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 DECEMBER 31, 2005
Commission File No. 000-50038
ARADYME CORPORATION
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(Exact name of small business issuer as specified in its charter)
Delaware 33-0619254
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1255 North Research Way, Suite Q3500
Orem, Utah 84097
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(Address of principal executive offices)
(801) 705-5000
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(Issuer's telephone number)
n/a
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(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 February 15, 2006, was 30,729,546.
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 December 31, 2005, our
audited consolidated balance sheet at September 30, 2005, and the related
unaudited consolidated statements of operations for the three-month periods and
cash flows for the three-month periods ended December 31, 2005 and 2004, are
attached hereto.
2
ARADYME CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
December 31, September 30,
2005 2005
------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 233,976 $ 84,485
Accounts receivable, net of allowance 238,594 335,499
Prepaid insurance 54,250 68,288
------------ ------------
Total Current Assets 526,820 488,272
------------ ------------
PROPERTY AND EQUIPMENT, NET 158,584 138,313
OTHER ASSETS
Prepaid license fees 89,912 78,662
Deposits 21,580 21,580
------------ ------------
Total Other Assets 111,492 100,242
------------ ------------
TOTAL ASSETS $ 796,896 $ 726,827
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 67,866 $ 134,147
Accrued expenses 501,396 347,940
Notes payable - related party 103,315 100,794
Notes payable 35,000 499,896
------------ ------------
Total Current Liabilities 707,577 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 -- --
Common stock: 50,000,000 shares authorized of $0.001 par value,
30,729,546 and 25,229,546 shares issued and outstanding, respectively 30,730 25,230
Additional paid-in capital 7,371,738 6,209,794
Accumulated deficit (7,313,149) (6,590,974)
------------ ------------
Total Stockholders' Equity (Deficit) 89,319 (355,950)
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 796,896 $ 726,827
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
3
ARADYME CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended
December 31,
2005 2004
-------------- --------------
REVENUES $ 202,155 $ 26,800
-------------- --------------
OPERATING EXPENSES
Wages and payroll taxes 733,366 403,175
Contract services 48,069 230,789
Rent 23,333 15,672
Depreciation and amortization 17,568 8,079
Other operating expenses 85,706 52,433
-------------- --------------
Total Operating Expenses 908,042 710,148
-------------- --------------
LOSS FROM OPERATIONS (705,887) (683,348)
-------------- --------------
OTHER INCOME (EXPENSE)
Interest expense (16,288) (130,115)
-------------- --------------
Total Other Expense (16,288) (130,115)
-------------- --------------
NET LOSS $ (722,175) $ (813,463)
============== ==============
BASIC LOSS PER SHARE $ (0.03) $ (0.03)
============== ==============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 26,425,198 23,471,970
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
4
ARADYME CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
December 31,
2005 2004
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (722,175) $ (813,463)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 17,568 8,079
Common stock issued for services - 96,000
Common stock issued for line of credit - 20,000
Warrants issued for line of credit - 107,787
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable 96,905 (5,200)
Decrease (Increase) in prepaids 2,788 (18,382)
(Increase) in deposits - (21,580)
(Decrease) Increase in accounts payable and
accounts payable related party (66,279) 51,969
Increase (decrease) in accrued expenses 153,456 (15,696)
(Decrease) in interest payable (14,876) -
-------------- --------------
Net Cash Used by Operating Activities (532,613) (590,486)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (37,839) (8,737)
-------------- --------------
Net Cash Used by Investing Activities (37,839) (8,737)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related-party notes payable 270,000 -
Payments on related-party notes payable (270,000) -
Proceeds from notes payable - 16,459
Payments on notes payable (247,500) (24,292)
Common stock issued for cash 1,000,000 550,000
Offering costs (32,557) -
-------------- --------------
Net Cash Provided by Financing Activities 719,943 542,167
-------------- --------------
NET (DECREASE) INCREASE IN CASH 149,491 (57,056)
CASH AT BEGINNING OF PERIOD 84,485 265,259
-------------- --------------
CASH AT END OF PERIOD $ 233,976 $ 208,203
============== ==============
CASH PAID FOR:
Interest $ 16,288 $ 2,327
Income taxes $ - $ -
The accompanying notes are an integral part of these consolidated financial statements.
5
ARADYME CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the Three Months Ended
December 31,
2005 2004
-------------- --------------
NON-CASH TRANSACTIONS:
Common stock issued for conversion of debt $ 200,000 $ -
Common stock issued for services $ - $ 96,000
Common stock issued for line of credit commitment $ - $ 20,000
Warrants issued for line of credit $ - $ 107,787
The accompanying notes are an integral part of these consolidated financial statements.
6
ARADYME CORPORATION AND SUBSIDIARY
Consolidated Notes to the Financial Statements
December 31, 2005 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 months ended December 31, 2005, 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
In December 2005, the Company signed a stock purchase agreement with an investor
that is an affiliate of an officer of the Company. Under this agreement, the
Company agreed to sell to the investor, in a series of tranches over the
succeeding 15 months, up to 15,000,000 shares of common stock at $0.20 per share
and warrants, with exercise prices escalating from $0.50 per share to $1.00 per
share, to purchase up to an additional 15,000,000 shares of common stock. If all
the tranches are fully funded, the Company will receive $3,000,000 without
regard to any additional amounts that would be received if any of the warrants
are exercised. In the initial tranche, funded on the execution of the agreement,
the investor paid $1,000,000 for 5,000,000 shares of restricted common stock,
and warrants to purchase an additional 5,000,000 shares of common stock at an
exercise price of $0.50 per share. The Company is required to file a
registration statement registering the resale of shares purchased by this
investor, additional shares that may be purchased by this investor, shares
issuable upon the exercise of warrants acquired under this stock purchase
agreement, and other shares held by the investor and its affiliates.
In December 2005, the Company issued 500,000 shares of common stock upon the
conversion of $200,000 convertible debt advanced to the Company under a line of
credit agreement at a conversion price of $0.40 per share, as approved by the
board of directors. The line of credit agreement and convertible promissory note
provided that if the Company was unable to repay the obligation when due, the
Company had the right to convert the principal to common stock based on a 20-day
average closing price of the Company common stock preceding the due date of the
note. A cash payment was made to the lender to pay total interest accrued on
this debt.
7
ARADYME CORPORATION AND SUBSIDIARY
Consolidated Notes to the Financial Statements
December 31, 2005 and September 30, 2005
NOTE 2 - MATERIAL EVENTS (Continued)
b. Warrants
In December 2005, the Company signed a stock purchase agreement with an investor
that is an affiliate of an officer of the Company. Under this agreement, the
Company agreed to sell to the investor, in a series of tranches over the
succeeding 15 months, up to 15,000,000 shares of common stock at $0.20 per share
and warrants, with exercise prices escalating from $0.50 per share to $1.00 per
share, to purchase up to an additional 15,000,000 shares of common stock. All of
the warrants expire on December 12, 2010. In the initial tranche, funded on the
execution of the agreement, the investor paid $1,000,000 for 5,000,000 shares of
restricted common stock and warrants to purchase an additional 5,000,000 shares
of common stock at an exercise price of $0.50 per share. The stock purchase
agreement provides that the number of warrants issuable on any of the future
funding tranches will be increased or decreased if actual funding of the
tranches is accelerated or delayed, respectively. The Company is required to
file a registration statement registering the shares issuable upon the exercise
of warrants acquired under this stock purchase agreement. The Company estimated
the fair value of the warrants to be $1,039,311 at the date of grant by using
the Black-Scholes option pricing model. The $1,000,000 proceeds of the initial
tranche were allocated between common stock and warrants based on the relative
fair value of each instrument, resulting in $490,362 allocated to common stock
and $509,638 allocated to warrants.
c. Promissory Notes
On November 16, 2005 and December 5, 2005, we borrowed $250,000 and $120,000,
respectively, from an affiliate of an officer of the Company. The balances of
the loans, with accrued interest, were due upon the closing of a contemplated
purchase of common stock by Eagle Rock Capital, LLC, which is also an affiliate
of the same officer of the Company, bore interest at the rate of 8% per annum,
and were secured by our accounts receivable. The balances of both loans, with
accrued interest, were subsequently paid on December 13, 2005, upon closing of a
purchase of common stock by Eagle Rock Capital, LLC.
On November 18, 2005, we paid the $150,000 principal amount and additional
accrued interest due on a promissory note held by one of the Company's
stockholders. The note was due on October 31, 2005, and accrued interest at a
rate of 7% per annum.
On December 21, 2005, we paid the $80,000 principal amount and additional
accrued interest due on a promissory note held by one of the Company's
stockholders. The note was due on November 30, 2005, and accrued interest at a
rate of 8% per annum.
NOTE 3 - STOCK OPTIONS AND WARRANTS
a. Stock Options
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 ten-year expirations. The Company estimates
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 issue, therefore, no compensation
expense is generally recognized.
8
ARADYME CORPORATION AND SUBSIDIARY
Consolidated Notes to the Financial Statements
December 31, 2005 and September 30, 2005
NOTE 3 - STOCK OPTIONS AND WARRANTS (Continued)
a. Stock Options (Continued)
In the three-month period ended December 31, 2005, the Company did not grant any
options to purchase shares of the Company's common stock.
A summary of the status of the Company's stock options and warrants as of
December 31, 2005, and September 30, 2005, and changes during the three-month
period ended December 31, 2005, and the 12-month period ended September 30,
2005, is presented below:
December 31, 2005 September 30, 2005
----------------------------- -----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------- ----------- ------------- ------------
Outstanding, beginning of period 8,525,500 $0.45 4,695,384 $0.45
Granted 5,000,000 $0.50 4,210,000 0.66
Canceled -- -- (372,384) 0.92
Exercised -- -- (7,500) 0.42
---------- ---------
Outstanding, end of period 13,525,500 $0.52 8,525,500 $0.54
========== =========
Exercisable, end of period 11,772,500 $0.52 6,492,500 $0.52
========== =========
Weighted average fair value of options
and warrants granted during the period $0.21 $0.56
Outstanding Exercisable
------------------------------------------ -------------------------------
Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Exercise Price at 12/31/05 Life Price at 12/31/05 Price
- -------------- ----------- ---- ----- ----------- -----
Stock Options - $ 0.42 3,965,000 5.26 $0.42 3,748,750 $0.42
$ 0.48 712,000 9.64 0.48 - -
$ 0.50 475,000 2.15 0.50 437,500 0.50
$ 0.64 2,025,000 8.84 0.64 1,461,250 0.64
$ 0.80 248,500 9.35 0.80 25,000 0.80
---------- ----------
Total Outstanding Options 7,425,500 6.60 $0.50 5,672,500 $0.48
========== ==========
Warrants - $ 0.75 900,000 2.50 $0.75 900,000 $0.75
$ 0.80 200,000 0.87 0.80 200,000 0.80
$ 0.50 5,000,000 4.95 0.50 5,000,000 0.50
---------- ----------
Total Outstanding Warrants 6,100,000 4.45 $0.55 6,100,000 $0.55
========== ==========
Total Outstanding Options
and Warrants 13,525,500 5.63 $0.52 11,772,500 $0.52
=========== ==========
9
ARADYME CORPORATION AND SUBSIDIARY
Consolidated Notes to the Financial Statements
December 31, 2005 and September 30, 2005
NOTE 3 - STOCK OPTIONS AND WARRANTS (Continued)
b. Warrants
In December 2005, warrants exercisable for 5,000,000 shares of common stock at
$0.50 per share were granted to Eagle Rock Capital,
LLC. (See Note 2b)
The Company estimated the fair value of the warrants at the date of grant by
using the Black-Scholes option pricing model based on the following assumptions:
Risk-free interest rate of 4.4%; expected life of five years; expected
volatility of 72%; and dividend yield of 0.00%.
NOTE 4 - SUBSEQUENT EVENTS
On January 27, 2006, the Company signed a subcontract with Covansys (Nasdaq:
CVNS), a global consulting and technology services company, to complete the data
migration services required for the delivery of voter registration and election
management solutions for the state of New Hampshire to help the state comply
with the Help America Vote Act of 2002. This agreement replaces the previous
subcontract the Company had with PCC Technology Group, LLC, the application
software supplier, and defines an expanded role for the Company to provide these
services to the state of New Hampshire.
On February 1, 2006, the Company signed a subcontract agreement with Syscon
Justice Systems, Ltd, a company dedicated exclusively to the development of
corrections information and case management software systems, to provide data
migration services to assist in the implementation of its "TAG Offender
Management System" for the State of Nevada Department of Corrections. TAG is a
widely deployed large-scale commercial off-the-shelf offender and case
management software package.
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
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, and 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.
10
ARADYME CORPORATION AND SUBSIDIARY
Consolidated Notes to the Financial Statements
December 31, 2005 and September 30, 2005
NOTE 5 - GOING CONCERN (Continued)
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 by March 2007. Additional funds
may be provided through the exercise of warrants granted under the agreement.
Even if the balance of $2.0 million is funded by March 2007 under the agreement,
the Company also anticipates that it may 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 data migration/conversion
services, data integration 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,
large-scale data 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 data migration/conversion
and data integration, and plan to continue to commercialize our technologies and
expand our solutions into additional areas as our limited capital and
internally-generated funds permit.
Because of the relatively short period being reported on in this
report, results for any given interim period may not be indicative of
comparative results for longer periods or for the entire year.
Management believes that the most notable trend in our financial
performance in the three-month period ended December 31, 2005, compared to the
comparable period ended December 31, 2004, is the significant increase in both
our revenue and our total operating expenses, and our decrease in net loss.
Revenue increased approximately 654% over the comparable quarter of the prior
year, while total operating expenses increased approximately 28% and our net
loss decreased about 11% for the same comparable period. The increases are the
result of bringing our initial services and products to market. We have
experienced success in establishing relationships with major software
integrators, and in gaining service contracts as a result of many of these
relationships, and we expect that our revenues will increase in future quarters,
11
over the level recognized in the three-month period ended December 31, 2005, as
we continue progress on projects that are currently underway, as well as on new
projects for which we have recently executed contracts.
Although our revenue recognized in the three-month period ended
December 31, 2005, was substantially higher than revenue from the comparable
period in the prior year, it was lower than our initial expectation for this
first fiscal quarter, due to customer delays in project schedules on several of
our current subcontracts on which we had work in progress. Our ability to
recognize revenue is highly dependent on project progress, which is largely
determined by our software integrator customer and the end customer. Most of our
contract backlog is made up of subcontracts to deliver data migration/conversion
services to states for voter registration compliance under the Help America Vote
Act of 2002, or HAVA. HAVA specified a deadline for states to be in compliance
with its requirements by the end of 2005. Due to this deadline, and the project
schedules initially agreed to when we executed subcontracts, we anticipated that
the states and software integrators with which we had been contracted to provide
solutions for these voter registration projects would comply with the federally
mandated deadline within the allotted timeframe, and that the government's
strict enforcement of the deadline would spur states to complete their projects
on time. As the federal deadline approached at the end of 2005, many of the
states and software integrators we had contracted with delayed their
implementation schedules, which resulted in a delay in our schedule to provide
our services and recognize the resulting revenue. Many of these delays were
attributable to the cyclical nature of the voting season (i.e., November
elections), the holidays, and the federal government's apparent leniency with
states in requiring them to have a fully compliant, single statewide voter
registration system by January 1, 2006, the original HAVA deadline. In addition,
since there had never been a category for statewide voter registration
applications until a few years ago, we have also experienced delays in working
with our strategic allies, as many of the application vendors with whom state
government customers have contracted to provide a voter registration application
solution have struggled to complete the applications within the timeframes
allotted in the overall project schedules. Unfortunately, the application
development delays have also made it difficult for us to obtain feedback from
the state regarding whether any additional data work will be required on our end
for the data to work with the applications that have been in the process of
being modified. As a result of these project delays, revenue that was projected
to be recognized by us in the fiscal quarter ended December 31, 2005, is now
projected to be recognized in succeeding fiscal quarters.
Liquidity and Capital Resources
At December 31, 2005, we had a working capital deficit of $180,759,
compared to a working capital deficit of $594,505 at September 30, 2005. At
December 31, 2005, we had an accumulated deficit of $7,313,150, and total
stockholders' equity of $89,317, as compared to a stockholders' deficit of
$355,950 as of 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 three months ended December 31, 2005, we used $532,612 in cash for operating
activities and $37,839 for investing activities through expenditures for capital
equipment, which was provided by net cash of $719,943 from financing activities,
resulting in a $149,492 increase in cash during the period. Financing activities
in the three month period ended December 31, 2005, provided cash of $967,443
(net of offering costs) from the sale of restricted common stock, and $200,000
of debt reduction through the conversion of principal on debt outstanding to
restricted common stock. Cash of $247,500 from the proceeds of the sale of
common stock was used to pay down notes payable.
12
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 affiliated
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.
Additional funds may also be provided through the exercise of warrants granted
under this agreement. We expect that additional capital will be required in
future fiscal years if we are unable to generate sufficient revenues from
commercialization of our database management systems.
Results of Operations
Our net loss decreased from $813,463 in the three-month period ended
December 31, 2004, to $722,175 in the three-month period ended December 31,
2005. We expect that as revenue increases, expenses will not increase at the
same rate; therefore, we anticipate further improvement in the net loss for
future periods.
Our revenues were $201,155 and $26,800 for the three months ended
December 31, 2005 and 2004, respectively, an increase of 654%. Although our
revenue from the commercialization of our database management system is not yet
adequate to cover our operating expenses, it has, however, grown significantly
over the prior year. As noted above, we expect that some of the revenue that
would have resulted from project milestone completions in the three months ended
December 31, 2005, will be recognized in subsequent quarters, due to delays in
most of the projects for which we have been contracted to provide solutions.
Significant 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.
The major elements of our operating expenses are employee costs and
consultant contract charges for those providing technical and other services. To
support further development of our technology, and to deliver our technology
solutions for contracts that have been signed since November 2004, we expanded
our staff compared to the period ended December 31, 2004. Additional employee
resources required to fulfill customer requirements increased our costs for
payroll, employee benefits, and contract services from $633,964 in the period
ended December 31, 2004, to $781,435 in the period ended December 31, 2005, an
increase of 23%. Total operating expenses for the same comparative period
increased from $710,448 to $908,042, or 28%, as we brought our initial products
and services to market, increased our product development activity, and expanded
our marketing and sales activities. Management expects that operating expenses
will continue to increase as additional employee resources are hired to support
growth in data migration/conversion and data integration services, although
management does not anticipate that the operating expenses will grow at the same
rate as projected revenue increases.
Because of our early stage of business development, revenue and
operating expense comparisons between various interim periods may not be
indicative of expected future results of operations. Generally, we expect that
operating expenses will continue to grow during our ongoing initial marketing
efforts, as increased sales will require 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.
Other income and expenses during the three-month period ended December
31, 2005, includes interest accrued on borrowings and notes payable to finance
insurance premiums. Interest expense decreased from $130,115 in the three-month
period ended December 31, 2004, to $16,288 in the three-month period ended
December 31, 2005. However interest in the three-month period ended December 31,
2004, included $107,787 of noncash expense derived from the valuation of
warrants associated with a line of credit arranged during that three-month
period.
13
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.
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 as of the first interim period that begins
after December 15, 2005. Accordingly, we will implement the revised standard in
the second quarter of fiscal year 2006. 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 migration/conversion
services, developing custom software, and selling software licenses and related
services, which include maintenance, support, consulting, and training services.
Revenues from data migration/conversion services, custom software development,
and license arrangements and related services are recognized in accordance with
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
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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 a standard license arrangement has been
previously negotiated with us, a purchase order from the customer is
required.
Delivery has occurred or services have been rendered. Data
management services are provided by us according 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
our customers with the right to a refund of any portion of their data
management 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 and 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 management solutions and 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 (i.e., 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 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, 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 of
December 31, 2005, pursuant to Rule 13a-15(b) under the Securities Exchange Act.
Based upon that evaluation, our Certifying Officers concluded that, as of
December 31, 2005, 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 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, Attached
as Adopted 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, Attached
as Adopted 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.
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: February 16, 2006 By: /s/ James R. Spencer
---------------------------
James R. Spencer, Chairman
(Chief Executive Officer)
Date: February 16, 2006 By: /s/ Scott A. Mayfield
---------------------------
Scott A. Mayfield
(Chief Financial Officer)
17