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 MARCH 31, 2006
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
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. 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 May 12, 2006, was 33,229,546.
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 March 31, 2006, our audited
consolidated balance sheet at September 30, 2005, and the related unaudited
consolidated statements of operations for the three- and six-month periods and
cash flows for the six-month periods ended March 31, 2006 and 2005, are attached
hereto.
2
ARADYME CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
March 31, September 30,
2006 2005
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ -- $ 84,485
Accounts receivable, net of allowance 262,646 335,499
Prepaid expenses 36,000 68,288
------------- -------------
Total Current Assets 298,646 488,272
------------- -------------
PROPERTY AND EQUIPMENT, NET 166,165 138,313
------------- -------------
OTHER ASSETS
Prepaid license fees 89,912 78,662
Deposits 21,580 21,580
------------- -------------
Total Other Assets 111,492 100,242
------------- -------------
TOTAL ASSETS $ 576,303 $ 726,827
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Cash overdraft $ 7,729 $ --
Accounts payable 147,668 134,147
Accrued expenses 480,084 347,940
Notes payable - related party 105,781 100,794
Notes payable 115,256 499,896
------------- -------------
Total Current Liabilities 856,518 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, 32,229,546 and 25,229,546 shares issued and
outstanding, respectively 32,230 25,230
Additional paid-in capital 7,645,237 6,209,794
Accumulated deficit (7,957,682) (6,590,974)
------------- -------------
Total Stockholders' Equity (Deficit) (280,215) (355,950)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 576,303 $ 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 Six Months Ended
March 31, March 31,
------------------------------ --------------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
REVENUES $ 265,736 $ 229,299 $ 467,891 $ 256,099
OPERATING EXPENSES
Wages and payroll taxes 691,795 560,851 1,425,161 964,026
Contract services 64,286 90,447 112,355 321,237
Rent 37,378 22,159 60,711 37,832
Depreciation and amortization 18,585 7,844 36,153 15,923
Other operating expenses 92,777 104,621 178,483 157,053
------------ ------------ ------------ ------------
Total Operating Expenses 904,821 785,922 1,812,863 1,496,071
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (639,085) (556,623) (1,344,972) (1,239,972)
OTHER INCOME (EXPENSE)
Interest expense (5,448) (2,313) (21,736) (132,427)
Loss on disposal of assets -- (39,892) -- (39,892)
------------ ------------ ------------ ------------
Total Other Expense (5,448) (42,205) (21,736) (172,319)
------------ ------------ ------------ ------------
NET LOSS $ (644,533) $ (598,828) $ (1,366,708) $ (1,412,291)
============ ============ ============ ============
BASIC LOSS PER SHARE $ (0.02) $ (0.02) $ (0.05) $ (0.06)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 31,367,324 24,201,063 28,838,887 23,832,510
============ ============ ============ ============
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 Six Months Ended
March 31,
2006 2005
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,366,708) $ (1,412,291)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 36,153 15,923
Loss on disposal of assets -- 39,892
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 72,853 (133,374)
Decrease in prepaids 21,038 4,399
(Increase) in deposits -- (20,578)
Increase in accounts payable and
related party payables 13,522 42,278
Increase in accrued expenses 132,145 119,938
(Decrease) in interest payable (11,030) --
------------- -------------
Net Cash Used by Operating Activities (1,102,027) (1,120,026)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (64,005) (60,024)
------------- -------------
Net Cash Used by Investing Activities (64,005) (60,024)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related-party notes payable 370,000 --
Payments on related-party notes payable (370,000) --
Proceeds from notes payable 100,000 96,459
Payments on notes payable (268,625) (44,464)
Cash overdraft 7,729 --
Common stock issued for cash 1,300,000 964,120
Offering costs (57,557) --
------------- -------------
Net Cash Provided by Financing Activities 1,081,547 1,016,115
------------- -------------
NET (DECREASE) IN CASH (84,485) (163,935)
CASH AT BEGINNING OF PERIOD 84,485 265,259
------------- -------------
CASH AT END OF PERIOD $ -- $ 101,324
============= =============
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 Six Months Ended
March 31,
2006 2005
------------- -------------
CASH PAID FOR:
Interest $ 4,860 $ 3,686
Income taxes $ -- $ --
NON-CASH TRANSACTIONS:
Common stock issued for conversion of debt $ 200,000 $ --
Common stock issued for services $ -- $ 96,000
Common stock issued for subscription receivable $ -- $ 15,000
Common stock issued for line of credit $ -- $ 20,000
Warrants issued for line of credit $ -- $ 107,787
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
ARADYME CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
March 31, 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 six months ended March 31, 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
In February and March 2006, the Company received $300,000 in cash from Eagle
Rock Capital, LLC, as payment toward the second tranche of the Stock Purchase
Agreement entered into on December 12, 2005, between Eagle Rock Capital, LLC,
and the Company. Based on the partial funding of this tranche, 1,500,000 shares
of common stock are considered issuable to this investor and are included on the
balance sheet as shares issued and outstanding. Full payment was received on
this $500,000 funding tranche and a cumulative 2,500,000 shares of common stock
have been now issued to this investor per the terms of the Stock Purchase
Agreement. See Note 4 - Subsequent Events.
b. Promissory Notes
In February 2006, the Company borrowed $100,000 from a stockholder, evidenced by
an unsecured promissory note with a one-month term, interest at 12% per annum,
and a 1% origination fee. The Company is in the process of renegotiating the
payment terms of the note.
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 issue, therefore no compensation
expense is generally recognized.
In the three-month period ended March 31, 2006, the Company did not grant any
options or warrants to purchase shares of the Company's common stock.
7
ARADYME CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
March 31, 2006 and September 30, 2005
NOTE 3 - STOCK OPTIONS AND WARRANTS (continued)
A summary of the status of the Company's stock options and warrants as of March
31, 2006, and September 30, 2005, and changes during the six-month period ended
March 31, 2006, and the twelve-month period ended September 30, 2005, is
presented below:
March 31, 2006 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 3/31/06 Life Price at 3/31/06 Price
- -------------- ---------- ----------- -------- ----------- --------
Stock Options - $ 0.42 3,965,000 5.01 $0.42 3,748,750 $0.42
$ 0.48 712,000 9.39 0.48 - -
$ 0.50 475,000 1.80 0.50 437,500 0.50
$ 0.64 2,025,000 8.59 0.64 1,461,250 0.64
$ 0.80 248,500 9.10 0.80 25,000 0.80
----------- -----------
Total Outstanding Options 7,425,500 6.35 $0.50 5,672,500 $0.48
=========== ===========
Warrants - $ 0.75 900,000 2.25 $0.75 900,000 $0.75
$ 0.80 200,000 0.62 0.80 200,000 0.80
$ 0.50 5,000,000 4.70 0.50 5,000,000 0.50
----------- -----------
Total Outstanding Warrants 6,100,000 4.20 0.55 6,100,000 $0.55
=========== ===========
Total Outstanding Options
and Warrants 13,525,500 5.38 $0.52 11,772,500 $0.52
=========== ===========
8
ARADYME CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
March 31, 2006 and September 30, 2005
NOTE 4 - SUBSEQUENT EVENTS
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 exercise prices 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. All of the warrants 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 were 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.
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.
9
ARADYME CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
March 31, 2006 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. 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 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 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.
Management believes that the most notable trends in our financial performance
are the increases in our revenue and expenses for the three- and six-month
periods ended March 31, 2006, compared to the three- and six-month periods ended
March 31, 2005. These increases are the result of bringing our products and
services to market and the subsequent recognition of revenue based on completion
of partial requirements of several of the contracts that we have previously
announced. At the same time, however, management notes that these revenues are
lower than management expected due to delays and cancellations in projects for
which we have been contracted to provide solutions. We believe that completion
of further requirements on continuous projects will result in more significant
revenue in the following several quarters.
10
During the six-month period ending March 31, 2006, we successfully completed the
delivery of our technology solutions on three of the initial data migration
projects for which we initially contracted and are now nearing completion on
several others. Since September 2004, we have initiated data migration
activities from approximately 3,000 independent sources which, we believe,
establishes us and our technology as a recognizable provider of migration and
conversion solutions. We also feel that the successes we have experienced in
providing our technology, systems, and processes will attract additional
contracts and partners for us.
With the actual experience we have had to date providing services and products
based on our unique and proprietary technology, we have proven that our
technology is adaptable and applicable to virtually any source data base or
format, allowing us migration opportunities and abilities that we feel are not
within other providers' technological capabilities. As evidenced by 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.
Results of Operations
- ---------------------
Our net loss decreased from $1,412,291 in the six-month period ended March 31,
2005, to $1,366,708 in the six-month period ended March 31, 2006; and increased
from $598,828 in the three-month period ended March 31, 2005, to $644,533 in the
three-month period ended March 31, 2006. We expect that as revenue increases,
expenses will not increase at the same rate; therefore, we anticipate
improvement in the net loss for future periods.
Our revenues increased 83%, from $256,099 in the six-month period ended March
31, 2005, to $467,891 in the six-month period ended March 31, 2006; and
increased 16%, from $229,299 for the three months ended March 31, 2005, to
$265,736 for the three months ended March 31, 2006. Our revenue from the
commercialization of our database management system is not yet adequate to cover
our operating expenses, but has grown significantly over the prior year.
Management has focused much of our sales and marketing resources on the
development of relationships and new sales leads. Revenue in the recent six- and
three-month periods was lower than management expected due to delays, and some
cancellations, in several of the projects for which we have been contracted to
provide solutions. 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 costs 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 compared to the three- and six-month
periods ended March 31, 2005. Total operating expenses for the three- and
six-month periods ending March 31, 2006, increased by 15% and 21% respectively,
when compared to the three- and sixth-month periods ended March 31, 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. 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.
11
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.
Other income and expenses during the six-month period ended March 31, 2006,
includes interest accrued on borrowings and notes payable to finance insurance
premiums. Interest expense decreased from $132,427 in the six-month period ended
March 31, 2005, to $21,736 in the six-month period ended March 31, 2006. However
interest in the six-month period ended March 31, 2005, included $107,787 of
noncash expense derived from the valuation of warrants associated with a line of
credit arranged during that three-month period.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 2006, we had a working capital deficit of $557,872, as compared
to a working capital deficit of $594,505 as of September 30, 2005. At March 31,
2006, we had an accumulated deficit of $7,957,682 and total stockholders'
deficit of $280,215, 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
six months ended March 31, 2006, we used $1,102,027 in cash for operating
activities and $64,005 for investing activities, which was provided by net cash
of $1,081,547 from financing activities, resulting in an $84,485 decrease in
cash during the period. Financing activities provided cash of $1,300,000 from
the sale of restricted common stock and proceeds of $470,000 from notes payable.
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.
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.
12
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 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.
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.
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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 "Securities 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 Securities Exchange Act) as of March 31,
2006, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon
that evaluation, our Certifying Officers concluded that, as of March 31, 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 Incorporated by reference from the current
between Aradyme Corporation and Eagle Rock report on Form 8-K dated April 17, 2006,
Capital, LLC, 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 report on Form 8-K dated April 17, 2006,
Capital, 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 report on Form 8-K dated April 17, 2006,
Stock Purchase Agreement between Aradyme filed April 19, 2006.
Corporation and Eagle Rock Capital, LLC, effective
December 12, 2005)
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: May 15, 2006 By /s/ James R. Spencer
----------------------------
James R. Spencer, Chairman
(Chief Executive Officer)
Date: May 15, 2006 By /s/ Scott A. Mayfield
---------------------------
Scott A. Mayfield
(Chief Financial Officer)
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