10QSB 1 q033105.txt 10-QSB ENDED MARCH 31, 2005 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, 2005 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 (IRS Employer Identification No.) incorporation or organization) 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 [ ] 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 10, 2005, was 24,429,546. 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, 2005, our audited consolidated balance sheet at September 30, 2004, 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, 2005 and 2004, are attached hereto. 2
ARADYME CORPORATION AND SUBSIDIARY Consolidated Balance Sheets ASSETS March 31, September 30, 2005 2004 ------------- ------------- (Unaudited) CURRENT ASSETS Cash $ 101,324 $ 265,259 Accounts receivable 162,634 29,260 Prepaid expenses 40,018 66,917 ------------- ------------- Total Current Assets 303,976 361,436 PROPERTY AND EQUIPMENT, NET 93,422 89,212 ------------- ------------- OTHER ASSETS Prepaid license fees 56,162 33,662 Deposits 25,538 4,960 ------------- ------------- Total Other Assets 81,700 38,622 ------------- ------------- TOTAL ASSETS $ 479,098 $ 489,270 ============= ============= The accompanying notes are an integral part of these unaudited consolidated financial statements. 3
ARADYME CORPORATION AND SUBSIDIARY Consolidated Balance Sheets (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY March 31, September 30, 2005 2004 ------------- ------------- (Unaudited) CURRENT LIABILITIES Accounts payable $ 76,057 $ 33,779 Accrued expenses 215,760 172,622 Notes payable 104,495 52,500 ------------- ------------- Total Current Liabilities 396,312 258,901 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY 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, 24,429,546 and 23,151,046 shares issued and outstanding, respectively 24,430 23,151 Additional paid-in capital 5,743,939 4,465,510 Stock subscription receivable (15,000) -- Accumulated deficit (5,670,583) (4,258,292) ------------- ------------- Total Stockholders' Equity 82,786 230,369 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 479,098 $ 489,270 ============= ============= The accompanying notes are an integral part of these unaudited consolidated financial statements. 4
ARADYME CORPORATION AND SUBSIDIARY Consolidated Statements of Operations (Unaudited) For the Three Months Ended For the Six Months Ended March 31, March 31, ------------------------------- --------------------------------- 2005 2004 2005 2004 ------------- ------------- ------------- ------------- REVENUES $ 229,299 $ 2,933 $ 256,099 $ 19,933 OPERATING EXPENSES Depreciation and amortization 7,844 12,758 15,923 24,978 Rent 22,159 6,812 37,832 19,082 Contract services 90,447 83,221 321,237 243,649 General and administrative 665,472 392,295 1,121,079 467,558 ------------- ------------- ------------- ------------- Total Operating Expenses 785,922 495,086 1,496,071 755,267 ------------- ------------- ------------- ------------- LOSS FROM OPERATIONS (556,623) (492,153) (1,239,972) (735,334) OTHER INCOME (EXPENSE) Interest expense (2,313) (25,389) (132,427) (49,580) Loss on disposal of assets (39,892) -- (39,892) -- ------------- ------------- ------------- ------------- Total Other Income (Expense) (42,205) (25,389) (172,319) (49,580) ------------- ------------- ------------- ------------- NET LOSS $ (598,828) $ (517,542) $ (1,412,291) $ (785,184) ------------- ------------- ------------- ------------- BASIC LOSS PER SHARE $ (0.02) $ (0.03) $ (0.06) $ (0.05) ============= ============= ============= ============= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 24,201,063 18,176,653 23,832,510 16,773,858 ============= ============= ============= ============= The accompanying notes are an integral part of these unaudited consolidated financial statements. 5
ARADYME CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended March 31, 2005 2004 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,412,291) $ (785,184) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 15,923 24,978 Bad debt -- -- Loss on disposal of assets 39,892 -- Warrants and options issued below market value -- 17,425 Common stock issued for services 96,000 16,625 Common stock issued for line of credit 20,000 -- Warrants issued for line of credit 107,787 -- Changes in assets and liabilities: (Increase) in accounts receivable (133,374) (5,393) Decrease in prepaids 4,399 75 (Increase) decrease in deposits (20,578) -- Increase (decrease) in accounts payable and related party payables 42,278 (212,640) Increase in accrued expenses 119,938 107,476 ------------- ------------- Net Cash Used by Operating Activities (1,120,026) (836,638) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets (60,024) (14,509) ------------- ------------- Net Cash Used by Investing Activities (60,024) (14,509) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable 96,459 80,000 Payments on notes payable (44,464) (15,000) Payments on related party payable -- (15,758) Common stock issued for cash 964,120 1,963,448 ------------- ------------- Net Cash Provided by Financing Activities 1,016,115 2,012,690 ------------- ------------- NET (DECREASE) INCREASE IN CASH (163,935) 1,161,543 CASH AT BEGINNING OF PERIOD 265,259 55,296 ------------- ------------- CASH AT END OF PERIOD $ 101,324 $ 1,216,839 ============= ============= The accompanying notes are an integral part of these unaudited consolidated financial statements. 6
ARADYME CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows (Continued) (Unaudited) For the Six Months Ended March 31, 2005 2004 ------------- ------------- CASH PAID FOR: Interest $ 3,686 $ 4,643 Income taxes $ -- $ -- NON-CASH TRANSACTIONS: Notes payable and accrued interest converted to common stock $ -- $ 657,624 Common stock issued for services $ 96,000 $ 16,625 Common stock issued for subscription receivable $ 15,000 $ 50,000 Warrants and options granted below market value $ -- $ 17,425 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. 7
ARADYME CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements March 31, 2005 and September 30, 2004 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, 2004, filed January 13, 2005. Operating results for the three and six months ended March 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. Subcontracts On January 6, 2005, the Company signed a subcontract agreement with Unisys (NYSE: UIS), a worldwide information technology services and solutions company, to provide data migration services for the Commonwealth of Virginia to help the state comply with the national Help America Vote Act of 2002, or HAVA. On January 25, 2005, the Company signed a subcontract with PCC Technology Group, LLC, an information technology services company that provides software solutions to industry, local, state and federal governments, to provide data migration services for the delivery of voter registration and election management solutions for the state of New Hampshire to help the state comply with HAVA. On January 29, 2005, the Company signed a subcontract with Covansys (Nasdaq: CVNS), a global consulting and technology services company, to provide data migration services for the delivery of voter registration and election management solutions for the state of New Hampshire to help the state comply with HAVA. On February 9, 2005, the Company signed a subcontract agreement with Accenture, LLP (U.S.-based business of Accenture) (NYSE: ACN) to provide data conversion and migration services for the delivery of voter registration and election management solutions for the state of Colorado to help the state comply with HAVA. 8 ARADYME CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements March 31, 2005 and September 30, 2004 NOTE 2 - MATERIAL EVENTS (continued) On February 16, 2005, the Company signed a subcontract with Covansys (Nasdaq: CVNS) to provide data migration services for the delivery of voter registration and election management solutions for the State of Maine to help the state comply with HAVA. On March 22, 2005 the Company signed a subcontract with Covansys (Nasdaq: CVNS) to provide data migration services for the delivery of voter registration and election management solutions for the State of New Jersey to help the state comply with HAVA. b. Common Stock In January through March 2005, the Company issued 426,000 shares of restricted common stock for cash of $411,000 and subscriptions receivable of $15,000, or $1.00 per share, to private investors in a private placement. c. Line of Credit Agreement In March 2005, the Company drew $80,000 against its line of credit. The line of credit is unsecured with a one-year term and interest at 15% per annum. 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, 2005, the Company did not grant any options to purchase shares of the Company's common stock. 9 ARADYME CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements March 31, 2005 and September 30, 2004 NOTE 3 - STOCK OPTIONS AND WARRANTS (continued) A summary of the status of the Company's stock options and warrants as of March 31, 2005, and September 30, 2004, and changes during the six-month period ended March 31, 2005, and the twelve-month period ended September 30, 2004, is presented below:
March 31, 2005 September 30, 2004 --------------------------- --------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price -------------- ---------- --------------- --------- Outstanding, beginning of period 4,695,384 $0.45 4,305,000 $0.43 Granted 2,228,000 0.65 390,384 0.81 Canceled (247,884) 0.98 -- -- Exercised (7,500) 0.42 -- -- -------------- --------------- Outstanding, end of period 6,668,000 $0.50 4,695,384 $0.45 -------------- --------------- Exercisable, end of period 5,352,500 $0.49 4,142,884 $0.46 -------------- --------------- Weighted Weighted Number Remaining Average Number Average Outstanding Contractual Exercise Exercisable Exercise Option Grant at 03/31/05 Life Price at 03/31/05 Price ------------ ----------- ------ ------- ----------- ------- Options--May 2002 1,000,000 2.08 $0.42 1,000,000 $0.42 Options--February 2003 325,000 2.08 0.50 325,000 0.50 Options--September 2003 2,965,000 8.51 0.42 2,532,500 0.42 Options--December 2003 150,000 4.68 0.50 75,000 0.50 Options--November 2004 2,028,000 9.60 0.64 1,220,000 0.64 Warrants--November 2004 200,000 1.62 0.80 200,000 0.80 ---------- ---------- 6,668,000 6.75 $0.50 5,352,500 $0.49 ========= =========
NOTE 4 - SUBSEQUENT EVENTS On May 5, 2005, the Company granted stock options to purchase a total of 370,000 shares of the Company's common stock at $0.80 per share to employees of, and a consultant to, the Company to provide incentive and to retain the services of the grantees. The options vest over a three- or four-year period and have 10-year expirations. The Company estimates the fair value of stock options at the date of grant by using the Black-Scholes option pricing model. All of the options were issued at the fair value of the Company's common stock on the date of issue and no compensation expense will be recognized. 10 ARADYME CORPORATION AND SUBSIDIARY Notes to the Consolidated Financial Statements March 31, 2005 and September 30, 2004 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. Revenue has increased significantly in the quarter ended March 31, 2005, and management will need to sustain those revenue increases and raise additional capital through private placement of the Company's preferred and/or common stock or through debt financing to sustain operations until revenues are sufficient to cover costs. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its 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 and 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 develop, manufacture, market and provide computer database management services and software based on proprietary technology. 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 trend in our financial performance is the substantial increase in our revenue for the three- and six-month periods ended March 31, 2005, compared to the comparable three- and six-month periods ended March 31, 2004. These significant 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. These revenues represent work completed on only the initial portion of contracts in place, and we believe that completion of further requirements will result in more significant revenue in the following several quarters. During the six-month period ending March 31, 2005, we successfully completed the early requirements of current contracts for the delivery of voter registration and election management solutions. Since December 2004, we have successfully initiated data migration activities from approximately 3,000 11 independent sources. We believe these successful efforts have established a strong validation of the technology, systems and processes used in the delivery of our products and services and that these successes 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 the technology is extremely 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. Our technology enables us to evaluate and pursue potential contracts and data migration projects including: 1) addressing state and federal initiatives such as motor vehicle registration, retirement benefits, department of corrections, "no child left behind" and other government database needs, although we have not yet obtained any contracts or projects in those areas within the public sector, and 2) a wide scope of data migration projects within the private sector. Liquidity and Capital Resources As of March 31, 2005, we had a working capital deficit of $92,336, as compared to working capital of $102,535 as of September 30, 2004. As of March 31, 2005, we had an accumulated deficit of $5,670,583 and total stockholders' equity of $82,786, as compared to an accumulated deficit of $4,258,292 and stockholders' equity of $230,369 as of September 30, 2004. The auditors' report for the year ended September 30, 2004, 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, 2005, we used $1,120,025 in cash for operating activities and $60,024 for investing activities, which was provided by net cash of $1,016,115 from financing activities, resulting in a $163,934 decrease in cash during the period. Financing activities provided cash of $964,120 from the sale of restricted common stock and proceeds of $96,459 from notes payable. We estimate that we will require approximately $2,000,000 in cash to fund our activities until revenues are sufficient to fund operations, which we expect to take at least two additional fiscal quarters. We intend to obtain that additional capital principally through the sale of securities. We have no commitment from any person to acquire any such securities or to provide funding through any other mechanism. 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 system on our projected time line. Results of Operations As a result of completion of some of the initial requirements of several contracts, we recognized our first significant revenues from the commercialization of our data migration services. For the six months ended March 31, 2005 our revenue was $256,099, compared to $19,933 for the six months ended March 31, 2004. Revenue for the three months ended March 31, 2005, was $229,299, compared to $2,933 for the three months ended March 31, 2004. Based on our current contracts, we expect that we will be able to recognize increased revenue over the next several quarters. In addition, we expect 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. As a result of the initial relationships we have formed with several major hardware, software and service integrators, we have already been awarded a 12 number of significant contracts related to voter registration and election management solutions for states to comply with HAVA. During the six-month period ended March 31, 2005, we have signed subcontracts to provide data migration services with the following partners, who are considered prime contractors to providing voter registration solutions to the indicated states: Covansys (Nasdaq: CVNS) Idaho Covansys (Nasdaq: CVNS) Nevada Accenture LLP (U.S.-based business of Accenture) (NYSE: ACN) Wisconsin Maximus, Inc. (NYSE: MMS) Missouri Unisys (NYSE: UIS) Virginia PCC Technology Group New Hampshire Accenture LLP (U.S.-based business of Accenture) (NYSE: ACN) Colorado Covansys (Nasdaq: CVNS) Maine Covansys (Nasdaq: CVNS) New Jersey The total subcontract amounts due to us under these subcontracts are estimated to be from 4% to 6% of the total HAVA voter registration funding for an individual state, which is primarily funded by the federal funds that have previously been appropriated to each state. These subcontracts are normally about one year in duration, provide for periodic payments over the life of the contract, and have potential for follow-on revenue for maintenance services. We are now leveraging the success we have had on our existing contracts with our partners in the six-month period ended March 31, 2005, to obtain new agreements with additional states to assist them with HAVA compliance. In addition, we have begun to focus more of our marketing and sales efforts on establishing new arrangements with these and other firms in other marketing areas, such as data distribution-migration repurposing, customer relationship management, and enterprise resource planning, to meet other government, industry or education needs in the public sector. We have also begun pursuing opportunities in the private sector. To support the commercialization of our products and services, we have expanded our staff to support the contracts that have been signed since November 2004. Our most significant operating expense is for employee and consultant contract services with those providing technical and other services. Our payroll burden and employee benefits expenses have increased compared to prior-year comparable periods. Total operating expenses for the three- and six-month periods ending March 31, 2005, increased by 59% and 98% respectively, when compared to the three- and sixth-month periods ended March 31, 2004, 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 our growth in offering data migration services. Because of this early stage of our 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 the 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 six-month period ended March 31, 2005, consist principally of the valuation of warrants granted, common stock issued to a lender that provided us with a line of credit agreement in November 13 2004, interest accrued on borrowings and notes payable to finance insurance premiums, and a net loss on assets disposed of. Interest expense decreased from $25,389 in the three-month period ended March 31, 2004, to $2,313 in the three-month period ended March 31, 2005, as a result of lower debt balances in the current year period. Interest expense increased from $49,580 in the six-month period ended March 31, 2004, to $132,427 in the six-month period ended March 31, 2005, mainly as a result of expensing the valuation of the warrants associated with the line of credit that was put in place in November 2004. In the three-month period ended March 31, 2005, we realized a net loss of $39,892 on the disposal of assets in conjunction with the relocation of the facility to Orem, Utah, in January 2005. Other Items We have reviewed all 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. Based on that review, we believe that none of these pronouncements will have a significant affect on current or future 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. 14 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. 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. 15 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, 2005, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of March 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. 16 PART II--OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During the quarter ended March 31, 2005, we issued an aggregate of 426,000 shares of restricted common stock in the following transactions. We sold an aggregate of 396,000 shares of restricted common stock to 15 investors for $381,000 in cash and a subscription receivable of $15,000, or $1.00 per share. At the time of these transactions, the closing market price for our common stock ranged from $1.05 to $1.75 per share. These purchasers were provided with a private placement memorandum detailing our business and financial information, including copies of our periodic reports as filed with the Securities and Exchange Commission, and were provided with the opportunity to ask questions directly of our executive officers. These transactions were conducted in reliance on the exemption from registration provided by Rule 506 of Regulation D. We sold an aggregate of 30,000 shares of restricted common stock to two investors for $30,000, or $1.00 per share. At the time of these transactions, the closing market price for our common stock ranged from $1.05 to $1.75 per share. These investors represented in writing that they were not residents of the United States. These transactions were conducted in reliance on Regulation S. On May 5, 2005, we issued options to purchase an aggregate of 370,000 shares of our common stock to 16 nonexecutive employees and one consultant to provide an incentive and retain the services of the recipients. The options have an exercise price of $0.80 per share, expire 10 years from the date of grant, and vest according to a variety of schedules over the next two and one-half to four years, subject to the recipient's continued employment with us. These options were granted pursuant to our 2004 Long-Term Incentive Program. Each of the foregoing persons was able to bear the financial risk of his or her investment. Each transaction was negotiated directly with each such person by one or more of our executive officers. No general solicitation was used, no commission or other remuneration was paid in connection with such transaction, and no underwriter participated. Each recipient acknowledged in writing the receipt of restricted securities and consented to a legend on the certificate issued and stop-transfer instructions with the transfer agent. Each certificate for the shares and the option agreements issued in the foregoing transactions bore a restrictive legend conspicuously on its face and stop-transfer instructions were noted respecting such certificate on our stock transfer records. Unless otherwise stated, each of the foregoing transactions was effected in reliance on the exemption from registration provided in Section 4(2) of the Securities Act of 1933, as amended, for transactions not involving any public offering. 17 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: May 13, 2005 By /s/ James R. Spencer ---------------------------- James R. Spencer, Chairman (Chief Executive Officer) Date: May 13, 2005 By /s/ Scott A. Mayfield ---------------------------- Scott A. Mayfield (Chief Financial Officer) 18