**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 
| **ý** | ** ** | **QUARTERLY REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                        |
| ** ** | ** ** | **For the quarterly period ended December 31, 2004**                                                                                                                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                                                        |
| **o**      | ** ** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                                                        |
| ** ** | ** ** | **For the transition period from                         to                       ** |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | **Commission File number 001-10320**                                                                                                                                                                                                                                                                        |

 

**Time America, Inc.**

(Exact name of small business issuer asspecified in its charter)

 

| **Nevada**                                                                          | ** ** | **13-3465289**                        |
|-------------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation of organization)                     |       | (I.R.S. Employer  Identification No.) |
|                                                                                |
| **8840 East Chaparral Road, Suite 100,  Scottsdale, AZ 85250**                      |
| (Address of principal executive offices)                                            |
|                                                                                |
| **(480) 296-0400**                                                                  |
| (Issuer’s telephone number)                                                    |
|                                                                                |
| **51 W. Third Street, Suite 310, Tempe, AZ  85281**                                 |
| (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 bySection 13 or 15(d) of the Exchange Act during the past 12 months (or forsuch 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  ý     No  o

 

State the number of shares outstanding of each of the issuer’s classesof common equity, as of the latest practicable date: At February 10, 2005,the issuer had outstanding 13,601,052 shares of Common Stock, par value $.005per share.

 

Transitional Small Business Disclosure Format:  Yes  o    No  ý

 

 

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**PART I – FINANCIAL INFORMATION**

 

**Item 1 – Financial Statements.**

**TIME AMERICA, INC. ANDSUBSIDIARY**

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                            | ** ** | **December 31,  2004** | ** ** | **June 30,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                                                                                                            | ** ** | **(Unaudited)**             | ** ** | ** **              | ** ** |
| **ASSETS**                                                                                                            | ** ** | ** **                  | ** ** | ** **              | ** ** |
| **Current  Assets:**                                                                                                  |       |                        |       |                    |       |
| Cash and cash equivalents                                                                                             |       | $                           | 1,268,660  |                    | $          | 2,058,929 |   |
| Accounts receivable – trade, net                                                                                 |       | 1,097,710                   |       | 1,028,850               |       |
| Inventory                                                                                                             |       | 577,094                     |       | 370,784                 |       |
| Prepaid expenses and other current assets                                                                             |       | 198,721                     |       | 290,546                 |       |
|                                                                                                                  |       |                        |       |                    |       |
| **Total  Current Assets**                                                                                             |       | 3,142,185                   |       | 3,749,109               |       |
|                                                                                                                  |       |                        |       |                    |       |
| **Property  and equipment, net**                                                                                      |       | 300,738                     |       | 203,309                 |       |
| **Other  Assets**                                                                                                     |       | 180,793                     |       | 234,641                 |       |
|                                                                                                                  |       |                        |       |                    |       |
| **Total  Assets**                                                                                                     |       | $                           | 3,623,716  |                    | $          | 4,187,059 |   |
|                                                                                                                  |       |                        |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)**                                                              | ** ** | ** **                  | ** ** | ** **              | ** ** |
|                                                                                                                  |       |                        |       |                    |       |
| **Current  Liabilities:**                                                                                             |       |                        |       |                    |       |
| Current portion of long-term debt                                                                                     |       | $                           | 1,049,603  |                    | $          | 756,353 |   |
| Accounts payable                                                                                                      |       | 393,975                     |       | 368,230                 |       |
| Accrued liabilities                                                                                                   |       | 326,571                     |       | 187,385                 |       |
| Deferred revenue                                                                                                      |       | 882,259                     |       | 416,513                 |       |
|                                                                                                                  |       |                        |       |                    |       |
| **Total  Current Liabilities**                                                                                        |       | 2,652,408                   |       | 1,728,481               |       |
|                                                                                                                  |       |                        |       |                    |       |
| **Long-term  debt, less current portion**                                                                             |       | 1,325,213                   |       | 2,337,345               |       |
|                                                                                                                  |       |                        |       |                    |       |
| **Total  Liabilities**                                                                                                |       | 3,977,621                   |       | 4,065,826               |       |
|                                                                                                                  |       |                        |       |                    |       |
| **Commitments:**                                                                                                      |       | —                      |       | —                  |       |
|                                                                                                                  |       |                        |       |                    |       |
| **Stockholders’  Equity (Deficit):**                                                                             |       |                        |       |                    |       |
| Common stock, $.005 par value, 50,000,000  shares authorized; 13,601,052 and 13,599,552 shares issued and outstanding |       | 68,006                      |       | 67,998                  |       |
| Contributed capital                                                                                                   |       | 8,042,974                   |       | 8,027,121               |       |
| Accumulated deficit                                                                                                   |       | (8,464,885                  | )          | (7,973,886              | )          |
|                                                                                                                  |       |                        |       |                    |       |
| **Total  Stockholders’ Equity (Deficit)**                                                                        |       | (353,905                    | )          | 121,233                 |       |
|                                                                                                                  |       |                        |       |                    |       |
| **Total  Liabilities and Stockholders’ Equity (Deficit)**                                                        |       | $                           | 3,623,716  |                    | $          | 4,187,059 |   |
|                                                                                                                       |            |                             |            |                         |            |  |  |  |  |  |

 

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

 

2

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 
| ** **                                         | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | **2004**                                  | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                         | ** ** | **(unaudited)**                           | ** ** | **(unaudited)**                         | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| **Revenues:**                                      |       |                                      |       |                                    |       |   |   |   |   |
| Product sales                                      |       | $                                         | 1,082,207  |                                    | $          | 867,311 |   | $ | 2,081,137 |   | $ | 1,765,639 |   |
| Services revenue                                   |       | 358,105                                   |       | 260,013                                 |       | 813,000 |   | 488,082 |   |
|                                               |       |                                      |       |                                    |       |   |   |   |   |
| **Total  Revenues**                                |       | 1,440,312                                 |       | 1,127,324                               |       | 2,894,137 |   | 2,253,721 |   |
|                                               |       |                                      |       |                                    |       |   |   |   |   |
| **Cost of  Revenues:**                             |       |                                      |       |                                    |       |   |   |   |   |
| Product                                            |       | 433,572                                   |       | 343,723                                 |       | 832,304 |   | 729,746 |   |
| Services                                           |       | 185,277                                   |       | 153,036                                 |       | 352,498 |   | 288,590 |   |
|                                               |       |                                      |       |                                    |       |   |   |   |   |
| **Total  Cost of Revenues**                        |       | 618,849                                   |       | 496,759                                 |       | 1,184,802 |   | 1,018,336 |   |
|                                               |       |                                      |       |                                    |       |   |   |   |   |
| **Gross  Profit**                                  |       | 821,463                                   |       | 630,565                                 |       | 1,709,335 |   | 1,235,385 |   |
|                                               |       |                                      |       |                                    |       |   |   |   |   |
| **Costs  and Expenses:**                           |       |                                      |       |                                    |       |   |   |   |   |
| Sales and marketing                                |       | 461,442                                   |       | 469,383                                 |       | 925,545 |   | 859,675 |   |
| Research and development                           |       | 337,946                                   |       | 201,073                                 |       | 625,718 |   | 372,703 |   |
| General and administrative                         |       | 259,549                                   |       | 225,672                                 |       | 495,128 |   | 410,323 |   |
|                                               |       |                                      |       |                                    |       |   |   |   |   |
| **Total  Costs and Expenses**                      |       | 1,058,937                                 |       | 896,128                                 |       | 2,046,391 |   | 1,642,701 |   |
|                                               |       |                                      |       |                                    |       |   |   |   |   |
| **Net Loss  from Operations**                      |       | (237,474                                  | )          | (265,563                                | )          | (337,056 | ) | (407,316 | ) |
|                                               |       |                                      |       |                                    |       |   |   |   |   |
| **Other  Income (Expense):**                       |       |                                      |       |                                    |       |   |   |   |   |
| Interest expense                                   |       | (91,386                                   | )          | (18,835                                 | )          | (189,897 | ) | (38,646 | ) |
| Other                                              |       | 25,774                                    |       | —                                  |       | 25,774 |   | (7 | ) |
| Interest income                                    |       | 4,418                                     |       | 1,704                                   |       | 10,180 |   | 1,704 |   |
|                                               |       |                                      |       |                                    |       |   |   |   |   |
|                                               |       | (61,194                                   | )          | (17,131                                 | )          | (153,943 | ) | (36,949 | ) |
|                                               |       |                                      |       |                                    |       |   |   |   |   |
| **Net Loss**                                       |       | $                                         | (298,668   | )                                       | $          | (282,694 | ) | $ | (490,999 | ) | $ | (444,265 | ) |
|                                               |       |                                      |       |                                    |       |   |   |   |   |
| **Basic  Loss per Share**                          |       | $                                         | (0.02      | )                                       | $          | (0.02 | ) | $ | (0.04 | ) | $ | (0.04 | ) |
|                                               |       |                                      |       |                                    |       |   |   |   |   |
| **Weighted  Average Number of Shares Outstanding** |       | 13,601,052                                |       | 12,810,393                              |       | 13,600,620 |   | 12,143,551 |   |
|                                                    |            |                                           |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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, 2004 ANDTHE SIX MONTH PERIOD ENDED DECEMBER 31, 2004 (Unaudited)

 
| ** **                             | ** ** | **Common Stock** | ** ** | **Contributed** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|----------------------------------------|------------|------------------|------------|-----------------|------------|-----------------|------------|-------------|------------|
| ** **                             | ** ** | **Shares**       | ** ** | **Amount**      | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                                   |       |             |       |            |       |            |       |        |       |   |   |
| Balance at June 30, 2003          |       | 10,656,057       |       | $               | 53,280     |            | $          | 6,338,351   |       | $ | (6,823,443 | ) | $ | (431,812 | ) |
|                                   |       |             |       |            |       |            |       |        |       |   |   |
| Exercise of Warrants                   |       | 147,500          |       | 738             |       | 28,762          |       | —      |       | 29,500 |   |
| Exercise of stock options              |       | 8,996            |       | 45              |       | 3,328           |       | —      |       | 3,373 |   |
| Issuance of common stock warrants      |       | —           |       | —          |       | 156,200         |       | —      |       | 156,200 |   |
| Issuance of common stock for services  |       | 50,000           |       | 250             |       | 54,750          |       | —      |       | 55,000 |   |
| Sale of common stock, net of costs     |       | 2,736,999        |       | 13,685          |       | 1,445,730       |       | —      |       | 1,459,415 |   |
| Net loss                               |       | —           |       | —          |       | —          |       | (1,150,443  | )          | (1,150,443 | ) |
| Balance at June 30, 2004          |       | 13,599,552       |       | 67,998          |       | 8,027,121       |       | (7,973,886  | )          | 121,233 |   |
|                                   |       |             |       |            |       |            |       |        |       |   |   |
| Exercise of stock options              |       | 1,500            |       | 8               |       | 353             |       | —      |       | 361 |   |
| Issuance of stock options for services |       |             |       |            |       | 15,500          |       |        |       | 15,500 |   |
| Net loss                               |       | —           |       | —          |       | —          |       | (490,999    | )          | (490,999 | ) |
| Balance at December 31, 2004      |       | 13,601,052       |       | $               | 68,006     |            | $          | 8,042,974   |       | $ | (8,464,885 | ) | $ | (353,905 | ) |
|                                        |            |                  |            |                 |            |                 |            |             |            |  |  |  |  |  |  |  |  |  |

 

See Notes to Consolidated FinancialStatements

 

4

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

CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)

 
| ** **                                                                            | ** ** | **Six Months Ended  December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| **Increase  (Decrease) in Cash and Cash Equivalents:**                                | ** ** | ** **                              | ** ** | ** ** | ** ** |
| **Cash  flows from operating activities:**                                            |       |                                    |       |   |   |
| Net income (loss)                                                                     |       | $                                       | (490,999   | ) | $ | (444,265 | ) |
| Adjustments to reconcile net income (loss)  to net cash used by operating activities: |       |                                    |       |   |   |
| Depreciation                                                                          |       | 39,170                                  |       | 28,454 |   |
| Stock options issued for services                                                     |       | 15,500                                  |       | — |   |
| Changes in Assets and Liabilities:                                                    |       |                                    |       |   |   |
| Accounts receivable-trade                                                             |       | (68,860                                 | )          | (120,583 | ) |
| Inventory                                                                             |       | (206,310                                | )          | (127,580 | ) |
| Prepaid expenses and other current assets                                             |       | 91,825                                  |       | (25,175 | ) |
| Other assets                                                                          |       | 53,848                                  |       | — |   |
| Accounts payable                                                                      |       | 25,745                                  |       | (82,046 | ) |
| Accrued liabilities                                                                   |       | 139,186                                 |       | 40,079 |   |
| Deferred revenue                                                                      |       | 465,745                                 |       | 84,767 |   |
| **Net cash  provided (used) by operating activities**                                 |       | 64,850                                  |       | (646,349 | ) |
|                                                                                  |       |                                    |       |   |   |
| **Cash  flows from investing activities:**                                            |       |                                    |       |   |   |
| Purchase of property and equipment                                                    |       | (136,598                                | )          | (74,464 | ) |
| **Net cash  used by investing activities**                                            |       | (136,598                                | )          | (74,464 | ) |
|                                                                                  |       |                                    |       |   |   |
| **Cash  flows from financing activities:**                                            |       |                                    |       |   |   |
| Repayment of capital leases                                                           |       | —                                  |       | (4,500 | ) |
| Repayment of debt                                                                     |       | (718,882                                | )          | (61,029 | ) |
| Proceeds from exercise of options and  warrants                                       |       | 361                                     |       | 31,598 |   |
| Proceeds from issuance of stock                                                       |       | —                                  |       | 1,487,847 |   |
| **Net cash  provided (used) by financing activities**                                 |       | (718,521                                | )          | 1,453,916 |   |
|                                                                                  |       |                                    |       |   |   |
| Net change in cash and cash equivalents                                               |       | (790,269                                | )          | 733,103 |   |
|                                                                                  |       |                                    |       |   |   |
| Cash and cash equivalents at beginning of  period                                     |       | 2,058,929                               |       | 245,795 |   |
|                                                                                  |       |                                    |       |   |   |
| Cash and cash equivalents at end of period                                            |       | $                                       | 1,268,660  |   | $ | 978,898 |   |
|                                                                                  |       |                                    |       |   |   |
| **Supplemental  disclosure of cash flow information:**                                |       |                                    |       |   |   |
| Interest paid                                                                         |       | $                                       | 189,897    |   | $ | 38,646 |   |
| Income taxes paid                                                                     |       | $                                       | —     |   | $ | — |   |

 

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 accountingprinciples (“GAAP”), pursuant to the rules and regulations of the Securitiesand Exchange 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 beenmade.  The results for the six monthperiod ended December 31, 2004, may not be indicative of the results forthe entire year.  These financialstatements should be read in conjunction with the Company’s Annual Report onForm 10-KSB for the fiscal year ended June 30, 2004.

 

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.

 

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:**

 

The Companyaccounts for stock-based compensation arrangements in accordance with theprovisions of Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” (“APB 25”).  UnderAPB 25, no compensation expense is recognized because the exercise price of theCompany’s employee stock options equals the market price of the underlyingstock on the date of grant.

 

The Company hasadopted the disclosure-only provisions, as permitted by Statement of FinancialAccounting Standards No. 123 (“SFAS 123”). Under SFAS 123, companies can, but are not required to, elect torecognize compensation expense for all stock-based awards using a fair value methodology.Had compensation expense for stock-based compensation been determined based onthe fair value of the options at the grant dates consistent with thecalculation methodology of SFAS 123, the Company’s net loss and loss per sharewould have been adjusted to the pro forma amounts presented below:

 

6

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| ** **                                                                                                                                        | ** ** | **Three Months  Ended December 31,** | ** ** | **Six Months  Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                        | ** ** | **2004**                                  | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                        | ** ** | ** **                                | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  loss:**                                                                                                                                    |       |                                      |       |                                    |       |   |   |   |   |
| As reported                                                                                                                                       |       | $                                         | (298,668   | )                                       | $          | (282,694 | ) | $ | (490,999 | ) | $ | (444,265 | ) |
|                                                                                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under the fair value based method for all  awards, net of related tax effects |       | (2,510                                    | )          | (2,195                                  | )          | (49,083 | ) | (25,038 | ) |
|                                                                                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| Pro forma                                                                                                                                         |       | $                                         | (301,178   | )                                       | $          | (284,889 | ) | $ | (540,082 | ) | $ | (469,303 | ) |
|                                                                                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| **Loss per  share:**                                                                                                                              |       |                                      |       |                                    |       |   |   |   |   |
| As reported                                                                                                                                       |       | $                                         | (0.02      | )                                       | $          | (0.02 | ) | $ | (0.04 | ) | $ | (0.04 | ) |
| Pro forma                                                                                                                                         |       | $                                         | (0.02      | )                                       | $          | (0.02 | ) | $ | (0.04 | ) | $ | (0.04 | ) |
|                                                                                                                                                   |            |                                           |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

The fair value of option grants is estimated as of the date of grantutilizing the Black-Scholes option-pricing model.

 

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

 

In September 2004,the Company and a shareholder agreed to extend the balloon payment on apromissory note from October 1, 2004 to October 1, 2005.  All other terms of the agreement remainedunchanged.

 

In November 2004,the Company paid $456,100 to retire the remaining balance on a term note with ashareholder.  The Company and theshareholder then entered into a $456,100 revolving credit note agreement.  The revolving credit note agreement expiresin November 2007.  Borrowings underthe note bear interest at 10% per annum with interest payments duemonthly.  Unused borrowings are subjectto a 2% commitment fee paid quarterly.

 

**Note E- Commitments:**

 

In October 2004,the Company entered into a five year non-cancelable lease agreement forfacilities that commences in January 1, 2005.  Annual expense under the agreement isapproximately $275,000 per year.

 

**Note F- New Accounting Pronouncements:**

 

On December 16, 2004, the Financial Accounting Standards Board(“FASB”) issued FASB Statement No. 123 (revised 2004), “Share-Based Payment,”which is a revision of FASB Statement No. 123, “Accounting for Stock-BasedCompensation.” Statement 123(R) supersedes APB Opinion No. 25, “Accounting forStock Issued to Employees,” and amends FASB Statement No. 95, “Statement ofCash Flows.” Generally, the approach in Statement 123(R) is similar to theapproach described in Statement 123. However, Statement 123(R) requires allshare-based payments to employees, including the grants of employee stockoptions, to be recognized in the income statement based on their fair values.Pro forma

 

7

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disclosure is no longer an alternative.

 

Statement 123(R) must be adopted no later than the first interim periodbeginning after December 15, 2005. Early adoption will be permitted inperiods in which financial statements have not been issued. The Company expectsto adopt Statement 123(R) on July 1, 2005, the beginning of its firstfiscal quarter of the fiscal year ending on June 30, 2006.

 

As permitted by Statement 123, the Company currently accounts forshare-based payments to employees using Opinion 25’s intrinsic value methodand, as such, generally recognizes no compensation cost for employee stockoptions. Accordingly, the adoption of Statement 123(R)’s fair value method willhave a significant impact on the Company’s results of operations, although itwill have no impact on its overall financial position. The impact of adoptionof Statement 123(R) cannot be predicted at this time because it will depend onlevels of share-based payments granted in the future. However, had the Companyadopted Statement 123(R) in prior periods, the impact of that standard wouldhave approximated the impact of Statement 123 as described in the disclosure ofpro forma net income and earnings per share in Note C to the consolidatedfinancial statements.

 

The Company currently uses the Black-Scholes option pricing model forthe valuation of options under Statement 123. The Company is currentlyassessing valuation model options to be used under Statement 123(R) and has notyet determined which valuation model to adopt. Statement 123(R) also requiresthe benefits of tax deductions in excess of recognized compensation cost to bereported as a financing cash flow, rather than as an operating cash flow asrequired under current literature. This requirement will reduce net operatingcash flows and increase net financing cash flows in periods after adoption. TheCompany cannot estimate what those amounts will be in the future because theydepend on, among other things, when employees exercise stock options.

 

8

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**Item2. Management’s Discussion And Analysis Or Plan Of Operation.**

** **

### **Critical AccountingPolicies**

### ** **

Our significant accounting policies are described in the auditedconsolidated financial statements and notes thereto included in our AnnualReport on Form 10-KSB for the year ended June 30, 2004.  We believe our most critical accountingpolicies are revenue recognition, software development costs and the allowancefor potentially uncollectible accounts receivable.

 

We derive our revenues from the sale of frontline labor managementsystems as well as sales of application software, parts and components.  Our systems consist of fully integratedsoftware and intelligent data collection terminals.  We also derive revenues by providingmaintenance, professional and educational services to our customers.  We recognize revenues from sales of oursystems, application software, parts and components at the time of shipment,unless we have significant obligations remaining.  When significant obligations remain, revenueis not recognized until such obligations have been completed or are no longersignificant.  We recognize revenues fromour sales-type leases of systems at the time of shipment.  Service and maintenance revenues arerecognized ratably over the contractual period or as the services areperformed.

 

We provide installation services and certain warranties to itscustomers. We also provide, without additional charge, certain software productenhancements for customers covered under software maintenance contracts.  The provisions for these expenses are made atthe time revenues are recognized.

 

We capitalize software development costs in accordance with Statementof Financial Accounting 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 oftechnological feasibility and the ongoing assessment of the recoverability ofthese costs requires considerable judgment by management with respect tocertain external factors including, but not limited to, anticipated futuregross product revenue, estimated economic life, and changes in software andhardware 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 to internal softwaredevelopment that could be capitalized under this statement were immaterial.

 

We provide for potentially uncollectible accounts receivable by use ofthe allowance method. The allowance is provided based upon a review of theindividual accounts outstanding, and our prior history of uncollectibleaccounts receivable. It is our practice to record an estimated allowance forsales returns and adjustments based on historical experience and to recordindividual charges for sales returns and adjustments directly to revenue asincurred.

 

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### **Comparison of the ThreeMonths Ended December 31, 2004 and December 31, 2003**

### ** **

*Revenues*.  Revenue for the three month period ended December 31,2004 (the “reporting period”) rose 28% to $1,440,312, compared to revenue of$1,127,324 for the three month period ended December 31, 2003 (the“comparable period”).  Our product salesincreased by 25% and services revenue increased by 38% over the comparableperiod.  We believe that the increase inrevenue is primarily due to increased investments in sales personnel andmarketing programs which increased our revenue volume.

 

*Gross Profit*.  Gross profit as a percentage of revenuesincreased to 57% in the reporting period, compared to 56% in the comparableperiod.  The gross profit percentage onproduct sales was unchanged over the comparable period and the gross profitpercentage on services revenue increased by 7% over the comparable period.  The increase in the gross profit percentageon services revenue is due to the 38% increase in services revenue whilelimiting the cost of services increase to only 21%.

 

The change in the gross profit percentage on products is within ournormal range of gross profit percentages. Our gross profit percentage on products is typically between 55% to 60%depending upon the mix of software versus hardware sales and the makeup ofhardware sales.  Our product revenue iscomprised of software and hardware sales, with hardware sales yielding asignificantly lower gross profit than software sales.  Hardware revenue is principally comprised oftwo versions of general data collection terminals, badge terminals andbiometric units.  The gross profit isgreater on badge terminals than biometric units because we add value to ourbadge terminals by installing software on the terminals.

 

*Expenses*.  Total costs and expenses were $1,058,937, or74% of revenues, in the reporting period, compared to $896,128, or 80% ofrevenues, in the comparable period.  Theincrease in costs and expenses in the reporting period is primarily due to a68% increase in research and development expenses in the current period. Salesand marketing expenses were $461,442, or 32% of revenues, in the reportingperiod, compared to $469,383, or 42% of revenues, in the comparable period.Research and development expenses were $337,946, or 24% of revenues, in thereporting period, compared to $201,073, or 18% of revenues, in the comparableperiod.  The increase in research anddevelopment expenses is primarily attributable to the hiring of additionaltechnology personnel to assist in generating new technologies for the Company.General and administrative expenses were $259,549, or 18% of revenues, in thereporting period, compared to $225,672, or 20% of revenues, in the comparableperiod.

 

### **Comparison of the SixMonths Ended December 31, 2004 and December 31, 2003**

### ** **

*Revenues*.  Revenue for the six month period ended December 31,2004 (the “reporting period”) rose 28% to $2,894,137, compared to revenue of$2,253,721 for the six month period ended December 31, 2003 (the“comparable period”).  Our product salesincreased by 18% and services revenue increased by 67% over the comparableperiod.  We believe that the increase inrevenue is primarily due to increased investments in sales personnel andmarketing programs which increased our revenue volume.  The increase in services revenue was drivenby a large service order in the first quarter.

 

*Gross Profit*.  Gross profit as a percentage of revenuesincreased to 59% in the reporting period, compared to 55% in the comparableperiod.  The gross profit percentage onproduct sales increased by 1% over the comparable period and the gross profitpercentage on services revenue increased by 16% over the comparableperiod.  The increase in the gross profitpercentage on services revenue is due to the 67% increase in services revenuewhile limiting the cost of services increase to only 22%.

 

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The change in the gross profit percentage on products is within ournormal range of gross profit percentages. Our gross profit percentage on products is typically between 55% to 60%depending upon the mix of software versus hardware sales and the makeup ofhardware sales.  Our product revenue iscomprised of software and hardware sales, with hardware sales yielding asignificantly lower gross profit than software sales.  Hardware revenue is principally comprised oftwo versions of general data collection terminals, badge terminals andbiometric units.  The gross profit isgreater on badge terminals than biometric units because we add value to ourbadge terminals by installing software on the terminals.

 

*Expenses*.  Total costs and expenses were $2,046,391, or71% of revenues, in the reporting period, compared to $1,642,701, or 73% ofrevenues, in the comparable period.  Theincrease in costs and expenses in the reporting period is primarily due to a68% increase in research and development expenses in the current period. Salesand marketing expenses were $925,545, or 32% of revenues, in the reportingperiod, compared to $859,675, or 38% of revenues, in the comparable period.Research and development expenses were $625,718, or 22% of revenues, in the reportingperiod, compared to $372,703, or 17% of revenues, in the comparableperiod.  The increase in research anddevelopment expenses is primarily attributable to the hiring of additionaltechnology personnel to assist in generating new technologies for the Company.General and administrative expenses were $495,128, or 17% of revenues, in thereporting period, compared to $410,323, or 18% of revenues, in the comparableperiod.

 

# **Liquidityand Capital Resources**

# ** **

At December 31, 2004, we had working capital of $489,776, comparedto $866,123 at December 31, 2003. Cash and cash equivalents at those dates amounted to $1,268,660 and$978,898, respectively.  We have fundedour operations for the past six years primarily through a combination of salesof equity securities and debt financing.

 

*Operations*.  Net cash from operations improved to $64,850provided in the reporting period, compared to net cash used by operations of$646,349 in the comparable period.  Thenet cash provided in the current period was primarily attributable to increasesin deferred revenue and accrued liablilites and was offset by the net loss andincreases in inventory and accounts receivable.

 

*Investment Activities*.  For the reporting period, we used $136,598 topurchase property and equipment, compared to $74,464 of property and equipmentpurchases in the comparable period.

 

*Financing Activities.*  For the reporting period, we used $718,521 infinancing activities primarily due to repayment of debt.  In the comparable period, we generated$1,453,916 in financing activities primarily due to proceeds from issuance ofcommon stock.

 

Our liquidity is affected by manyfactors, some based on the normal ongoing operations of the business and othersrelated to the uncertainties of the time and attendance industry and globaleconomies.  Although our cashrequirements will fluctuate based on the timing and extent of these factors, webelieve that our current cash reserves, cash generated from operations, and ourborrowing capacity under our two credit facilities, will be sufficient tosatisfy commitments for capital expenditures and other cash requirements forthe next 12 months.  We may, however,seek to obtain additional capital through a line of credit at a financialinstitution or through additional debt or equity offerings during this timeperiod.  The raising of additionalcapital in public or private markets will primarily be dependent uponprevailing

 

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market conditions and the demand 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.

 

**Item 3. Controls and Procedures.**

 

As ofthe end of the period covered by this report, the Company carried out anevaluation, under the supervision and with the participation of its ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of theCompany’s disclosure controls and procedures. Disclosure controls and proceduresare designed to ensure that information required to be disclosed in theperiodic reports filed or submitted under the Securities Exchange Act of 1934is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms. Basedupon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures were effectiveas of the end of the quarterly period covered by this report.  No change in the internal control overfinancial reporting occurred during the last fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, the internal controlover financial reporting.

 

# **FORWARD-LOOKINGINFORMATION**

# ** **

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), which the Company believes are within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended.  The forward-looking statements containedherein are based on current expectations that 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 thereonor comparable 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 – OTHER INFORMATION**

##### ** **

**Item1. 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.

 

**Item6. Exhibits**

** **

(a)                               Thefollowing exhibits are filed herewith pursuant to Regulation S-B.

 
| **No.** | ** ** | **Description**                                            |
|---------|------------|------------------------------------------------------------|
|    |       |                                                       |
| 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**

 

In accordance with the requirements of the Securities Exchange Act of1934, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                          | TIME AMERICA, INC.             |
|-------------------------------|--------------------------------|
|                          |                           |
|                          |                           |
| Dated: February 14, 2005 |                           |
|                          | By                             | /s/ Craig J. Smith |   |
|                          | Craig J. Smith                 |
|                          | Chief Financial Officer        |
|                          | (Principal Accounting Officer) |

 

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