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

**Washington, D.C. 20549**

 

**FORM 10-QSB**

**(AmendmentNo. 1)**

 

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

 

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

 

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

 

**For the transition period from                         to                          **

 

**Commission File number 001-10320**

 

**Time America, Inc.**

(Exact name of small businessissuer as specified in its charter)

 

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

 

**8840 EastChaparral Road, Suite 100, Scottsdale, AZ 85250**

(Address of principal executiveoffices)

 

**(480)296-0400**

(Issuer’s telephone number)

 

**N/A**

(Former name, former addressand former fiscal year, if changed since last report)

 

Check whether the issuer: (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes   x   No    o

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act.)   Yes   o   No   x

 

State the number of shares outstanding of each of the issuer’s classesof common equity, as of the latest practicable date: On July 27, 2006, theissuer had outstanding 15,004,404] shares of Common Stock, par value $.005 pershare.

 

Transitional Small Business Disclosure Format:  Yes o    No x

 

 

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**ExplanatoryNote**

 

We are filing this Amendment No. 1 to our Quarterly Report on Form 10-QSBfor the quarterly period ended March 31, 2006 for the purpose of amendingthe Consolidated Statements of Cash Flows presented in such quarterly report tocorrect certain errors in the report. The amendment relates to the accountingfor the sale of certain assets to Unitime Systems, Inc. effective March 31,2006, and affects the following line items in such Statements of CashFlow:  Accounts receivable-other; Netcash provided (used) by operating activities; Net cash used by investingactivities; and Gain on sale of assets. We have also updated Item 2 of Part I,Management’s Discussion and Analysis of Financial Condition and Results ofOperations, to give effect to the amendment. In addition, we have amendedItem 6 of Part II to reflect the filing of updated certificationspursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002, and we have filed certifications pursuant toRules 13a-14(a) and 15d-14(a) under the Securities Exchange Actof 1934, as amended. Other than the changes regarding the restatement andrelated disclosures, no other information in this Amendment No. 1 has beenupdated to reflect any subsequent information or events since the originalfiling of this Form 10-Q on May 10, 2006.

 

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**PART I– FINANCIAL INFORMATION**

 

**Item 1 – Financial Statements.**

 

**TIME AMERICA, INC.AND SUBSIDIARIES**

CONSOLIDATED BALANCE SHEETS

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

 

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

 

2

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

CONSOLIDATED STATEMENTS OFOPERATIONS

(UNAUDITED)

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

 

See Notes to ConsolidatedFinancial Statements

 

3

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

CONSOLIDATED STATEMENTS OFCHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEAR ENDED JUNE 30,2005 AND

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

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

 

See Notes to ConsolidatedFinancial Statements

 

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

CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)

 
| ** **                                                                   | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **March 31,**    | ** ** |
| ** **                                                                   | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **Increase (Decrease) in Cash and Cash  Equivalents:**                       | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Cash  flows from operating activities:**                                   | ** ** | ** **            | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                     | (1,761,850 | ) | $ | (794,259 | ) |
| Adjustments  to reconcile net loss to net cash used by operating activities: |       |                  |       |   |   |
| Depreciation                                                                 |       | 90,605                |       | 64,347 |   |
| Share based  compensation expense                                            |       | 113,730               |       | — |   |
| Common  stock, stock options and warrants issued for services                |       | 213,104               |       | 15,500 |   |
| Induced  conversion of debt charge                                           |       | 40,179                |       | — |   |
| Changes in  Assets and Liabilities:                                          |       |                  |       |   |   |
| Accounts  receivable-trade                                                   |       | (281,584              | )          | (271,444 | ) |
| Accounts  receivable-other                                                   |       | (530,428              | )          | — |   |
| Inventory                                                                    |       | (286,543              | )          | (83,501 | ) |
| Prepaid  expenses and other current assets                                   |       | (15,900               | )          | 72,452 |   |
| Other assets                                                                 |       | 72,180                |       | 84,079 |   |
| Accounts  payable                                                            |       | 128,623               |       | (52,859 | ) |
| Accrued  liabilities                                                         |       | 288,520               |       | 150,444 |   |
| Deferred  revenue                                                            |       | 129,203               |       | 463,615 |   |
| **Net cash  provided (used) by operating activities**                        |       | (1,800,161            | )          | (351,626 | ) |
|                                                                         |       |                  |       |   |   |
| **Cash  flows from investing activities:**                                   | ** ** | ** **            | ** ** | ** ** | ** ** |
| Purchase of  property and equipment                                          |       | (187,053              | )          | (240,649 | ) |
| **Net cash  used by investing activities**                                   |       | (187,053              | )          | (240,649 | ) |
|                                                                         |       |                  |       |   |   |
| **Cash  flows from financing activities:**                                   | ** ** | ** **            | ** ** | ** ** | ** ** |
| Repayment of  debt                                                           |       | (1,209,111            | )          | (841,376 | ) |
| Proceeds  from exercise of options and warrants                              |       | 1,600                 |       | 361 |   |
| Proceeds  from debt                                                          |       | 2,500,000             |       | — |   |
| **Net cash  provided (used) by financing activities**                        |       | 1,292,489             |       | (841,015 | ) |
|                                                                         |       |                  |       |   |   |
| Net change  in cash and cash equivalents                                     |       | (694,725              | )          | (1,433,290 | ) |
|                                                                         |       |                  |       |   |   |
| Cash and  cash equivalents at beginning of period                            |       | 1,361,717             |       | 2,058,929 |   |
|                                                                         |       |                  |       |   |   |
| Cash and  cash equivalents at end of period                                  |       | $                     | 666,992    |   | $ | 625,639 |   |
|                                                                         |       |                  |       |   |   |
| **Supplemental  disclosure of cash flow information:**                       | ** ** | ** **            | ** ** | ** ** | ** ** |
| Interest  paid                                                               |       | $                     | 201,254    |   | $ | 148,492 |   |
| Income taxes  paid                                                           |       | $                     | —     |   | $ | — |   |
|                                                                         |       |                  |       |   |   |
| **Noncash  investing and financing activities:**                             | ** ** | ** **            | ** ** | ** ** | ** ** |
| Conversion  of debt to equity                                                |       | $                     | 250,000    |   | $ | — |   |
| Gain on sale  of assets                                                      |       | $                     | 425,848    |   | $ | — |   |

 

See Notes to ConsolidatedFinancial Statements

 

5

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## **SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

## ** **

**Note A - Basis of Presentation and InterimConsolidated Financial Statements**

 

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

 

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

 

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

 

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

 

Diluted earnings per share are computed based on theweighted average number of shares of common stock and dilutive securitiesoutstanding during the period. 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.

 

**Note C- Stock Based Compensation:**

 

Prior to July 1,2005, the Company accounted for stock-based compensation arrangements inaccordance with the provisions of Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” (“APB 25”). Accordingly,compensation expense, if any, was measured as the excess of the underlyingstock price over the exercise price on the date of grant. The Company compliedwith the disclosure provisions of Statement of Financial Accounting StandardsBoard No. 123 (“SFAS 123”) “Accounting for Stock Based Compensation” asamended by SFAS 148 “Accounting for Stock-Based Compensation-Transition andDisclosure,” which required pro-forma disclosure of compensation expenseassociated with stock options under the fair value method.

 

Effective July 1,2005, the Company adopted the fair value recognition provisions of Statement ofFinancial Accounting Standards Board No. 123(R), “Share–Based Payment,”using the modified prospective-transition method. Under this transition method,compensation expense

 

6

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recognized for the nine months ended March 31 offiscal year 2006 includes:  (a) compensationexpense for all share-based payments granted prior to, but not yet vested as ofJune 30, 2005 based on the grant date fair value estimated and (b) compensationexpense for all share-based payments granted subsequent to June 30, 2005,based on the grant date fair value estimated in accordance with the provisionsof SFAS 123 (R). Results for prior periods have not been restated. The fair value of option grants is estimatedas of the date of grant utilizing the Black-Scholes option-pricing model andamortized to expense over the options’ vesting period.

 

As a result of adopting SFAS 123(R) on July 1, 2005, the Company’snet loss for the three month and nine month periods ended March 31, 2006is $10,163 and $113,730, respectively, higher than if it had continued toaccount for share-based compensation under APB 25.

 

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

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

 

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

 

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

 

Effective January 3, 2006, the Companyentered into a Security and Purchase Agreement with Laurus, which repaid the Company’s existingindebtedness with Laurus and replaced such indebtedness with the creditfacility evidenced by the Security and Pledge Agreement. Under the termsof the Security and Purchase Agreement, Laurus purchased from the Company aSecured Convertible Term Note in the aggregate principal amount of $2,000,000,and a Secured 

 

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Non-Convertible Revolving Note in the aggregate principal amount of$1,500,000. The transaction was a recapitalization of existing agreements withLaurus. The Term Note replaced an existing secured convertible term note issuedMarch 22, 2004 and the principal balance of $1,058,310 was paid in fullwith the proceeds of the Term Note. Gross proceeds received by the Companyunder the Term Note were $941,690. The Revolving Note replaced an existing$1,500,000 revolving facility that had an outstanding balance of $1,000,000that was paid in full with proceeds from the Revolving Note. The Company didnot receive any of the proceeds from the Revolving Note.

 

The Term Note has a three-year term and bears interest at 2% above theprime rate, with a minimum interest rate of 7.25%. The Term Note provides forprincipal repayment, in cash or stock, in thirty (30) equal monthlyinstallments of $66,666.67 commencing on July 1, 2006. Monthly principaland interest payments will be converted, subject to certain volume limitations,into shares of the Company’s common stock if the average market price of suchstock for the five (5) days preceding the payment due date is 10% abovethe initial fixed conversion price of $0.65 per share. The Company may notconvert any of its repayment obligations under the Term Note to common stockunless either there exists an effective registration statement covering theshares to be issued, or an exemption for the resale of all of the common stockissued and issuable under the Term Note is available under Rule 144 of theSecurities Act of 1933, as amended. The Company may redeem the Term Noteupon payment to Laurus of an amount equal to 115% of the outstanding principalbalance under the Term Note together with accrued but unpaid interest.

 

The Revolving Note has a two-year term, and bears interest at 2% abovethe prime rate, with a minimum interest rate of 7.25%. Availability under theRevolving Note is based on an advance rate equal to 90% of eligible accountsreceivable and 30% of inventory subject to a $1,000,000 cap. The Revolving Noteis subject to an early termination fee of 5% of the face amount of theRevolving Note in the first year, and 4% thereafter. If an event of defaultoccurs, Laurus may elect to require the Company and its subsidiaries tomake a default payment in an amount equal to125% of the outstanding principalamount of the Revolving Note.

 

The Company’s obligations under Term Note and the Revolving Note aresecured by a first lien on all assets of the Company, and Laurus may accelerateall outstanding obligations under the notes upon the occurrence andcontinuation of an event of default. In addition to the notes, the Companyissued to Laurus a seven-year warrant to purchase 140,000 shares of the Company’scommon stock at an exercise price of $0.65 per share, subject to adjustmentbased on the occurrence of certain corporate events. The Company must file aregistration statement with the Securities and Exchange Commission to registerthe resale of the shares of common stock underlying the warrants and the commonstock issuable upon conversion of the Term Note within 60 days of funding andmust use its best efforts to have the registration statement declared effectivewithin 180 days of funding. On the closing of the Term Note and the RevolvingNote, the Company issued an aggregate of 351,923 shares of common stock toLaurus for payment of fees due.

 

The Company considered the Term Note to be substantively modified (asdefined in EITF No. 96-19 “Debtor’s Accounting for a Modification orExchange of Debt Instruments”) and accounted for the transaction as anextinguishment of the prior outstanding term note and, as a result, recorded aloss on extinguishment in the amount of $298,108. The Company deemed that the

 

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Revolving Notewas not substantially modified and did not record the previous note as beingextinguished.

 

**Note E- New Accounting Pronouncements:**

 

In June 2005, the FASBissued Statement of Financial Accounting Standards No. 154, (“SFAS 154”),“Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20,“Accounting Changes” and FASB Statement No. 3, “Reporting AccountingChanges in Interim Financial Statements.” SFAS 154 applies to all voluntary changes in accounting principle andchanges the requirements for accounting for and reporting a change inaccounting principle. SFAS 154 requires the retrospective application to priorperiods’ financial statements of the direct effect of a voluntary change inaccounting principle unless it is impracticable. APB No. 20 required thatmost voluntary changes in accounting principle be recognized by including innet income of the period of the change the cumulative effect of changing to thenew accounting principle. FASB stated that SFAS 154 improves financialreporting because its requirements enhance the consistency of financialinformation between periods. Unless early adoption is elected, SFAS 154 iseffective for fiscal years beginning after December 15, 2005. Earlyadoption is permitted for fiscal years beginning after June 1, 2005. SFAS154 does not change the transition provisions of any existing accountingpronouncements, including those that are in a transition phase as of theeffective date of this statement. The adoption of SFAS 154 is not expectedto have a material affect on our financial position or results of operations.

 

**Note F– Sale of Assets:**

 

Effective March 31, 2006, the Company sold certain of the Company’sdirect sales assets to Unitime Systems, Inc. (“Unitime”) pursuant to theterms of an Asset Purchase Agreement (the “Purchase Agreement”) between theparties. Under the terms of the Purchase Agreement, Unitime purchased certainassets associated with the Company’s direct sales business, including a copy ofthe source code and other intellectual property relating to the Company’sNETtime, HourTrack and GENESIS time and attendance software products, relatedASP and maintenance contracts, and certain specified direct channel salesopportunities. The Purchase Agreement was executed on April 12, 2006.

 

The sale generated cash to the Company on April 12, 2006 ofapproximately $530,000. The purchase price under the Purchase Agreementincluded cash payable to the Company at the closing in consideration for a copyof the source code and related intellectual property. The consideration for theASP and maintenance contracts was determined based on multiples of theprojected annualized revenues under such contracts. At closing, the Companyreceived in cash 100% of the total consideration for the customer ASP contractsand 40% of the total consideration for the maintenance contracts. The remainingconsideration for the maintenance contracts is payable quarterly over the next14 months. The Company will also be transitioning over additional ASP customersover the next six months, which the Company will be paid for at the time ofsuch transfers. Additionally, for the 12-month period following the closing,Unitime is obligated to pay the Company monthly royalty

 

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payments equalto 27.5% of the revenues Unitime generates in connection with direct channelsales opportunities specified at closing.

 

The amount due from the sale of approximately $530,000 was recorded asaccounts receivable – other in the accompanying financial statements. The fullamount was received in April 2006.

 

**Item2. Management’s Discussion And Analysis of Financial Condition and Results ofOperations.**

** **

### **Critical AccountingPolicies**

### ** **

Our significant accounting policies aredescribed in the audited consolidated financial statements and notes theretoincluded in our Annual Report on Form 10-KSB for the year ended June 30,2005. We believe our most critical accounting policies are revenue recognition,software development costs and the allowance for potentially uncollectibleaccounts receivable.

 

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

 

•                  Persuasiveevidence of an arrangement exists, which is typically when a non-cancelablesales and software license agreement or purchase order has been signed;

•                  Delivery, whichis typically FOB shipping point, is complete for the software (eitherphysically or electronically), data collection hardware and related ancillaryproducts;

•                  The customer’sfee is deemed to be fixed or determinable and free of contingencies or significantuncertainties;

•                  Collectibilityis probable; and

•                  Vendor-specificobjective evidence of fair value exists for all undelivered elements, typicallymaintenance and professional services.

 

The fair value of the undelivered elements is deferred and the remainingportion of the arrangement fee is allocated to the delivered elements and isrecognized as revenue, assuming all other conditions for revenue recognitionhave been satisfied. Substantially all of our sales agreements containallocations of the purchase price among the various elements of the arrangement.If we cannot determine the fair value of any undelivered element included in anarrangement, we will defer revenue until all elements are delivered, servicesare performed or until fair value can be objectively determined.

 

As part of an arrangement, end-user customers typically purchasemaintenance contracts as well as professional services from us. Maintenanceservices include telephone and Web-based support as

 

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well as rightsto unspecified upgrades and enhancements, when and if we make them generallyavailable. Professional services are typically for implementation, installationof the software and data collection hardware, training, building interfaces andcustom features, and running test data.

 

Revenues from maintenance services are recognized ratably over the termof the maintenance contract period, which is usually one year. Maintenanceservices are typically stated separately in an arrangement and are also sold ona stand-alone basis in renewal agreements. We have classified the value ofrevenues pertaining to the contractual maintenance obligations that exist forthe 12-month period subsequent to the balance sheet date as a current liability,and the contractual obligations with a term beyond 12 months, if present, as anon-current liability.

 

Revenues from customer support services are recognized as the servicesare delivered. Revenues from professional services are generally recognized basedon vendor-specific objective evidence of fair value when:

 

•                  A non-cancelableagreement for the services has been signed or a customer’s purchase order hasbeen received;

•                  The professionalservices have been delivered;

•                  The customer’sfee is deemed to be fixed or determinable and free of contingencies orsignificant uncertainties; and

•                  Collectibilityis probable.

 

Vendor-specific objective evidence of fair value is based upon theprice charged when these services are sold separately and are typically anhourly rate for professional services and a per-class rate for training.Based upon our experience in completing professional services, we havedetermined that these services are typically delivered within a 12-month periodsubsequent to the contract signing and therefore classifies deferredprofessional services as a current liability.

 

Our arrangements with end-user customers do not include any rights ofreturn. Our arrangements with reseller channel customers do include a 30 dayrights of return provision on unused products. None of our arrangements includerights to price protection, nor do arrangements with reseller channel customersinclude any acceptance provisions. Our arrangements with end-user customersgenerally include our standard acceptance provision. Our standard acceptanceprovision states that the customer’s acceptance of the products shall be deemedto occur upon completion of running our standard diagnostic tests.

 

At the time we enter into an arrangement, we assess the probability ofcollection of the fee and the terms granted to the customer. For end-usercustomers, our typical payment terms include a deposit and balance typicallydue within 30 days of the invoice date, such that all payments for the softwarelicense, data collection hardware and related ancillary products, as well asservices included in the original arrangement, are ordinarily due within oneyear of contract signing. Our payment terms for reseller channel customers aretypically due within 30 days of the invoice date.

 

If the arrangement includes a substantive acceptance provision, wedefer revenue not meeting the criterion for recognition under Statement ofPosition 97-2, “Software Revenue Recognition,” and

 

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classify thisrevenue as deferred revenue, including deferred product revenue. This revenueis recognized, assuming all other conditions for revenue recognition have beensatisfied when the uncertainty regarding acceptance is resolved as generallyevidenced by written acceptance or payment of the arrangement fee. If thepayment terms for the arrangement are considered extended, we defer revenue onthe arrangement until the payment of the arrangement fee becomes due. Thedeferred amounts related to arrangements with extended payment terms areremoved from deferred revenue and accounts receivable, as we have determinedthat these amounts do not represent either receivable or deferred revenue untilthe payment becomes due. We report the allocated fair value of revenues relatedto the product element of arrangements as a current liability because of theexpectation that these revenues will be recognized within 12 months of thebalance sheet date.

 

We capitalize software development costs in accordance with Statementof Financial Accounting Standards No. 86, “Accounting for the Costs ofComputer Software to be Sold, Leased, or Otherwise Marketed.” Capitalization ofsoftware development costs begins upon the establishment of technologicalfeasibility of the product. The establishment of technological feasibility andthe ongoing assessment of the recoverability of these costs requireconsiderable judgment by management with respect to certain external factorsincluding, but not limited to, anticipated future gross product revenue,estimated economic life, and changes in software and hardware technology. Amortizationof capitalized software development costs begins when the products areavailable for general release to customers and is computed on aproduct-by-product basis using straight-line amortization with useful lives offive years or, if less, the remaining estimated economic life of the product. Amountsrelated to internal software development that could be capitalized under thisstatement were deemed 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.

 

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

### ** **

*Revenues:*

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

 

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

 

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*Product Sales:*

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

 

Product sales have remained relatively flatover the three and nine months ended March 31, 2006.

 

*Service Revenue:*

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

 

The increase in our service revenue in thecurrent quarter and nine-month period was primarily attributable to a 60% and56%, respectively, increase in our NETtime software service revenue over suchperiods. In addition, maintenance revenue increased by 15% in the three monthperiod and by 31% in the nine month period.

 

*Gross Profit:*

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

 

The decrease in overall and product grossprofit is primarily due to the accounting for a large contract with a Fortune100 company. The contract is for a $2,150,000 software and hardware solutionrequiring successful completion of a pilot program followed by completion ofthe remainder of the contract. The pilot program section of the contractis for $378,000. We are accounting for the software portion of the pilotprogram using the percentage of completion method for long-term contracts. Theestimated costs for development of the software exceed our revenues for thesoftware and the Company recorded an estimated loss of approximately $177,000for the software portion of this contract. If the revenue and costs under thiscontract were removed, our overall and product margins for the current quarterand nine-month period ended March 31, 2006 would be in line with ournormal margins as discussed below. We do expect to achieve a gross profit onthe contract as a whole as it is fulfilled over the next year.

 

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Our gross profit percentage on products istypically between 55% to 60% depending upon the mix of software versus hardwaresales and the makeup of hardware sales. Our product revenue is comprised ofsoftware and hardware sales, with hardware sales yielding a significantly lowergross profit than software sales. Hardware revenue is principally comprised oftwo versions of general data collection terminals, badge terminals andbiometric units. The gross profit is greater on badge terminals than biometricunits because we add value to our badge terminals by installing software on theterminals.

 

Our gross profit percentage on servicesrevenue was relatively flat for the both periods presented.

 

*Operating Expenses:*

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

 

*Sales and Marketing Expense:*

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

 

The increase in sales and marketing expensesin the current quarter and nine-month period is primarily attributable tohigher labor and employee acquisition costs as we have increased our salesstaff.

 

*Research and Development Expense:*

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

 

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The increase in research and developmentexpenses is primarily attributable to labor and other costs associated with thedevelopment of our new data collection terminal and enhancement of our softwareofferings.

 

*General and Administrative Expense:*

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

 

The increase in general and administrativeexpenses is primarily due to $5,000 in costs in the current quarter and $84,000in costs in the current nine month period as a result of the adoption of FASBStatement No. 123(R) in the first quarter of fiscal 2006. We also incurredapproximately $60,000 in expenses associated with the preparation and filing ofa registration statement in the nine month period.

 

Other Expense:

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

 

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

 

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

 

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# **Liquidityand Capital Resources**

# ** **

Cash Flow Highlights:

 
| ** **                         | ** ** | **Nine Months Ended March 31,** | ** ** | **Percentage** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                         | ** ** | **2006**                             | ** ** | **2005**       | ** ** | **Change** | ** ** |
| ** **                         | ** ** | ** **                           | ** ** | ** **     | ** ** | ** ** | ** ** |
| Net cash from operations           |       | (1,800,161                           | )          | $              | (351,626   | ) | (412 | )% |
|                               |       |                                 |       |           |       |   |   |
| Purchase of property and equipment |       | $                                    | (187,053   | )              | $          | (240,649 | ) | 22 | % |
| Repayment of debt                  |       | $                                    | (1,209,111 | )              | $          | (841,376 | ) | (44 | )% |
|                               |       |                                 |       |           |       |   |   |
| Proceeds from debt                 |       | $                                    | 2,500,000  |           | $          | — |   | n/a |   |
| Net change is cash                 |       | $                                    | (694,725   | )              | $          | (1,433,290 | ) | (52 | )% |
| Cash at end of period              |       | $                                    | 666,992    |           | $          | 625,639 |   | 7 | % |

 

At March 31, 2006, we had workingcapital of $664,505, compared to working capital of $851,916 at June 30, 2005.Cash and cash equivalents at those dates amounted to $666,992 and $1,361,717,respectively. We have funded our operations for the past six years primarilythrough a combination of sales of equity securities and debt financing.

 

*Operations*. The netcash used from operations in the current period was primarily attributable tothe net loss of $1,761,850. Included in the net loss was a total of $457,618 ofnon-cash charges. Contributing to the net cash used were increases in accountsreceivable of $281,584 and inventory of $286,543. Net cash used during thisperiod was partially offset by increases in accounts payable of $128,623 andaccrued liabilities of $288,520.

 

Also contributing to the net cash used was an increase in accountsreceivable-other. Effective March 31, 2006, the Company sold certain ofthe Company’s direct sales assets to Unitime Systems, Inc. (“Unitime”)pursuant to the terms of an Asset Purchase Agreement (the “Purchase Agreement”)between the parties. Under the terms of the Purchase Agreement, Unitimepurchased certain assets associated with the Company’s direct sales business,including a copy of the source code and other intellectual property relating tothe Company’s NETtime, HourTrack and GENESIS time and attendance softwareproducts, related ASP and maintenance contracts, and certain specified directchannel sales opportunities. The Purchase Agreement was executed on April 12,2006.

 

The sale generated cash to the Company on April 12, 2006 ofapproximately $530,000. The purchase price under the Purchase Agreementincluded cash payable to the Company at the closing in consideration for a copyof the source code and related intellectual property. The consideration for theASP and maintenance contracts was determined based on multiples of theprojected annualized revenues under such contracts. At closing, the Companyreceived in cash 100% of the total consideration for the customer ASP contractsand 40% of the total consideration for the maintenance contracts. The remainingconsideration for the maintenance contracts is payable quarterly over the next14 months. The Company will also be transitioning over additional ASP customersover the

 

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next sixmonths, which the Company will be paid for at the time of such transfers. Additionally,for the 12-month period following the closing, Unitime is obligated to pay theCompany monthly royalty payments equal to 27.5% of the revenues Unitimegenerates in connection with direct channel sales opportunities specified atclosing.

 

The amount due from the sale of approximately $530,000 was recorded asaccounts receivable – other in the accompanying financial statements. The fullamount was received in April 2006.

 

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

 

*Financing Activities.*Ourrepayment of debt in the current period increased from the prior year period aswe paid off the balance on a term note. Further information regarding this canbe found in footnote D in the accompanying financial statements.

 

Our liquidity is affected by manyfactors, some based on the normal ongoing operations of our business and othersrelated to the uncertainties of the time and attendance industry and globaleconomies. Although our cash requirements will continue to fluctuate based onthe timing and extent of these factors, we believe that our current cashreserves, cash generated from operations, cash received from our asset sale(see “Investment Activities” above), recent financings, and our borrowingcapacity under our two credit facilities, will be sufficient to satisfycommitments for capital expenditures and other cash requirements for the next12 months. The ability to raise additional capital in public or private marketswill primarily be dependent upon prevailing market conditions and the demandfor our products and services. No assurance can be given that we will be ableto raise additional capital, when needed or at all, or that such capital, ifavailable, will be on acceptable terms. In the absence of obtaining additionalfinancing, the Company may be unable to fund its operations and may experiencedefaults under certain of its contractual agreements, including our creditfacilities and lease agreements for our corporate headquarters. Our leaseagreements are subject to termination in the event of a default. Certain of theparties to these agreements could take legal action against the Company to collectamounts owed to them. Accordingly, the Company’s financial condition couldrequire that the Company seek the protection of applicable reorganization lawsin order to avoid or delay actions by third parties, which could materiallyadversely affect, interrupt or cause the cessation of the Company’s operations.

 

**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 andprocedures are designed to ensure that information required to be disclosed inthe periodic reports filed or submitted under the Securities Exchange Act of1934, as amended, is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms. Based upon that evaluation, the Chief Executive Officer

 

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and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures wereeffective as of the end of the quarterly period covered by this report. Nochange in the internal control over financial reporting occurred during thelast fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, the internal control over 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), within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. The forward-looking statements containedherein are based on current expectations that involve a number of risks anduncertainties. 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 or comparable terminology,or by discussions of strategy that involve risks and uncertainties. The Companywishes to caution the reader that these forward-looking statements that are nothistorical facts are only predictions. No assurances can be given that thefuture results indicated, whether expressed or implied, will be achieved. Whilesometimes presented with numerical specificity, these projections and otherforward-looking statements are based upon a variety of assumptions relating tothe business of the Company, which, although considered reasonable by theCompany, may not be realized. Because of the number and range ofassumptions underlying the Company’s projections and forward-lookingstatements, many of which are subject to significant uncertainties andcontingencies that are beyond the reasonable control of the Company, some ofthe assumptions inevitably will not materialize, and unanticipated events andcircumstances may occur subsequent to the date of this report. Theseforward-looking statements are based on current expectations and the Companyassumes no obligation to update this information. Therefore, the actualexperience of the Company and the results achieved during the period covered byany particular projections or forward-looking statements may differsubstantially 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 noassurance that any of these expectations will be realized or that any of theforward-looking statements contained herein will prove to be accurate.

 

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##### **PART II – OTHERINFORMATION**

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**Item1. Legal Proceedings.**

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

 

**Item6. Exhibits and Reports on Form 8-K.**

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(a)                                  The followingexhibits are filed herewith pursuant to Regulation S-B.

 
| 10.1   |   | Asset  Purchase Agreement, dated April 12, 2006 between Time America, Inc. and  Unitime Systems, Inc. (Previously Filed) |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                     |
| 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 accordancewith the requirements of the Securities Exchange Act of 1934, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                      | TIME AMERICA, INC.        |
|---------------------------|--------------------------------|
|                      |                           |
|                      |                           |
| Dated: July 28, 2006 |                           |
|                      | By                             | /s/ Craig J. Smith |   |
|                      | Craig J. Smith                 |
|                      | Chief Financial Officer        |
|                      | (Principal Accounting Officer) |

 

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