by us in advance of performance of the maintenance obligation.
Professional services revenue includes fees derived from the delivery of
training, installation and consulting services. Revenue from training,
installation and consulting services is recognized on a time and materials basis
as the related services are performed.
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Forward-Looking Statements
This report contains statements about the future, sometimes referred to as
"forward-looking" statements. Forward-looking statements are typically
identified by the use of the words "believe," "may," "should," "expect,"
"anticipate," "estimate," "project," "propose," "plan," "intend," and similar
words and expressions. We intend that the forward-looking statements will be
covered by the safe harbor provisions for forward-looking statements contained
in Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Statements that describe our future strategic plans,
goals, or objectives are also forward-looking statements.
Although we have attempted to identify important factors that could cause actual
results to differ materially, there may be other factors that cause the
forward-looking statements not to come true as described in this report. These
forward-looking statements are only predictions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially. While we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance, or
achievements.
The forward-looking information is based on present circumstances and on our
predictions respecting events that have not occurred, that may not occur, or
that may occur with different consequences from those now assumed or
anticipated.
ITEM 3. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
to the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), is recorded, processed, summarized and
reported within the time periods specified by the Securities and Exchange
Commission's rules and forms, and that information is accumulated and
communicated to our management, including our principal executive and principal
financial officers (whom we refer to in this periodic report as our Certifying
Officers), as appropriate to allow timely decisions regarding required
disclosure. Our management evaluated, with the participation of our Certifying
Officers, the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act) as of June 30, 2006, pursuant
to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our
Certifying Officers concluded that, as of June 30, 2006, our disclosure controls
and procedures were effective.
There were no changes in our internal control over financial reporting that
occurred during our most recently completed fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II--OTHER INFORMATION
ITEM 6. EXHIBITS
The following exhibits are filed as a part of this report:
Exhibit
Number* Title of Document Location
- ---------------- -------------------------------------------------------------- -----------------------------------
Item 10 Material Contracts
- ---------------- -------------------------------------------------------------- -----------------------------------
10.29 Revised and Restated Stock Purchase Agreement between Incorporated by reference from the current
Aradyme Corporation and Eagle Rock Capital, LLC, report on Form 8-K dated April 17, 2006,
dated April 17, 2006 filed April 19, 2006.
10.30 Revised and Restated Registration Rights Agreement Incorporated by reference from the current
between Aradyme Corporation and Eagle Rock Capital, report on Form 8-K dated April 17, 2006,
LLC, dated April 17, 2006 filed April 19, 2006.
10.31 Form of Warrant To Purchase Shares of Common Stock Incorporated by reference from the current
(to be issued pursuant to Revised and Restated Stock report on Form 8-K dated April 17, 2006,
Purchase Agreement between Aradyme Corporation and filed April 19, 2006.
Eagle Rock Capital, LLC, effective December 12, 2005)
10.32 Promissory Note for $150,000 payable to EnviroFresh, Attached
Inc. d/b/a Eagle Rock Funding dated June 28, 2006
10.33 Promissory Note for $125,000 payable to EnviroFresh, Inc. Attached
d/b/a Eagle Rock Funding dated July 14, 2006
Item 31 Rule 13a-14(a)/15d-14(a) Certifications
- ---------------- -------------------------------------------------------------- -----------------------------------
31.01 Certification of Principal Executive Officer Attached
Pursuant to Rule 13a-14
31.02 Certification of Principal Financial Officer Attached
Pursuant to Rule 13a-14
Item 32 Section 1350 Certifications
- ---------------- -------------------------------------------------------------- -----------------------------------
32.01 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Attached
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)
32.02 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Attached
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)
- ---------------
* All exhibits are numbered with the number preceding the decimal indicating
the applicable SEC reference number in Item 601 and the number following
the decimal indicating the sequence of the particular document. Omitted
numbers in the sequence refer to documents previously filed as an exhibit.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ARADYME CORPORATION
(Registrant)
Date: August 21, 2006 By: /s/ James R. Spencer
James R. Spencer, Chairman
(Chief Executive Officer)
Date: August 21, 2006 By: /s/ Scott A. Mayfield
Scott A. Mayfield
(Chief Financial Officer)
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Aradyme (ADYE) Inactive
Filed: 21 Aug 06, 12:00am