**U.S. SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

**ý****                                ****QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarterly period ended March 31, 2006**

 

**o****                                ****TRANSITION REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                             to                             **

 

**Commission File number 001-10320**

 

**Time America, Inc.**

(Exactname of small business issuer as specified in its charter)

 
| **Nevada**                       | ** ** | **13-3465289**      |
|----------------------------------|------------|---------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer    |
| incorporation of  organization)  |       | Identification No.) |

 

**8840 East Chaparral Road, Suite 100, Scottsdale, AZ 85250**

(Address of principal executive offices)

 

**(480)296-0400**

(Issuer’stelephone number)

 

**N/A**

(Formername, former address and former fiscal year, if changed since last report)

 

Checkwhether the issuer: (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.    Yes  ý     No  o

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act.)     Yes  o      No ý

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date: At May 10, 2006, the issuer hadoutstanding 15,003,904 shares of Common Stock, par value $.005 per share.

 

TransitionalSmall Business Disclosure Format:  Yes  o   No  ý

 

 

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**PART I – FINANCIALINFORMATION**

 

**Item 1 – Financial Statements.**

 

**TIME AMERICA, INC. ANDSUBSIDIARY**

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                             | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                             | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| ** **                                                                                                             | ** ** | **(Unaudited)**    | ** ** | ** **        | ** ** |
| **ASSETS**                                                                                                             | ** ** | ** **         | ** ** | ** **        | ** ** |
| **Current  Assets:**                                                                                                   | ** ** | ** **         | ** ** | ** **        | ** ** |
| Cash and  cash equivalents                                                                                             |       | $                  | 666,992    |              | $          | 1,361,717 |   |
| Accounts  receivable – trade, net                                                                                 |       | 1,761,110          |       | 1,479,526         |       |
| Accounts  receivable – other                                                                                      |       | 530,428            |       | —            |       |
| Inventory                                                                                                              |       | 764,262            |       | 477,719           |       |
| Prepaid expenses  and other current assets                                                                             |       | 284,273            |       | 268,373           |       |
|                                                                                                                   |       |               |       |              |       |
| **Total  Current Assets**                                                                                              |       | 4,007,065          |       | 3,587,335         |       |
|                                                                                                                   |       |               |       |              |       |
| **Property  and equipment, net**                                                                                       |       | 470,717            |       | 374,269           |       |
| **Other  Assets**                                                                                                      |       | 258,702            |       | 330,882           |       |
|                                                                                                                   |       |               |       |              |       |
| **Total  Assets**                                                                                                      |       | $                  | 4,736,484  |              | $          | 4,292,486 |   |
|                                                                                                                   |       |               |       |              |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                               | ** ** | ** **         | ** ** | ** **        | ** ** |
|                                                                                                                   |       |               |       |              |       |
| **Current  Liabilities:**                                                                                              | ** ** | ** **         | ** ** | ** **        | ** ** |
| Current  portion of long-term debt                                                                                     |       | $                  | 890,387    |              | $          | 998,061 |   |
| Accounts  payable                                                                                                      |       | 552,019            |       | 423,396           |       |
| Accrued  liabilities                                                                                                   |       | 893,169            |       | 436,180           |       |
| Deferred  revenue                                                                                                      |       | 1,006,985          |       | 877,782           |       |
|                                                                                                                   |       |               |       |              |       |
| **Total  Current Liabilities**                                                                                         |       | 3,342,560          |       | 2,735,419         |       |
|                                                                                                                   |       |               |       |              |       |
| **Long-term  debt, less current portion**                                                                              |       | 3,293,586          |       | 2,210,592         |       |
| ** **                                                                                                             | ** ** | ** **         | ** ** | ** **        | ** ** |
| **Total  Liabilities**                                                                                                 |       | 6,636,146          |       | 4,946,011         |       |
|                                                                                                                   |       |               |       |              |       |
| **Commitments:**                                                                                                       |       | —             |       | —            |       |
|                                                                                                                   |       |               |       |              |       |
| **Stockholders’  Equity (Deficit):**                                                                              | ** ** | ** **         | ** ** | ** **        | ** ** |
| Common  stock, $.005 par value, 50,000,000 shares authorized; 15,003,904 and  14,251,552 shares issued and outstanding |       | 75,021             |       | 71,258            |       |
| Contributed  capital                                                                                                   |       | 9,781,447          |       | 9,269,497         |       |
| Accumulated  deficit                                                                                                   |       | (11,756,130        | )          | (9,994,280        | )          |
|                                                                                                                   |       |               |       |              |       |
| **Total  Stockholders’ Equity (Deficit)**                                                                         |       | (1,899,662         | )          | (653,525          | )          |
|                                                                                                                   |       |               |       |              |       |
| **Total  Liabilities and Stockholders’ Equity (Deficit)**                                                         |       | $                  | 4,736,484  |              | $          | 4,292,486 |   |

 

#### **See Notes to Consolidated Financial Statements**

 

2

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#### **TIME AMERICA, INC. ANDSUBSIDIARY**

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 
| ** **                                         | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **2006**                               | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(unaudited)**                        | ** ** | **(unaudited)**                       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| **Revenues:**                                      | ** ** | ** **                             | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product  sales                                     |       | $                                      | 1,256,006  |                                  | $          | 1,222,964 |   | $ | 3,322,927 |   | $ | 3,304,102 |   |
| Services  revenue                                  |       | 467,154                                |       | 405,993                               |       | 1,410,401 |   | 1,218,993 |   |
|                                               |       |                                   |       |                                  |       |   |   |   |   |
| **Total  Revenues**                                |       | 1,723,160                              |       | 1,628,957                             |       | 4,733,328 |   | 4,523,095 |   |
|                                               |       |                                   |       |                                  |       |   |   |   |   |
| **Cost of  Revenues:**                             | ** ** | ** **                             | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product                                            |       | 684,943                                |       | 502,018                               |       | 1,701,287 |   | 1,334,322 |   |
| Services                                           |       | 224,316                                |       | 200,169                               |       | 653,294 |   | 552,668 |   |
| ** **                                         | ** ** | ** **                             | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total  Cost of Revenues**                        |       | 909,259                                |       | 702,187                               |       | 2,354,581 |   | 1,886,990 |   |
| ** **                                         | ** ** | ** **                             | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross  Profit**                                  |       | 813,901                                |       | 926,770                               |       | 2,378,747 |   | 2,636,105 |   |
|                                               |       |                                   |       |                                  |       |   |   |   |   |
| **Costs  and Expenses:**                           | ** ** | ** **                             | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and  marketing                               |       | 530,413                                |       | 505,682                               |       | 1,662,105 |   | 1,431,227 |   |
| Research and  development                          |       | 383,600                                |       | 369,660                               |       | 1,130,750 |   | 995,378 |   |
| General and administrative                         |       | 299,616                                |       | 274,526                               |       | 1,020,417 |   | 769,654 |   |
|                                               |       |                                   |       |                                  |       |   |   |   |   |
| **Total  Costs and Expenses**                      |       | 1,213,629                              |       | 1,149,868                             |       | 3,813,272 |   | 3,196,259 |   |
|                                               |       |                                   |       |                                  |       |   |   |   |   |
| **Net Loss  from Operations**                      |       | (399,728                               | )          | (223,098                              | )          | (1,434,525 | ) | (560,154 | ) |
|                                               |       |                                   |       |                                  |       |   |   |   |   |
| **Other  Income (Expense):**                       | ** ** | ** **                             | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  expense                                  |       | (186,057                               | )          | (83,029                               | )          | (504,554 | ) | (272,926 | ) |
| Loss on debt  extinguishment                       |       | (298,108                               | )          | —                                |       | (298,108 | ) | — |   |
| Other                                              |       | 425,848                                |       | —                                |       | 464,267 |   | 25,774 |   |
| Interest  income                                   |       | 2,238                                  |       | 2,867                                 |       | 11,070 |   | 13,047 |   |
|                                               |       |                                   |       |                                  |       |   |   |   |   |
|                                               |       | (56,079                                | )          | (80,162                               | )          | (327,325 | ) | (234,105 | ) |
|                                               |       |                                   |       |                                  |       |   |   |   |   |
| **Net Loss**                                       |       | $                                      | (455,807   | )                                     | $          | (303,260 | ) | $ | (1,761,850 | ) | $ | (794,259 | ) |
|                                               |       |                                   |       |                                  |       |   |   |   |   |
| **Basic  and Diluted Loss per Share**              |       | $                                      | (0.03      | )                                     | $          | (0.02 | ) | $ | (0.12 | ) | $ | (0.06 | ) |
|                                               |       |                                   |       |                                  |       |   |   |   |   |
| **Weighted  Average Number of Shares Outstanding** |       | 14,996,083                             |       | 13,601,052                            |       | 14,632,738 |   | 13,600,762 |   |

 

See Notes to Consolidated FinancialStatements

 

3

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#### **TIME AMERCIA, INC. ANDSUBSIDIARY**

CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEAR ENDED JUNE 30, 2005 AND

THE NINE MONTH PERIOD ENDED MARCH 31,2006 (Unaudited)

 
| ** **                              | ** ** | **Common Stock** | ** ** | **Contributed** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|-----------------------------------------|------------|------------------|------------|-----------------|------------|-----------------|------------|-------------|------------|
| ** **                              | ** ** | **Shares**       | ** ** | **Amount**      | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                                    |       |             |       |            |       |            |       |        |       |   |   |
| Balance at June 30,  2004          |       | 13,599,552       |       | $               | 67,998     |            | $          | 8,027,121   |       | $ | (7,973,886 | ) | $ | 121,233 |   |
|                                    |       |             |       |            |       |            |       |        |       |   |   |
| Conversion  of debt to common stock     |       | 600,000          |       | 3,000           |       | 297,000         |       | —      |       | 300,000 |   |
| Exercise of  stock options              |       | 2,000            |       | 10              |       | 426             |       | —      |       | 436 |   |
| Issuance of  common stock warrants      |       | —           |       | —          |       | 168,700         |       | —      |       | 168,700 |   |
| Issuance of  common stock for services  |       | 50,000           |       | 250             |       | 31,250          |       | —      |       | 31,500 |   |
| Issuance of  stock options for services |       | —           |       | —          |       | 15,500          |       | —      |       | 15,500 |   |
| Induced  conversion of debt             |       | —           |       | —          |       | 729,500         |       | —      |       | 729,500 |   |
| Net loss                                |       | —           |       | —          |       | —          |       | (2,020,394  | )          | (2,020,394 | ) |
| Balance at June 30,  2005          |       | 14,251,552       |       | 71,258          |       | 9,269,497       |       | (9,994,280  | )          | (653,525 | ) |
|                                    |       |             |       |            |       |            |       |        |       |   |   |
| Exercise of  stock options              |       | 4,000            |       | 20              |       | 1,580           |       | —      |       | 1,600 |   |
| Conversion  of debt to common stock     |       | 446,429          |       | 2,233           |       | 247,767         |       | —      |       | 250,000 |   |
| Induced  conversion of debt             |       | —           |       | —          |       | 40,179          |       | —      |       | 40,179 |   |
| Reclass of  warrants to liability       |       | —           |       | —          |       | (102,900        | )          | —      |       | (102,900 | ) |
| Share-based  awards compensation        |       | —           |       | —          |       | 113,730         |       | —      |       | 113,730 |   |
| Recission of  common stock for services |       | (50,000          | )          | (250            | )          | (31,250         | )          | —      |       | (31,500 | ) |
| Issuance of  common stock for services  |       | 351,923          |       | 1,760           |       | 205,875         |       | —      |       | 207,635 |   |
| Issuance of  common stock warrants      |       | —           |       | —          |       | 36,969          |       | —      |       | 36,969 |   |
| Net loss                                |       | —           |       | —          |       | —          |       | (1,761,850  | )          | (1,761,850 | ) |
| Balance at March 31,  2006         |       | 15,003,904       |       | $               | 75,021     |            | $          | 9,781,447   |       | $ | (11,756,130 | ) | $ | (1,899,662 | ) |

 

See Notes to Consolidated FinancialStatements

 

4

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#### **TIME AMERICA, INC. ANDSUBSIDIARY**

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
| ** **                                                                   | ** ** | **Nine Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| **Increase  (Decrease) in Cash and Cash Equivalents:**                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Cash  flows from operating activities:**                                   | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                     | (1,761,850 | ) | $ | (794,259 | ) |
| Adjustments  to reconcile net loss to net cash used by operating activities: |       |                                  |       |   |   |
| Depreciation                                                                 |       | 90,605                                |       | 64,347 |   |
| Share based  compensation expense                                            |       | 113,730                               |       | — |   |
| Common  stock, stock options and warrants issued for services                |       | 213,104                               |       | 15,500 |   |
| Induced  conversion of debt charge                                           |       | 40,179                                |       | — |   |
| Changes in  Assets and Liabilities:                                          |       |                                  |       |   |   |
| Accounts  receivable-trade                                                   |       | (281,584                              | )          | (271,444 | ) |
| Inventory                                                                    |       | (286,543                              | )          | (83,501 | ) |
| Prepaid  expenses and other current assets                                   |       | (15,900                               | )          | 72,452 |   |
| Other assets                                                                 |       | 72,180                                |       | 84,079 |   |
| Accounts  payable                                                            |       | 128,623                               |       | (52,859 | ) |
| Accrued  liabilities                                                         |       | 288,520                               |       | 150,444 |   |
| Deferred  revenue                                                            |       | 129,203                               |       | 463,615 |   |
| **Net cash  provided (used) by operating activities**                        |       | (1,269,733                            | )          | (351,626 | ) |
|                                                                         |       |                                  |       |   |   |
| **Cash  flows from investing activities:**                                   | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Purchase of  property and equipment                                          |       | (187,053                              | )          | (240,649 | ) |
| Due from  sale of assets                                                     |       | (530,428                              | )          | — |   |
| **Net cash  used by investing activities**                                   |       | (717,481                              | )          | (240,649 | ) |
|                                                                         |       |                                  |       |   |   |
| **Cash  flows from financing activities:**                                   | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Repayment of  debt                                                           |       | (1,209,111                            | )          | (841,376 | ) |
| Proceeds  from exercise of options and warrants                              |       | 1,600                                 |       | 361 |   |
| Proceeds  from debt                                                          |       | 2,500,000                             |       | — |   |
| **Net cash  provided (used) by financing activities**                        |       | 1,292,489                             |       | (841,015 | ) |
|                                                                         |       |                                  |       |   |   |
| Net change  in cash and cash equivalents                                     |       | (694,725                              | )          | (1,433,290 | ) |
|                                                                         |       |                                  |       |   |   |
| Cash and  cash equivalents at beginning of period                            |       | 1,361,717                             |       | 2,058,929 |   |
|                                                                         |       |                                  |       |   |   |
| Cash and  cash equivalents at end of period                                  |       | $                                     | 666,992    |   | $ | 625,639 |   |
|                                                                         |       |                                  |       |   |   |
| **Supplemental  disclosure of cash flow information:**                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Interest  paid                                                               |       | $                                     | 201,254    |   | $ | 148,492 |   |
| Income taxes  paid                                                           |       | $                                     | —     |   | $ | — |   |
|                                                                         |       |                                  |       |   |   |
| **Noncash  investing and financing activities:**                             | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Conversion  of debt to equity                                                |       | $                                     | 250,000    |   | $ | — |   |

 

See Notes to Consolidated FinancialStatements

 

5

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## **SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

**Note A - Basis of Presentation and Interim Consolidated FinancialStatements**

 

The accompanying unaudited consolidated financialstatements of Time America, Inc. and subsidiary (“Time America” or the “Company”)have been prepared in accordance with generally accepted accounting principles(“GAAP”), pursuant to the rules and regulations of the Securities andExchange Commission, and are unaudited. Accordingly, they do not include all the information and footnotesrequired by GAAP for complete financial statements.  In the opinion of management, all adjustments(which include only normal recurring adjustments) necessary for a fairpresentation of the results for the interim periods presented have been made.  The results for the nine month period ended March 31,2006, may not be indicative of the results for the entire year.  These financial statements should be read inconjunction with the Company’s Annual Report on Form 10-KSB for the fiscalyear ended June 30, 2005.

 

The preparation of financial statements in conformity withgenerally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from these estimates.

 

**Note B - Income (Loss) Per Share:**

 

Basic income (loss) per share of common stock was computedby dividing the net income (loss) by the weighted average number of shares ofcommon stock outstanding during the period.

 

Diluted earnings per share are computed based on theweighted average number of shares of common stock and dilutive securitiesoutstanding during the period.  Dilutivesecurities are options and warrants that are freely exercisable into commonstock at less than the prevailing market price. Dilutive securities are notincluded in the weighted average number of shares when inclusion would increasethe earnings per share or decrease the loss per share.

 

**Note C- Stock Based Compensation:**

 

Prior to July 1,2005, the Company accounted for stock-based compensation arrangements inaccordance with the provisions of Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” (“APB 25”).  Accordingly, compensation expense, if any,was measured as the excess of the underlying stock price over the exerciseprice on the date of grant.  The Companycomplied with the disclosure provisions of Statement of Financial AccountingStandards Board No. 123 (“SFAS 123”) “Accounting for Stock BasedCompensation” as amended by SFAS 148 “Accounting for Stock-BasedCompensation-Transition and Disclosure,” which required pro-forma disclosure ofcompensation expense associated with stock options under the fair value method.

 

Effective July 1,2005, the Company adopted the fair value recognition provisions of Statement ofFinancial Accounting Standards Board No. 123(R), “Share–Based Payment,”using the modified prospective-transition method.  Under this transition method, compensationexpense recognized for the nine months ended March 31, 2006 of fiscal year 2006includes:  (a) compensation expensefor all share-based payments granted prior to, but not yet vested as of June 30,2005 based on the grant date fair value estimated and (b)

 

6

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compensation expense for all share-based paymentsgranted subsequent to June 30, 2005, based on the grant date fair valueestimated in accordance with the provisions of SFAS 123 (R).  Results for prior periods have not beenrestated.  The fair value of optiongrants is estimated as of the date of grant utilizing the Black-Scholesoption-pricing model and amortized to expense over the options’ vesting period.

 

As a result ofadopting SFAS 123(R) on July 1, 2005, the Company’s net loss for the threemonth and nine month periods ended March 31, 2006 is $10,163 and $113,730,respectively, higher than if it had continued to account for share-basedcompensation under APB 25.

 

The followingtable illustrates the effect on the Company’s net loss and loss per share forthe three months and nine months ended March 31, 2005 if the Company hadapplied the fair value recognition provisions of SFAS 123 to options grantedunder the Company’s stock option plans.

 
| ** **                                                                                                                                        | ** ** | **Three Months**         | ** ** | **Nine Months**          | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                        | ** ** | **Ended March 31,** | ** ** | **Ended March 31,** | ** ** |
| ** **                                                                                                                                        | ** ** | **2005**                 | ** ** | **2005**                 | ** ** |
|                                                                                                                                              |       |                     |       |                     |       |
| **Net  loss:**                                                                                                                                    | ** ** | ** **               | ** ** | ** **               | ** ** |
| As reported                                                                                                                                       |       | $                        | (303,260   | )                        | $          | (794,259 | ) |
|                                                                                                                                              |       |                     |       |                     |       |
| Deduct:  Total stock-based employee compensation expense determined under the fair  value based method for all awards, net of related tax effects |       | (1,690                   | )          | (50,773                  | )          |
|                                                                                                                                              |       |                     |       |                     |       |
| Pro forma                                                                                                                                         |       | $                        | (304,950   | )                        | $          | (845,032 | ) |
|                                                                                                                                              |       |                     |       |                     |       |
| **Loss per  share:**                                                                                                                              | ** ** | ** **               | ** ** | ** **               | ** ** |
| As reported                                                                                                                                       |       | $                        | (0.02      | )                        | $          | (0.06 | ) |
| Pro forma                                                                                                                                         |       | $                        | (0.02      | )                        | $          | (0.06 | ) |

 

**Note D- Long-term Debt:**

 

In September 2005, theCompany amended the conversion price on a portion of its convertible term notewith Laurus Master Funds (“Laurus”). The conversion price on the first $250,000of the note was reduced to $0.56 per share. Inconnection with the amendment, the Company incurred a non-cash charge of$40,179 in the first quarter of 2006.

 

Effective January 3, 2006, the Company enteredinto a Security and Purchase Agreement with Laurus, which repaid the Company’s existing indebtedness with Laurus and replacedsuch indebtedness with the credit facility evidenced by the Security and PledgeAgreement.  Under the terms of theSecurity and Purchase Agreement, Laurus purchased from the Company a SecuredConvertible Term Note in the aggregate principal amount of $2,000,000, and aSecured Non-Convertible Revolving Note in the aggregate principal amount of$1,500,000.  The transaction was arecapitalization of existing agreements with Laurus.  The Term Note replaced an existing securedconvertible term note issued March 22, 2004 and the principal balance of$1,058,310 was paid in full with the proceeds of the Term Note.  Gross proceeds received by the Company underthe Term Note were $941,690.  TheRevolving Note replaced an existing $1,500,000

 

7

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revolvingfacility that had an outstanding balance of $1,000,000 that was paid in fullwith proceeds from the Revolving Note. The Company did not receive any of the proceeds from the Revolving Note.

 

TheTerm Note has a three-year term and bears interest at 2% above the prime rate,with a minimum interest rate of 7.25%. The Term Note provides for principal repayment, in cash or stock, inthirty (30) equal monthly installments of $66,666.67 commencing on July 1,2006.  Monthly principal and interestpayments will be converted, subject to certain volume limitations, into sharesof the Company’s common stock if the average market price of such stock for thefive (5) days preceding the payment due date is 10% above the initialfixed conversion price of $0.65 per share. The Company may not convert any of its repayment obligations under theTerm Note to common stock unless either there exists an effective registrationstatement covering the shares to be issued, or an exemption for the resale ofall of the common stock issued and issuable under the Term Note is availableunder Rule 144 of the Securities Act of 1933, as amended.  The Company may redeem the Term Note uponpayment to Laurus of an amount equal to 115% of the outstanding principalbalance under the Term Note together with accrued but unpaid interest.

 

TheRevolving Note has a two-year term, and bears interest at 2% above the primerate, with a minimum interest rate of 7.25%.  Availability under the Revolving Note is basedon an advance rate equal to 90% of eligible accounts receivable and 30% ofinventory subject to a $1,000,000 cap. The Revolving Note is subject to an early termination fee of 5% of theface amount of the Revolving Note in the first year, and 4% thereafter.  If an event of default occurs, Laurus mayelect to require the Company and its subsidiaries to make a default payment inan amount equal to125% of the outstanding principal amount of the RevolvingNote.

 

TheCompany’s obligations under Term Note and the Revolving Note are secured by afirst lien on all assets of the Company, and Laurus may accelerate alloutstanding obligations under the notes upon the occurrence and continuation ofan event of default.  In addition to thenotes, the Company issued to Laurus a seven-year warrant to purchase 140,000shares of the Company’s common stock at an exercise price of $0.65 per share,subject to adjustment based on the occurrence of certain corporate events.  The Company must file a registrationstatement with the Securities and Exchange Commission to register the resale ofthe shares of common stock underlying the warrants and the common stockissuable upon conversion of the Term Note within 60 days of funding and mustuse its best efforts to have the registration statement declared effectivewithin 180 days of funding.  On theclosing of the Term Note and the Revolving Note, the Company issued anaggregate of 351,923 shares of common stock to Laurus for payment of fees due.

 

TheCompany considered the Term Note to be substantively modified (as defined inEITF No. 96-19 “Debtor’s Accounting for a Modification or Exchange of DebtInstruments”) and accounted for the transaction as an extinguishment of theprior outstanding term note and, as a result, recorded a loss on extinguishmentin the amount of $298,108.  The Companydeemed that the Revolving Note was not substantially modified and did notrecord the previous note as being extinguished.

 

**Note E - New Accounting Pronouncements:**

 

In June 2005, the FASBissued Statement of Financial Accounting Standards No. 154, (“SFAS 154”),“Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20,“Accounting Changes” and FASB Statement No. 3, “Reporting AccountingChanges in Interim Financial Statements.” SFAS 154 applies to all voluntary changes in accounting principle andchanges the requirements for accounting for and reporting a change inaccounting principle. SFAS 154 requires the

 

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retrospective application to prior periods’financial statements of the direct effect of a voluntary change in accountingprinciple unless it is impracticable. APB No. 20 required that mostvoluntary changes in accounting principle be recognized by including in netincome of the period of the change the cumulative effect of changing to the newaccounting principle. FASB stated that SFAS 154 improves financial reportingbecause its requirements enhance the consistency of financial informationbetween periods. Unless early adoption is elected, SFAS 154 is effective forfiscal years beginning after December 15, 2005. Early adoption ispermitted for fiscal years beginning after June 1, 2005. SFAS 154 does notchange the transition provisions of any existing accounting pronouncements,including those that are in a transition phase as of the effective date of thisstatement.  The adoption of SFAS 154is not expected to have a material affect on our financial position or resultsof operations.

 

**NoteF - Sale of Assets:**

 

OnApril 12, 2006, the Company and Unitime Systems, Inc. (“Unitime”)closed on the sale of certain of the Company’s direct sales assets to Unitimepursuant to the terms of an Asset Purchase Agreement (the “Purchase Agreement”)between the parties. Under the terms of the Purchase Agreement, Unitimepurchased certain assets associated with the Company’s direct sales business,including a copy of the source code and other intellectual property relating tothe Company’s NETtime, HourTrack and GENESIS time and attendance softwareproducts, related ASP and maintenance contracts, and certain specified directchannel sales opportunities.  The salewas deemed effective as of March 31, 2006.

 

Thesale generated cash to the Company at closing of approximately $530,000. Thepurchase price under the Purchase Agreement included cash payable to theCompany at the closing in consideration for a copy of the source code andrelated intellectual property. The consideration for the ASP and maintenancecontracts was determined based on multiples of the projected annualizedrevenues under such contracts. At closing, the Company received in cash 100% ofthe total consideration for the customer ASP contracts and 40% of the totalconsideration for the maintenance contracts. The remaining consideration for the maintenance contracts is payablequarterly over the next 14 months. The Company will also be transitioning overadditional ASP customers over the next six months, which the Cmopany will bepaid for at the time of such transfers. Additionally, for the 12-month period following the closing, Unitime isobligated to pay the Company monthly royalty payments equal to 27.5% of therevenues Unitime generates in connection with direct channel sales opportunitiesspecified at closing.

 

The amount due at closing ofapproximately $530,000 was recorded as accounts receivable — other in theaccompanying financial statements.  Thefull amount was received in April 2006.

 

**Item 2. Management’sDiscussion And Analysis of Financial Condition and Results of Operations.**

 

### **Critical AccountingPolicies**

 

Our significant accountingpolicies are described in the audited consolidated financial statements andnotes thereto included in our Annual Report on Form 10-KSB for the year endedJune 30, 2005.  We believe our mostcritical accounting policies are revenue recognition, software developmentcosts and the allowance for potentially uncollectible accounts receivable.

 

We license software and sell data collectionhardware and related ancillary products to end-user customers through ourdirect sales force as well as reseller channel customers through independentresellers. Our software license revenue is earned from perpetual licenses ofoff-the-shelf software requiring none or minor modification or customization.The software license, data collection hardware and related ancillary productrevenues from our end-user customers and reseller channel customers aregenerally recognized when:

 

•                  Persuasive evidence of an arrangement exists,which is typically when a non-cancelable sales and software license agreementor purchase order has been signed;

•                  Delivery, which is typically FOB shippingpoint, is complete for the software (either physically or electronically), datacollection hardware and related ancillary products;

•                  The customer’s fee is deemed to be fixed ordeterminable and free of contingencies or significant uncertainties;

•                  Collectibility is probable; and

•                  Vendor-specific objective evidence of fairvalue exists for all undelivered elements, typically maintenance andprofessional services.

 

Thefair value of the undelivered elements is deferred and the remaining portion ofthe arrangement fee is allocated to the delivered elements and is recognized asrevenue, assuming all other conditions for revenue recognition have beensatisfied. Substantially all of our sales agreements contain allocations of thepurchase price among the various elements of the arrangement.  If we cannot determine the fair value of anyundelivered element included in an arrangement, we will defer revenue until allelements are delivered, services are performed or until fair value can beobjectively determined.

 

Aspart of an arrangement, end-user customers typically purchase maintenancecontracts as well as professional services from us.  Maintenance services include telephone andWeb-based support as well as

 

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rights to unspecifiedupgrades and enhancements, when and if we make them generally available. Professionalservices are typically for implementation, installation of the software anddata collection hardware, training, building interfaces and custom features,and running test data.

 

Revenuesfrom maintenance services are recognized ratably over the term of themaintenance contract period, which is usually one year.  Maintenance services are typically statedseparately in an arrangement and are also sold on a stand-alone basis inrenewal agreements. We have classified the value of revenues pertaining to thecontractual maintenance obligations that exist for the 12-month periodsubsequent to the balance sheet date as a current liability, and thecontractual obligations with a term beyond 12 months, if present, as anon-current liability.

 

Revenuesfrom customer support services are recognized as the services aredelivered.  Revenues from professionalservices are generally recognized based on vendor-specific objective evidenceof fair value when:

 

•                  A non-cancelable agreement for the serviceshas been signed or a customer’s purchase order has been received;

•                  The professional services have beendelivered;

•                  The customer’s fee is deemed to be fixed ordeterminable and free of contingencies or significant uncertainties; and

•                  Collectibility is probable.

 

Vendor-specificobjective evidence of fair value is based upon the price charged when theseservices are sold separately and are typically an hourly rate for professionalservices and a per-class rate for training. Based upon our experience incompleting professional services, we have determined that these services aretypically delivered within a 12-month period subsequent to the contract signingand therefore classifies deferred professional services as a current liability.

 

Ourarrangements with end-user customers do not include any rights of return.  Our arrangements with reseller channelcustomers do include a 30 day rights of return provision on unusedproducts.  None of our arrangementsinclude rights to price protection, nor do arrangements with reseller channelcustomers include any acceptance provisions. Our arrangements with end-user customers generally include our standardacceptance provision. Our standard acceptance provision states that thecustomer’s acceptance of the products shall be deemed to occur upon completionof running our standard diagnostic tests.

 

Atthe time we enter into an arrangement, we assess the probability of collectionof the fee and the terms granted to the customer. For end-user customers, ourtypical payment terms include a deposit and balance typically due within 30days of the invoice date, such that all payments for the software license, datacollection hardware and related ancillary products, as well as servicesincluded in the original arrangement, are ordinarily due within one year ofcontract signing. Our payment terms for reseller channel customers aretypically due within 30 days of the invoice date.

 

Ifthe arrangement includes a substantive acceptance provision, we defer revenuenot meeting the criterion for recognition under Statement of Position 97-2, “SoftwareRevenue Recognition,” and classify this revenue as deferred revenue, includingdeferred product revenue. This revenue is recognized, assuming all otherconditions for revenue recognition have been satisfied when the uncertaintyregarding acceptance is resolved as generally evidenced by written acceptanceor payment of the arrangement fee. If the payment

 

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terms for the arrangementare considered extended, we defer revenue on the arrangement until the paymentof the arrangement fee becomes due. The deferred amounts related toarrangements with extended payment terms are removed from deferred revenue andaccounts receivable, as we have determined that these amounts do not representeither receivable or deferred revenue until the payment becomes due. We reportthe allocated fair value of revenues related to the product element ofarrangements as a current liability because of the expectation that theserevenues will be recognized within 12 months of the balance sheet date.

 

Wecapitalize software development costs in accordance with Statement of FinancialAccounting Standards No. 86, “Accounting for the Costs of ComputerSoftware to be Sold, Leased, or Otherwise Marketed.” Capitalization of softwaredevelopment costs begins upon the establishment of technological feasibility ofthe product.  The establishment of technological feasibility and theongoing assessment of the recoverability of these costs require considerablejudgment by management with respect to certain external factors including, butnot limited to, anticipated future gross product revenue, estimated economiclife, and changes in software and hardware technology.  Amortization ofcapitalized software development costs begins when the products are availablefor general release to customers and is computed on a product-by-product basisusing straight-line amortization with useful lives of five years or, if less,the remaining estimated economic life of the product.  Amounts related tointernal software development that could be capitalized under this statementwere deemed immaterial.

 

We provide for potentiallyuncollectible accounts receivable by use of the allowance method.  The allowance is provided based upon a reviewof the individual accounts outstanding, and our prior history of uncollectibleaccounts receivable.  It is our practice to record an estimated allowancefor sales returns and adjustments based on historical experience and to recordindividual charges for sales returns and adjustments directly to revenue asincurred.

 

### **Results of Operationsfor the Three and Nine Months Ended March 31, 2006 and 2005**

 

*Revenues:*

 
| ** ** | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|------------|------------|--------------------------|------------|--------------------------|------------|
| ** ** | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** |
| Revenues   |       | $                        | 1,723,160  |                     | $          | 1,628,957 |   | 6 | % | $ | 4,733,328 |   | $ | 4,523,095 |   | 5 | % |
|            |            |                          |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

See “Product Sales” and “Service Revenue” below fordiscussion on the change.

 

*Product Sales:*

 
| ** **                                    | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                    | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** |
| Product  sales                                |       | $                        | 1,256,006  |                     | $          | 1,222,964 |   | 3 | % | $ | 3,322,927 |   | $ | 3,304,102 |   | 1 | % |
| Product  sales as a percent of total revenues |       | 73                       | %          | 75                       | %          | — |   | 70 | % | 73 | % | — |   |
|                                               |            |                          |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Product sales have remained relatively flat over thethree and nine months ended March 31, 2006.

 

*Service Revenue:*

 
| ** **                                      | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                      | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** |
| Service  revenue                                |       | $                        | 467,154    |                     | $          | 405,993 |   | 15 | % | $ | 1,410,401 |   | $ | 1,218,993 |   | 16 | % |
| Service  revenue as a percent of total revenues |       | 27                       | %          | 25                       | %          | — |   | 30 | % | 27 | % | — |   |
|                                                 |            |                          |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in our service revenue in the currentquarter and nine-month period was primarily attributable to a 60% and 56%,respectively, increase in our NETtime software service revenue over suchperiods.  In addition, maintenancerevenue increased by 15% in the three month period and by 31% in the nine monthperiod.

 

*Gross Profit:*

 
| ** **           | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|----------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **           | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
| Product gross margin |       | 45                       | %          | 59                       | %          | 49 | % | 60 | % |
| Service gross margin |       | 52                       | %          | 51                       | %          | 54 | % | 55 | % |
| Total gross margin   |       | 47                       | %          | 57                       | %          | 50 | % | 58 | % |

 

The decrease in overall and product gross profit isprimarily due to the accounting for a large contract with a Fortune 100company.  The contract is for a$2,150,000 software and hardware solution requiring successful completion of apilot program followed by completion of the remainder of the contract.  The pilot program section of thecontract is for $378,000.  We areaccounting for the software portion of the pilot program using the percentageof completion method for long-term contracts. The estimated costs for development of the software exceed our revenuesfor the software and the Company recorded an estimated loss of approximately$177,000 for the software portion of this contract. If the revenue and costsunder this contract were removed, our overall and product margins for thecurrent quarter and nine-month period ended March 31, 2006 would be inline with our normal margins as discussed below.  We do expect to achieve a gross profit on thecontract as a whole as it is fulfilled over the next year.

 

Our gross profit percentage on products is typicallybetween 55% to 60% depending upon the mix of software versus hardware sales andthe makeup of hardware sales.  Ourproduct revenue is comprised of software and hardware sales, with hardwaresales yielding a significantly lower gross profit than software sales.  Hardware revenue is principally comprised oftwo versions of general data collection terminals, badge terminals and biometricunits.  The gross profit is greater onbadge terminals than biometric units because we add value to our badgeterminals by installing software on the terminals.

 

Our gross profit percentage on services revenue wasrelatively flat for the both periods presented.

 

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*Operating Expenses:*

 
| ** **                                               | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|----------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                               | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** |
| Total costs  and expenses                                |       | $                        | 1,213,629  |                     | $          | 1,149,868 |   | 6 | % | $ | 3,813,272 |   | $ | 3,196,259 |   | 19 | % |
| Total costs  and expenses as a percent of total revenues |       | 70                       | %          | 71                       | %          | — |   | 81 | % | 71 | % | — |   |
|                                                          |            |                          |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Sales and Marketing Expense:*

 
| ** **                                                  | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|-------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                  | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** |
| Sales and  marketing expense                                |       | $                        | 530,413    |                     | $          | 505,682 |   | 5 | % | $ | 1,662,105 |   | $ | 1,431,227 |   | 16 | % |
| Sales and  marketing expense as a percent of total revenues |       | 31                       | %          | 31                       | %          | — |   | 35 | % | 32 | % | — |   |
|                                                             |            |                          |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in sales and marketing expenses in thecurrent quarter and nine-month period is primarily attributable to higher laborand employee acquisition costs as we have increased our sales staff.

 

*Research and Development Expense:*

 
| ** **                                                       | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                       | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** |
| Research and  development expense                                |       | $                        | 383,600    |                     | $          | 369,660 |   | 4 | % | $ | 1,130,750 |   | $ | 995,378 |   | 14 | % |
| Research and  development expense as a percent of total revenues |       | 22                       | %          | 23                       | %          | — |   | 24 | % | 22 | % | — |   |
|                                                                  |            |                          |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in research and development expenses isprimarily attributable to labor and other costs associated with the developmentof our new data collection terminal and enhancement of our software offerings.

 

*General and Administrative Expense:*

 
| ** **                                                         | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|--------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                         | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** |
| General and  administrative expense                                |       | $                        | 299,616    |                     | $          | 274,526 |   | 9 | % | $ | 1,020,417 |   | $ | 769,654 |   | 33 | % |
| General and  administrative expense as a percent of total revenues |       | 17                       | %          | 17                       | %          | — |   | 22 | % | 17 | % | — |   |
|                                                                    |            |                          |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in general and administrative expensesis primarily due to $5,000 in costs in the current quarter and $84,000 in costsin the current nine month period as a result of the adoption of

 

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FASBStatement No. 123(R) in the first quarter of fiscal 2006.  We also incurred approximately $60,000 inexpenses associated with the preparation and filing of a registration statementin the nine month period.

 

OtherExpense:

 
| ** **                                    | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                    | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Percent  Change** | ** ** |
| Other  expense                                |       | $                        | 56,079     |                     | $          | 80,162 |   | (30 | )% | $ | 327,325 |   | $ | 234,105 |   | 40 | % |
| Other  expense as a percent of total revenues |       | 3                        | %          | 5                        | %          | — |   | 7 | % | 5 | % | — |   |
|                                               |            |                          |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Other income (expense) consists primarily ofinterest expense.  The increase in other expense is primarily due to anincrease of approximately $103,000 and $232,000, respectively, in interestexpense for the current quarter and nine month period.  Interest expense has increased because we arecarrying over $975,000 in additional debt since June 2005. Also included inother income is a gain on sale of assets of $425,848 as discussed in Note F ofthe accompanying financial statements.

 

We recorded a loss on extinguishment of debt in theamount of $298,000 in the current quarter as a result of a restructuring ofdebt in January of this year as discussed in Note D of the accompanyingfinancial statements.

 

 

# **Liquidity and CapitalResources**

 

CashFlow Highlights:

 
| ** **                          | ** ** | **Nine Months Ended March 31,** | ** ** | **Percentage** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                          | ** ** | **2006**                             | ** ** | **2005**       | ** ** | **Change** | ** ** |
|                                |       |                                 |       |           |       |   |   |
| Net cash  from operations           |       | $                                    | (1,269,733 | )              | $          | (351,626 | ) | (261 | )% |
|                                |       |                                 |       |           |       |   |   |
| Purchase of  property and equipment |       | $                                    | (187,053   | )              | $          | (240,649 | ) | 22 | % |
| Repayment of  debt                  |       | $                                    | (1,209,111 | )              | $          | (841,376 | ) | (44 | )% |
|                                |       |                                 |       |           |       |   |   |
| Proceeds  from debt                 |       | $                                    | 2,500,000  |           | $          | — |   | n/a |   |
| Net change  is cash                 |       | $                                    | (694,725   | )              | $          | (1,433,290 | ) | (51 | )% |
| Cash at end  of period              |       | $                                    | 666,992    |           | $          | 625,639 |   | 7 | % |

 

At March 31, 2006, we had working capital of$664,505, compared to working capital of $851,916 at June 30, 2005.  Cash and cash equivalents at those datesamounted to $666,992 and $1,361,717, respectively.  We have funded our operations for the pastsix years primarily through a combination of sales of equity securities anddebt financing.

 

*Operations*.  The net cash used from operations in thecurrent period was primarily attributable to the net loss of $1,761,850.  Included in the net loss was a total of$457,618 of non-cash charges.  Also

 

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contributingto the net cash used were increases in accounts receivable of $281,584 andinventory of $286,543.  Net cash usedduring this period was partially offset by increases in accounts payable of $128,623and accrued liabilities of $288,520.

 

*Investment Activities*. Our use of cash for property and equipment includes investments ininformation systems and infrastructure to support expanding operations.

 

OnApril 12, 2006, the Company and Unitime Systems, Inc. (“Unitime”)closed on the sale of certain of the Company’s direct sales assets to Unitimepursuant to the terms of an Asset Purchase Agreement (the “Purchase Agreement”)between the parties. Under the terms of the Purchase Agreement, Unitimepurchased certain assets associated with the Company’s direct sales business,including a copy of the source code and other intellectual property relating tothe Company’s NETtime, HourTrack and GENESIS time and attendance softwareproducts, related ASP and maintenance contracts, and certain specified directchannel sales opportunities.  The salewas deemed effective as of March 31, 2006.

 

Thesale generated cash to the Company at closing of approximately $530,000. Thepurchase price under the Purchase Agreement included cash payable to theCompany at the closing in consideration for a copy of the source code andrelated intellectual property. The consideration for the ASP and maintenancecontracts was determined based on multiples of the projected annualizedrevenues under such contracts. At closing, the Company received in cash 100% ofthe total consideration for the customer ASP contracts and 40% of the totalconsideration for the maintenance contracts. The remaining consideration for the maintenance contracts is payablequarterly over the next 14 months. The Company will also be transitioning overadditional ASP customers over the next six months, which the Cmopany will bepaid for at the time of such transfers. Additionally, for the 12-month period following the closing, Unitime isobligated to pay the Company monthly royalty payments equal to 27.5% of therevenues Unitime generates in connection with direct channel salesopportunities specified at closing.

 

Theamount due at closing of approximately $530,000 was recorded as accountsreceivable — other in the accompanying financial statements.  The full amount was received in April 2006.

 

*Financing Activities*  Our repayment of debt in thecurrent period increased from the prior year period as we paid off the balanceon a term note.  Further informationregarding this can be found in footnote D in the accompanying financialstatements.

 

Our liquidity is affected by manyfactors, some based on the normal ongoing operations of our business and othersrelated to the uncertainties of the time and attendance industry and globaleconomies.  Although our cashrequirements will continue to fluctuate based on the timing and extent of thesefactors, we believe that our current cash reserves, cash generated fromoperations, cash received from our asset sale (see “Investment Activities”above), recent financings, and our borrowing capacity under our two creditfacilities, will be sufficient to satisfy commitments for capital expendituresand other cash requirements for the next 12 months.  The ability to raise additional capital inpublic or private markets will primarily be dependent upon prevailing marketconditions and the demand for our products and services.  No assurance can be given that we will beable to raise additional capital, when needed or at all, or that such capital,if available, will be on acceptable terms. In the absence of obtainingadditional financing, the Company may be unable to fund its operations and mayexperience defaults under certain of its contractual agreements, including ourcredit facilities and lease agreements for our corporate headquarters.  Our lease agreements are subject totermination in the event of a default. Certain of the parties to these agreements could take

 

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legal action against the Company to collectamounts owed to them.  Accordingly, theCompany’s financial condition could require that the Company seek theprotection of applicable reorganization laws in order to avoid or delay actionsby third parties, which could materially adversely affect, interrupt or causethe cessation of the Company’s operations.

 

**Item 3. Controls and Procedures.**

 

As of the end of the periodcovered by this report, the Company carried out an evaluation, under thesupervision and with the participation of its Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the Company’s disclosure controlsand procedures. Disclosure controls and procedures are designed to ensure thatinformation required to be disclosed in the periodic reports filed or submittedunder the Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms. Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective as of the end of thequarterly period covered by this report. No change in the internal control over financial reporting occurredduring the last fiscal quarter that has materially affected, or is reasonablylikely to materially affect, the internal control over financial reporting.

# ** **

# **FORWARD-LOOKING INFORMATION**

 

The statements contained in thisQuarterly Report on Form 10-QSB that are not historical fact areforward-looking statements (as such term is defined in the Private SecuritiesLitigation Reform Act of 1995), within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Theforward-looking statements contained herein are based on current expectationsthat involve a number of risks and uncertainties.  These statements can be identified by the useof forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,”or “anticipates,” or the negative thereof or other variations thereon orcomparable terminology, or by discussions of strategy that involve risks anduncertainties.  The Company wishes tocaution the reader that these forward-looking statements that are nothistorical facts are only predictions. No assurances can be given that the future results indicated, whetherexpressed or implied, will be achieved. While sometimes presented with numerical specificity, these projectionsand other forward-looking statements are based upon a variety of assumptionsrelating to the business of the Company, which, although considered reasonableby the Company, may not be realized. Because of the number and range of assumptions underlying the Company’sprojections and forward-looking statements, many of which are subject tosignificant uncertainties and contingencies that are beyond the reasonablecontrol of the Company, some of the assumptions inevitably will notmaterialize, and unanticipated events and circumstances may occur subsequent tothe date of this report.  Theseforward-looking statements are based on current expectations and the Companyassumes no obligation to update this information.  Therefore, the actual experience of theCompany and the results achieved during the period covered by any particularprojections or forward-looking statements may differ substantially from thoseprojected.  Consequently, the inclusionof projections and other forward-looking statements should not be regarded as arepresentation by the Company or any other person that these estimates andprojections will be realized, and actual results may vary materially.  There can be no assurance that any of theseexpectations will be realized or that any of the forward-looking statementscontained herein will prove to be accurate.

 

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##### **PART II — OTHERINFORMATION**

 

**Item 1. Legal Proceedings.**

 

The Company isfrom time to time involved in legal proceedings arising from the normal courseof business.  As of the date of thisreport, the Company is not currently involved in any legal proceedings.

 

**Item 6. Exhibits andReports on Form 8-K.**

 

(a)               The following exhibits are filed herewithpursuant to Regulation S-B.

 
| 10.1     |   | Asset  Purchase Agreement, dated April 12, 2006 between Time America, Inc.  and Unitime Systems, Inc. |
|----------|--------|----------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                 |
| 31.1     |   | Section 302 Certification of Chief Executive Officer                                                            |
|     |   |                                                                                                                 |
| 31.2     |   | Section 302 Certification of Chief Financial Officer                                                            |
|     |   |                                                                                                                 |
|  32 |   | Section 906 Certifications                                                                                      |

 

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**SIGNATURES**

 

Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                           | TIME AMERICA, INC.             |
|--------------------------------|--------------------------------|
|                           |                           |
|                           |                           |
| Dated:  May 15, 2006 |                           |
|                           | By                             |  /s/ Craig J. Smith |   |
|                           | Craig J. Smith                 |
|                           | Chief Financial Officer        |
|                           | (Principal Accounting Officer) |

 

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