**U.S. SECURITIES AND EXCHANGECOMMISSION**

**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  March 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 as  specified in its charter)                  |
|                                                                                |   |   |
| **Nevada**                                                                          |   | **13-3465289** |
| (State or other jurisdiction of  incorporation of organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                |   |   |
| **51 West Third Street, Suite 310, Tempe,  Arizona 85281**                          |
| (Address of principal executive offices)                                            |
|                                                                                |   |   |
| **(480) 296-0400**                                                                  |
| (Issuer’s telephone number)                                                    |
|                                                                                |   |   |
| **N/A**                                                                             |
| (Former name, former address and former  fiscal year, if changed since last report) |

 

Check whether the issuer: (1) filed all reports required to be filed 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 90days.     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 May 6, 2004, the issuerhad outstanding 13,596,052 shares of Common Stock, par value $.005 per share.

 

Transitional Small Business Disclosure Format:   Yes     o     No     ý

 

 

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**PART I – FINANCIAL INFORMATION**

 

**Item 1 – Financial Statements.**

 

**TIMEAMERICA, INC. AND SUBSIDIARY**

CONSOLIDATED BALANCE SHEETS

 
|                                                                                                                  |   | **March 31,  2004** |      | **June 30,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-----------|-------------------------|--------|
|                                                                                                                  |   | **(Unaudited)**          |      |                    |   |
| **ASSETS**                                                                                                            |   |                     |      |                    |   |
| **Current Assets:**                                                                                                   |   |                     |      |                    |   |
| Cash and cash equivalents                                                                                             |   | $                        | 2,320,742 |                    | $      | 245,795 |   |
| Accounts receivable – trade, net                                                                                 |   | 870,113                  |      | 551,576                 |   |
| Inventory                                                                                                             |   | 345,086                  |      | 232,815                 |   |
| Prepaid expenses and other current assets                                                                             |   | 151,697                  |      | 34,451                  |   |
|                                                                                                                  |   |                     |      |                    |   |
| **Total Current  Assets**                                                                                             |   | 3,687,638                |      | 1,064,637               |   |
|                                                                                                                  |   |                     |      |                    |   |
| **Property and  equipment, net**                                                                                      |   | 160,017                  |      | 115,633                 |   |
| **Other Assets**                                                                                                      |   | 199,800                  |      | —                  |   |
|                                                                                                                  |   |                     |      |                    |   |
| **Total Assets**                                                                                                      |   | $                        | 4,047,455 |                    | $      | 1,180,270 |   |
|                                                                                                                  |   |                     |      |                    |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)**                                                              |   |                     |      |                    |   |
|                                                                                                                  |   |                     |      |                    |   |
| **Current  Liabilities:**                                                                                             |   |                     |      |                    |   |
| Current portion of long-term debt                                                                                     |   | $                        | 710,223   |                    | $      | 283,148 |   |
| Accounts payable                                                                                                      |   | 312,559                  |      | 272,129                 |   |
| Accrued liabilities                                                                                                   |   | 264,804                  |      | 209,288                 |   |
| Deferred revenue                                                                                                      |   | 337,829                  |      | 250,012                 |   |
|                                                                                                                  |   |                     |      |                    |   |
| **Total Current  Liabilities**                                                                                        |   | 1,625,415                |      | 1,014,577               |   |
|                                                                                                                  |   |                     |      |                    |   |
| **Long-term debt,  less current portion**                                                                             |   | 1,961,687                |      | 597,505                 |   |
|                                                                                                                  |   |                     |      |                    |   |
| **Total Liabilities**                                                                                                 |   | 3,587,102                |      | 1,612,082               |   |
|                                                                                                                  |   |                     |      |                    |   |
| **Commitments:**                                                                                                      |   | —                   |      | —                  |   |
|                                                                                                                  |   |                     |      |                    |   |
| **Stockholders’  Equity (Deficit):**                                                                             |   |                     |      |                    |   |
| Common stock, $.005 par value, 50,000,000  shares authorized; 13,571,052 and 10,656,057 shares issued and outstanding |   | 67,855                   |      | 53,280                  |   |
| Contributed capital                                                                                                   |   | 7,969,921                |      | 6,338,351               |   |
| Accumulated deficit                                                                                                   |   | (7,577,423               | )         | (6,823,443              | )      |
|                                                                                                                  |   |                     |      |                    |   |
| **Total Stockholders’  Equity (Deficit)**                                                                        |   | 460,353                  |      | (431,812                | )      |
|                                                                                                                  |   |                     |      |                    |   |
| **Total Liabilities  and Stockholders’ Equity (Deficit)**                                                        |   | $                        | 4,047,455 |                    | $      | 1,180,270 |   |

 

See Notes to Consolidated FinancialStatements

 

2

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**TIME AMERICA, INC. AND SUBSIDIARY**

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 
|                                               |   | **Three  Months Ended  March 31,** |      | **Nine  Months Ended  March 31,** |   |
|----------------------------------------------------|--------|-----------------------------------------|-----------|----------------------------------------|--------|
|                                               |   | **2004**                                |      | **2003**                               |   | **2004** |   | **2003** |   |
|                                               |   |                                    |      |                                   |   |   |   |   |   |
| **Revenues:**                                      |   |                                    |      |                                   |   |   |   |   |   |
| Product sales                                      |   | $                                       | 1,009,733 |                                   | $      | 785,132 |   | $ | 2,775,372 |   | $ | 2,505,350 |   |
| Services revenue                                   |   | 296,374                                 |      | 220,174                                |   | 784,456 |   | 644,957 |   |
|                                               |   |                                    |      |                                   |   |   |   |   |   |
| **Total Revenues**                                 |   | 1,306,107                               |      | 1,005,306                              |   | 3,559,828 |   | 3,150,307 |   |
|                                               |   |                                    |      |                                   |   |   |   |   |   |
| **Cost of Revenues:**                              |   |                                    |      |                                   |   |   |   |   |   |
| Product                                            |   | 435,860                                 |      | 353,078                                |   | 1,165,606 |   | 1,030,831 |   |
| Services                                           |   | 158,553                                 |      | 129,895                                |   | 447,143 |   | 385,550 |   |
|                                               |   |                                    |      |                                   |   |   |   |   |   |
| **Total Cost of  Revenues**                        |   | 594,413                                 |      | 482,973                                |   | 1,612,749 |   | 1,416,381 |   |
|                                               |   |                                    |      |                                   |   |   |   |   |   |
| **Gross Profit**                                   |   | 711,694                                 |      | 522,333                                |   | 1,947,079 |   | 1,733,926 |   |
|                                               |   |                                    |      |                                   |   |   |   |   |   |
| **Costs and Expenses:**                            |   |                                    |      |                                   |   |   |   |   |   |
| Sales and marketing                                |   | 522,195                                 |      | 216,746                                |   | 1,381,869 |   | 768,752 |   |
| Research and development                           |   | 250,879                                 |      | 147,506                                |   | 623,583 |   | 480,373 |   |
| General and administrative                         |   | 228,875                                 |      | 173,011                                |   | 639,198 |   | 516,466 |   |
|                                               |   |                                    |      |                                   |   |   |   |   |   |
| **Total Costs and  Expenses**                      |   | 1,001,949                               |      | 537,263                                |   | 2,644,650 |   | 1,765,591 |   |
|                                               |   |                                    |      |                                   |   |   |   |   |   |
| **Net Loss from  Operations**                      |   | (290,255                                | )         | (14,930                                | )      | (697,571 | ) | (31,665 | ) |
|                                               |   |                                    |      |                                   |   |   |   |   |   |
| **Other Income (Expense):**                        |   |                                    |      |                                   |   |   |   |   |   |
| Interest expense                                   |   | (21,021                                 | )         | (19,630                                | )      | (59,666 | ) | (58,992 | ) |
| Other                                              |   | —                                  |      | 81                                     |   | (7 | ) | 122 |   |
| Interest income                                    |   | 1,561                                   |      | 6                                      |   | 3,264 |   | 1,115 |   |
|                                               |   |                                    |      |                                   |   |   |   |   |   |
|                                               |   | (19,460                                 | )         | (19,543                                | )      | (56,409 | ) | (57,755 | ) |
|                                               |   |                                    |      |                                   |   |   |   |   |   |
| **Net Loss**                                       |   | $                                       | (309,715  | )                                      | $      | (34,473 | ) | $ | (753,980 | ) | $ | (89,420 | ) |
|                                               |   |                                    |      |                                   |   |   |   |   |   |
| **Basic Loss per  Share**                          |   | $                                       | (0.02     | )                                      | $      | (0.00 | ) | $ | (0.06 | ) | $ | (0.01 | ) |
|                                               |   |                                    |      |                                   |   |   |   |   |   |
| **Weighted Average  Number of Shares Outstanding** |   | 13,548,799                              |      | 9,219,902                              |   | 12,608,561 |   | 9,194,268 |   |

 

See Notes to Consolidated FinancialStatements

 

3

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#### **TIME AMERCIA, INC.AND SUBSIDIARY**

CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY (DEFICIT)FOR THE YEAR ENDED JUNE 30, 2003 ANDTHE NINE MONTH PERIOD ENDED MARCH 31, 2004 (Unaudited)

 
|                                  |   | **Common  Stock** |   | **Contributed  Capital** |   | **Accumulated  Deficit** |   | **Total**  |   |
|---------------------------------------|--------|-------------------|--------|--------------------------|--------|--------------------------|--------|------------|--------|
|                                  |   | **Shares**        |   | **Amount**               |   |
|                                  |   |              |   |                     |   |                     |   |       |   |   |   |
| Balance at June 30, 2002         |   | 9,105,828         |   | $                        | 45,529 |                     | $      | 6,052,120  |   | $ | (6,670,715 | ) | $ | (573,066 | ) |
|                                  |   |              |   |                     |   |                     |   |       |   |   |   |
| Issuance of common stock for services |   | 161,340           |   | 807                      |   | 43,175                   |   | —     |   | 43,982 |   |
| Sale of common stock                  |   | 1,388,889         |   | 6,944                    |   | 243,056                  |   | —     |   | 250,000 |   |
| Net loss                              |   | —            |   | —                   |   | —                   |   | (152,728   | )      | (152,728 | ) |
| 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             |   | 5,496             |   | 27                       |   | 2,071                    |   | —     |   | 2,098 |   |
| Issuance of common stock warrants     |   | —            |   | —                   |   | 99,200                   |   | —     |   | 99,200 |   |
| Issuance of common stock for services |   | 25,000            |   | 125                      |   | 27,375                   |   | —     |   | 27,500 |   |
| Sale of common stock                  |   | 2,736,999         |   | 13,685                   |   | 1,474,162                |   | —     |   | 1,487,847 |   |
| Net loss                              |   | —            |   | —                   |   | —                   |   | (753,980   | )      | (753,980 | ) |
| Balance at March 31, 2004        |   | 13,571,052        |   | 67,855                   |   | 7,969,921                |   | (7,577,423 | )      | 460,353 |   |
|                                       |        |                   |        |                          |        |                          |        |            |        |  |  |  |  |  |  |

 

See Notes to Consolidated FinancialStatements

 

4

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#### **TIME AMERICA, INC.AND SUBSIDIARY**

CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)

 
|                                                                                  |   | **Nine  Months Ended  March 31,** |      |
|---------------------------------------------------------------------------------------|--------|----------------------------------------|-----------|
|                                                                                  |   | **2004**                               |      | **2003** |   |
| **Increase (Decrease)  in Cash and Cash Equivalents:**                                |   |                                   |      |   |   |
| **Cash flows from  operating activities:**                                            |   |                                   |      |   |   |
| Net income (loss)                                                                     |   | $                                      | (753,980  | ) | $ | (89,420 | ) |
| Adjustments to reconcile net income (loss)  to net cash used by operating activities: |   |                                   |      |   |   |
| Depreciation                                                                          |   | 43,912                                 |      | 46,652 |   |
| Common stock issued for services                                                      |   | 27,500                                 |      | 43,982 |   |
| Changes in Assets and Liabilities:                                                    |   |                                   |      |   |   |
| Accounts receivable-trade                                                             |   | (318,537                               | )         | 120,815 |   |
| Inventory                                                                             |   | (112,271                               | )         | (92,474 | ) |
| Prepaid expenses and other current assets                                             |   | (117,246                               | )         | 6,063 |   |
| Other assets                                                                          |   | (199,800                               | )         |   |   |
| Accounts payable                                                                      |   | 40,430                                 |      | 6,521 |   |
| Accrued liabilities                                                                   |   | 55,516                                 |      | (80,872 | ) |
| Deferred revenue                                                                      |   | 87,817                                 |      | (37,323 | ) |
| **Net cash used by  operating activities**                                            |   | (1,246,659                             | )         | (76,056 | ) |
|                                                                                  |   |                                   |      |   |   |
| **Cash flows from  investing activities:**                                            |   |                                   |      |   |   |
| Purchase of property and equipment                                                    |   | (88,296                                | )         | (23,173 | ) |
| **Net cash used by  investing activities**                                            |   | (88,296                                | )         | (23,173 | ) |
|                                                                                  |   |                                   |      |   |   |
| **Cash flows from  financing activities:**                                            |   |                                   |      |   |   |
| Repayment of capital leases                                                           |   | (12,142                                | )         | (17,589 | ) |
| Repayment of debt                                                                     |   | (97,401                                | )         | (88,383 | ) |
| Proceeds from debt                                                                    |   | 2,000,000                              |      | 150,000 |   |
| Proceeds from exercise of options and  warrants                                       |   | 31,598                                 |      | — |   |
| Proceeds from issuance of stock                                                       |   | 1,487,847                              |      | — |   |
| **Net cash provided  (used) by financing activities**                                 |   | 3,409,902                              |      | 44,028 |   |
|                                                                                  |   |                                   |      |   |   |
| Net change in cash and cash equivalents                                               |   | 2,074,947                              |      | (55,201 | ) |
|                                                                                  |   |                                   |      |   |   |
| Cash and cash equivalents at beginning of  period                                     |   | 245,795                                |      | 195,249 |   |
|                                                                                  |   |                                   |      |   |   |
| Cash and cash equivalents at end of period                                            |   | $                                      | 2,320,742 |   | $ | 140,048 |   |
|                                                                                  |   |                                   |      |   |   |
| **Supplemental  disclosure of cash flow information:**                                |   |                                   |      |   |   |
| Interest paid                                                                         |   | $                                      | 59,666    |   | $ | 62,966 |   |
| Income taxes paid                                                                     |   | $                                      | —    |   | $ | — |   |

 

See Notes to Consolidated FinancialStatements

 

5

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## **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

## ** **

**Basis of Presentationand Interim Consolidated Financial Statements**

 

The accompanyingunaudited consolidated financial statements of Time America, Inc. andsubsidiary (“Time America” or the “Company”) have been prepared in accordancewith generally accepted accounting principles (“GAAP”), pursuant to the rulesand regulations of the Securities and Exchange Commission, and areunaudited.  Accordingly, they do notinclude all the information and footnotes required by GAAP for completefinancial statements.  In the opinion ofmanagement, all adjustments (which include only normal recurring adjustments)necessary for a fair presentation of the results for the interim periodspresented have been made.  The resultsfor the nine month period ended March 31, 2004, may not be indicative ofthe results for the entire year.  Thesefinancial statements should be read in conjunction with the Company’s AnnualReport on Form 10-KSB for the fiscal year ended June 30, 2003.

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from theseestimates.

 

**Income (Loss) PerShare:**

 

Basic income (loss) pershare of common stock was computed by dividing the net income (loss) by theweighted average number of shares of common stock outstanding.

 

Diluted earnings pershare are computed based on the weighted average number of shares of commonstock and dilutive securities outstanding during the period.  Dilutive securities are options and warrantsthat are freely exercisable into common stock at less than the prevailingmarket price. Dilutive securities are not included in the weighted averagenumber of shares when inclusion would increase the earnings per share ordecrease the loss per share.

 

**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 as 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 valuemethodology. Had compensation cost for stock-based compensation been determinedbased on the 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 March 31,** |     | **Nine  Months Ended March 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|----------|---------------------------------------|--------|
|                                                                                                                                              |   | **2004**                               |     | **2003**                              |   | **2004** |   | **2003** |   |
|                                                                                                                                              |   |                                   |     |                                  |   |   |   |   |   |
| **Net loss:**                                                                                                                                     |   |                                   |     |                                  |   |   |   |   |   |
| As reported                                                                                                                                       |   | $                                      | (309,715 | )                                     | $      | (34,473 | ) | $ | (753,980 | ) | $ | (89,420 | ) |
|                                                                                                                                              |   |                                   |     |                                  |   |   |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under the fair value based method for all  awards, net of related tax effects |   | (67,205                                | )        | (63,647                               | )      | (92,243 | ) | (89,330 | ) |
|                                                                                                                                              |   |                                   |     |                                  |   |   |   |   |   |
| Pro forma                                                                                                                                         |   | $                                      | (376,920 | )                                     | $      | (98,120 | ) | $ | (846,223 | ) | $ | (178,750 | ) |
|                                                                                                                                              |   |                                   |     |                                  |   |   |   |   |   |
| **Loss per share:**                                                                                                                               |   |                                   |     |                                  |   |   |   |   |   |
| As reported                                                                                                                                       |   | $                                      | (0.02    | )                                     | $      | (0.00 | ) | $ | (0.06 | ) | $ | (0.01 | ) |
| Pro forma                                                                                                                                         |   | $                                      | (0.03    | )                                     | $      | (0.01 | ) | $ | (0.07 | ) | $ | (0.02 | ) |

 

The fair value ofoption grants is estimated as of the date of grant utilizing the Black-Scholesoption-pricing model with the following weighted average assumptions for allgrants, expected life of options of three (3) years, risk-free interest ratesof seven percent (7%), volatility at twenty five percent (25%) to fifty percent(50%), and a zero percent (0%) dividend yield.

 

**Long-term Debt:**

 

In January 2004, the Company and a shareholderagreed to extend the term of its $400,000 line of credit facility toDecember 31, 2005.  All other termsof the agreement remained unchanged.

 

On March 22, 2004, the Companyconsummated a private placement pursuant to which the Company issued a $2,000,000principal amount secured convertible term note due March 22, 2007 (the“Note”), together with a common stock purchase warrant entitling the holder topurchase 280,000 shares of common stock (the “Warrant”).  The Note and theWarrant were sold to a single “accredited investor” (as such term is defined inthe rules promulgated under the Securities Act of 1933, as amended (the“Act”)), Laurus Master Fund, Ltd. (“Laurus”), for a purchase price of$2,000,000.  The principal and unpaid interest on the Note are convertibleinto shares of the Company’s common stock at a price of $1.17 per share (the“Fixed Conversion Price”), which was based on the weighted average price of theCompany’s common stock for the twenty trading days immediately prior to the issuanceof the Note.  Such conversion price is subject to antidilution adjustmentsbased on the occurrence of certain corporate events.

 

The Note provides for monthly payments ofinterest at the prime rate, which is subject to reduction if the market priceof the Company’s common stock exceeds certain designated thresholds.  TheNote also provides for monthly amortization, commencing on June 1, 2004through February 1, 2005, of $30,000 per month, $50,000 per month from March 1, 2005 through May1, 2005, $72,083 per month from June 1, 2005 through November 1, 2006and $94,167 per month from December 2006 through February 2007.  Laurus has the option to receive shares ofthe Company’s common stock in lieu of debt service payments at the then FixedConversion Price.  The Note is secured by a first priority lien on all ofthe assets of the Company.

 

7

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The Warrant entitles the holder thereof to purchase, at any timethrough March 22, 2011:  200,000 shares of the Company’s common stockat a price of $1.29 per share; 40,000 shares of the Company’s common stock at aprice of $1.35 per share; and 40,000 shares of the Company’s common stock at aprice of $1.40 per share.

 

Pursuant to a Registration Rights Agreement (the “Registration RightsAgreement”) entered into between the Company and Laurus, the Company isobligated to: (a) file a registration statement under the Act to register theresale of the shares of the Company’s common stock issuable upon conversion ofthe Note and exercise of the Warrant (the “Registration Statement”) within 45days of the date of the funding with respect to the Note; (b) use its bestefforts to have the Registration Statement declared effective under the Act aspromptly as possible, but in any event prior to the 90th dayfollowing the funding of the Note; and (c) maintain the effectiveness of theRegistration Statement until the earlier date of when (i) all registrablesecurities have been sold or (ii) all registrable securities may be sold immediatelywithout registration under the Act and without volume restrictions pursuant toRule 144(k).  Laurus, or other holders of the Note and the Warrant,are entitled to certain specified remedies if the Company does not timelycomply with its registration obligations.

 

The privateplacement of the Note and the Warrant with Laurus was facilitated by The OberonGroup, LLC (“Oberon”) in consideration for which Oberon was paid an advisoryfee of $150,000, which has been recorded as a deferred financing charge.

 

The net proceeds from the private placement of the Note and the Warrantapproximated $1,745,000, and will be used by the Company for working capitalpurposes, including possible investment in related businesses or products.

 

On March 22, 2004, the Company entered into a subordinated noteagreement with a shareholder and existing debt holder.  Under the terms of the agreement, anexisting term note was refinanced as a five year term note with monthlyprincipal and interest payments at 15%. In consideration for agreeing to subordinate repayment of the note tothe Laurus convertible term note, the Company issued 25,000 shares ofrestricted common stock to the holder of the subordinated note.

 

**Stockholders’ Equity:**

 

InAugust 2003, the Company completed a private placement of 1,303,000 sharesof common stock at a price of $0.42 per share. The Company received netproceeds of $519,897 and has used those funds primarily for additional salesand engineering resources.

 

InNovember 2003, the Company completed a private placement of 1,433,999shares of common stock at a price of $0.75 per share. The Company received netproceeds of $967,950 and is using those funds primarily for additional salesand engineering resources.

 

8

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**Item 2. Management’s Discussion And Analysis Or Plan Of Operation.**

** **

### **CriticalAccounting Policies**

### ** **

Our significant accounting policies are described in the auditedconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-KSB for the year ended June 30, 2003.  We believe our most critical accountingpolicies are revenue recognition, software development costs and the allowancefor potentially uncollectible accounts receivable.

 

The Company derives its revenues from the sale of frontline labormanagement systems as well as sales of application software, parts andcomponents.  The Company’s systemsconsist of fully integrated software and intelligent data collectionterminals.  The Company also derives revenuesby providing maintenance, professional and educational services to itscustomers.   The Company recognizesrevenues from sales of its systems, application software, parts and componentsat the time of shipment, unless the Company has significant obligationsremaining.  When significant obligationsremain, revenue is not recognized until such obligations have been completed orare no longer significant.  The Companyrecognizes revenues from its sales-type leases of systems at time ofshipment.  Service revenues arerecognized ratably over the contractual period or as the services areperformed.

 

The Company provides installation services and certain warranties toits customers. It also provides, without additional charge, certain softwareproduct enhancements for customers covered under software maintenancecontracts.  The provision for theseexpenses are made at the time revenues are recognized.

 

The Company capitalizes software development costs in accordance withStatement of Financial Accounting Standards No. 86, “Accounting for the Costsof Computer Software to be Sold, Leased, or Otherwise Marketed.” Capitalizationof software development costs begins upon the establishment of technologicalfeasibility of the product.  Theestablishment of technological feasibility and the ongoing assessment of therecoverability of these costs requires considerable judgment by management withrespect to certain external factors including, but not limited to, anticipatedfuture gross product revenue, estimated economic life, and changes in softwareand hardware technology.  Amortizationof capitalized software development costs begins when the products areavailable for general release to customers and is computed on a product-by-productbasis using straight-line amortization with useful lives of five years or, ifless, the remaining estimated economic life of the product.  Amounts related to internal softwaredevelopment that could be capitalized under this statement were immaterial.

 

The Company provides for potentially uncollectible accounts receivableby use of the allowance method. The allowance is provided based upon a reviewof the individual accounts outstanding, and the Company’s prior history ofuncollectible accounts receivable. It is the Company’s practice to record anestimated allowance for sales returns and adjustments based on historicalexperience and to record individual charges for sales returns and adjustmentsdirectly to revenue as incurred.

 

### **Comparison of theThree Months Ended March 31, 2004 and March 31, 2003**

### ** **

*Revenues*. Revenue for the three month period ended March 31, 2004 (the“reporting period”) rose 30% to $1,306,107, compared to revenue of $1,005,306for the three month period ended March 31, 2003 (the “comparableperiod”).  The Company’s product salesincreased by 29% and services revenue increased

 

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by 35% over the comparable period. The Company believes that the increases are primarily due to increasedinvestments in sales personnel and marketing programs.

 

*Gross Profit*. Gross profit as a percentage of revenues increased to 55% in thereporting period, compared to 52% in the comparable period.  The gross profit percentage on product salesincreased by 2% over the comparable period and the gross profit percentage onservices revenue increased by 6% over the comparable period.

 

The change in the gross profit percentage on products is within theCompany’s normal range of gross profit percentages.  The Company’s gross profit percentage on products is typicallybetween 55% to 60% depending upon the mix of software versus hardware sales andthe makeup of hardware sales.  TheCompany’s product revenue is comprised of software and hardware sales, withhardware sales yielding a significantly lower gross profit than softwaresales.   Hardware revenue is principallycomprised of two versions of general data collection terminals, badge terminalsand biometric units.  Our gross profitis greater 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 $1,001,949, or 77% of revenues, in thereporting period, compared to $537,263, or 53% of revenues, in the comparableperiod.  The increase in the costs andexpenses as a percentage of revenue in the reporting period is primarily due toa 141% increase in sales and marketing expenses in the current period. Salesand marketing expenses were $522,195, or 40% of revenues, in the reportingperiod, compared to $216,746, or 22% of revenues, in the comparableperiod.  In August andNovember 2003, we closed private placement offerings that yielded netproceeds of $1,487,847.  The primary useof proceeds of those funds was to finance key marketing initiatives and addsales personnel.  We do not expectreturns in the short term on these investments.  Research and development expenses were $250,879, or 19% ofrevenues, in the reporting period, compared to $147,506, or 15% of revenues, inthe comparable period.  The increase inresearch and development expenses is primarily attributable to the hiring ofadditional technology personnel to assist in generating new technologies forthe Company.  General and administrativeexpenses were $228,875, or 18% of revenues, in the reporting period, comparedto $173,011, or 17% of revenues, in the comparable period.  The increase in general and administrativeexpenses is primarily attributable to expenses associated with the preparationof a registration statement for filing with the Securities and ExchangeCommission and maintaining an outside investor relations program in thereporting period that were not present in the comparable period.

 

### **Comparison of theNine Months Ended March 31, 2004 and March 31, 2003**

### ** **

*Revenues*. Revenue for the nine month period ended March 31, 2004 (the“reporting period”) rose 13% to $3,559,828, compared to revenue of $3,150,307for the nine month period ended March 31, 2003 (the “comparableperiod”).  The Company’s product salesincreased by 11% and services revenue increased by 22% over the comparableperiod.  The Company believes that theincreases are primarily due to increased investments in sales personnel andmarketing programs.

 

*Gross Profit*. Gross profit as a percentage of revenues remained steady at 55% in thereporting and comparable period.  Thegross profit percentage on product sales decreased by 1% over the comparableperiod and the gross profit percentage on services revenue increased by 3% overthe comparable period.

 

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The explanation for the change in the gross profit is the same asdiscussed above in the three month comparison of our financial results

 

# ***Expenses***.  Total costs and expenses were$2,644,650, or 74% of revenues, in the reporting period, compared to$1,765,591, or 56% of revenues, in the comparable period.  The increase in the costs and expenses as apercentage of revenue in the reporting period is primarily due to an 80%increase in sales and marketing expenses in the current period. Sales andmarketing expenses were $1,381,869, or 39% of revenues, in the reportingperiod, compared to $768,752, or 24% of revenues, in the comparableperiod.  In August andNovember 2003, we closed private placement offerings that yielded net proceedsof $1,487,847.  The primary use ofproceeds from these financing transactions was to fund key marketinginitiatives and add sales personnel in which we do not expect returns in theshort term.  Research and developmentexpenses were $623,583, or 18% of revenues, in the reporting period, comparedto $480,373, or 15% of revenues, in the comparable period.  The increase in research and developmentexpenses is due to the Company hiring additional technology personnel to assistthe Company in generating new technologies. General and administrative expenseswere $639,198, or 18% of revenues, in the reporting period, compared to$516,466, or 16% of revenues, in the comparable period.  The increase in general andadministrative expenses is primarily attributable to expenses associated withthe preparation of a registration statement and maintaining an outside investorrelations program in the reporting period that were not present in thecomparable period.

# ** **

# **Liquidity and Capital Resources**

# ** **

At March 31, 2004, the Company had working capital of $2,062,223,compared to $107,059 at March 31, 2003. Cash and cash equivalents at those dates amounted to $2,320,742 and$140,048, respectively.  The Company hasfunded its operations for the past six years through a combination of sales ofequity securities, debt financing and cash flows from operations.

 

*Operations*. Net cash used by operations increased to $1,246,659 in the reportingperiod, compared to net cash used by operations of $76,056 in the comparableperiod.  The net cash used in thecurrent period was primarily attributable to the net loss along with increasesin accounts receivable, inventory, prepaid and other current assets and otherassets.  [Prepaid what?]

 

*Investment Activities*.  For the reporting period, the Company used$88,296 to purchase property and equipment, compared to $23,173 of property andequipment purchases in the comparable period. Major purchases in the period included a new trade show booth.

 

*Financing Activities.*  For the reporting period the Companygenerated $3,409,902 in financing activities primarily due to proceeds from theissuance of convertible notes and common stock in private placementtransactions.  In the comparable period,the Company generated $44,028 in financing activities primarily due to proceedsfrom debt.

 

The Company’s liquidity is affected by many factors, some based on thenormal ongoing operations of the business and others related to theuncertainties of the time and attendance industry and global economies.  Although the Company’s cash requirementswill fluctuate based on the timing and extent of these factors, managementbelieves that cash generated from operations, together with the Company’sborrowing capacity under its two credit facilities, will be sufficient tosatisfy commitments for capital expenditures and other cash requirements forthe next 12 months.  The Company may,however, seek to

 

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obtain additionalcapital through a line of credit at a financial institution or throughadditional debt or equity offerings during this time period.  The raising of additional capital in publicor private markets will primarily be dependent upon prevailing marketconditions and the demand for the Company’s products and services.  No assurance can be given that the Companywill be able to raise additional capital, when needed or at all, or that suchcapital, if available, will be on acceptable terms.

 

**Item3. Controls and Procedures.**

 

As of the end of the period covered by thisreport, the Company carried out an evaluation, under the supervision and withthe participation of its Chief Executive Officer and Chief Financial Officer,of the effectiveness of the Company’s disclosure controls and procedures.Disclosure controls and procedures are designed to ensure that informationrequired to be disclosed in the periodic reports filed or submitted under theSecurities and Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms. Based upon that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company’s disclosurecontrols and procedures were effective as of the end of the quarterly period coveredby this report.  No change in theinternal control over financial reporting occurred during the last fiscalquarter that has materially affected, or is likely to materially affect, theinternal control over financial reporting.

 

# **FORWARD-LOOKING INFORMATION**

# ** **

The statements contained in this Quarterly Report on Form 10-QSB thatare not historical fact are forward-looking statements (as such term is definedin the Private Securities Litigation Reform Act of 1995), which the Companybelieves are within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended.  The forward-lookingstatements contained herein are based on current expectations that involve anumber of risks and uncertainties. These statements can be identified by the use of forward-lookingterminology 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 the Company and the resultsachieved during the period covered by any particular projections orforward-looking statements may differ substantially from those projected.  Consequently, the inclusion of projectionsand other forward-looking statements should not be regarded as a representationby the Company or any other person that these estimates and projections will berealized, and actual results may vary materially.  There can be no assurance that any of these expectations will berealized or that any of the forward-looking statements contained herein willprove to be accurate.

 

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##### **PART II – OTHER INFORMATION**

##### ** **

**Item 1. Legal Proceedings.**

 

The Company is from time to time involved inlegal proceedings arising from the normal course of business.   As of the date of this report, the Companyis not currently involved in any legal proceedings.

 

### **Item 2. Changes inSecurities.**

### ** **

In March 2004, the Company entered intoa subordinated note agreement with a shareholder and existing debt holder.  Under the terms of the agreement, anexisting term note was refinanced as a five year term note with monthlyprincipal and interest payments at 15%. In consideration for subordinating repayment for the note to the Laurusconvertible term note, the Company issued 25,000 shares of the restrictedcommon stock to the subordinated note holder. The common stock was issued in reliance on the exemption provided underSection 4(2) of the Securities Act of 1933, as amended, and Regulation Dthereunder.

 

In March 2004, the Company consummated aprivate placement pursuant to which the Company issued a $2,000,000 principalamount secured convertible term note due March 22, 2007 (the “Note”),together with a common stock purchase warrant entitling the holder to purchase280,000 shares of common stock (the “Warrant”).  The Note and the Warrantwere sold to a single “accredited investor” (as such term is defined in therules promulgated under the Securities Act of 1933, as amended (the “Act”)),Laurus Master Fund, Ltd. (“Laurus”), for a purchase price of $2,000,000. The principal and unpaid interest on the Note are convertible into shares ofthe Company’s common stock at a price of $1.17 per share (the “Fixed ConversionPrice”), which was based on the weighted average price of the Company’s commonstock for the twenty trading days immediately prior to the issuance of theNote.  Such conversion price is subject to antidilution adjustments basedon the occurrence of certain corporate events.

 

The Note provides for monthly payments of interest at the prime rate,which is subject to reduction if the market price of the Company’s common stockexceeds certain designated thresholds.  The Note also provides for monthlyamortization, commencing on June 1, 2004 through February 1, 2005,of  $30,000 per month, $50,000 per monthfrom March 1, 2005 through May 1, 2005, $72,083 per month fromJune 1, 2005 through November 1, 2006 and $94,167 per month fromDecember 2006 through February 2007. Laurus has the option to receive shares of the Company’s common stock inlieu of debt service payments at the then Fixed Conversion Price.  TheNote is secured by a first priority lien on all of the assets of the Company.

 

The Warrant entitles the holder thereof to purchase, at any timethrough March 22, 2011:  200,000 shares of the Company’s common stockat a price of $1.29 per share; 40,000 shares of the Company’s common stock at aprice of $1.35 per share; and 40,000 shares of the Company’s common stock at aprice of $1.40 per share.

 

Pursuant to a Registration Rights Agreement (the “Registration RightsAgreement”) entered into between the Company and Laurus, the Company isobligated to: (a) file a registration statement under the Act to register theresale of the shares of the Company’s common stock issuable upon conversion ofthe Note and exercise of the Warrant (the “Registration Statement”) within 45days of the date of the funding with respect to the Note; (b) use its bestefforts to have the Registration Statement declared effective under

 

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the Act as promptly as possible, but in any event prior to the 90thday following the funding of the Note; and (c) maintain the effectiveness ofthe Registration Statement until the earlier date of when (i) all registrablesecurities have been sold or (ii) all registrable securities may be soldimmediately without registration under the Act and without volume restrictionspursuant to Rule 144(k).  Laurus, or other holders of the Note and theWarrant, are entitled to certain specified remedies if the Company does nottimely comply with its registration obligations.

 

The private placementof the Note and the Warrant with Laurus was facilitated by The Oberon Group,LLC (“Oberon”) in consideration for which Oberon was paid an advisory fee of$150,000, which has been recorded as a deferred financing charge.

 

The net proceeds from the private placement of the Note and the Warrantapproximated $1,745,000, and will be used by the Company for working capitalpurposes, including possible investment in related businesses or products.

 

**Item 6. Exhibits And Reports On Form 8-K**

** **

(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                            |

 

(b)                                 Reportson Form 8-K

 

On February 6, 2004,the Company furnished a Current Report on Form 8-K under Item 12 thereof,containing a copy of its earnings release, dated February 5, 2004, for theperiod ended December 31, 2003.

 

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**SIGNATURES**

 

 

In accordance with the requirements of theSecurities Exchange Act of 1934, the registrant caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                       | TIME AMERICA, INC.             |
|----------------------------|--------------------------------|
|                       |
|                       |
| Dated:   May 14, 2004 |
|                       | By                             | /s/ Craig J. Smith |   |
|                       | Craig J. Smith                 |
|                       | Chief Financial Officer        |
|                       | (Principal Accounting Officer) |

 

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