**U.S. SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM10-QSB**

 

| **ý** | ** ** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                        |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                          |
|       |       | **For the  quarterly period ended September 30, 2005**                                                                                                                                                                        |
|       |       |                                                                                                                                                                                                                          |
| **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**                                                                                                                                                                                         |

 

**TimeAmerica, Inc.**

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

 

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

 

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

(Address of principal executive offices)

 

**(480) 296-0400**

(Issuer’s telephone number)

 

**N/A**

(Former name, former address and formerfiscal year, if changed since last report)

 

Check whether the issuer: (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.     Yes  ý         No o

 

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

 

State the number of shares outstanding ofeach of the issuer’s classes of common equity, as of the latest practicabledate: At November 8, 2005, the issuer had outstanding 14,651,981 shares ofCommon Stock, par value $.005 per share.

 

Transitional Small Business DisclosureFormat:  Yes  o    No  ý

 

 

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**PART I – FINANCIAL INFORMATION**

 

**Item 1 –Financial Statements.**

 

**TIMEAMERICA, INC. AND SUBSIDIARY**

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                            | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------|------------|
| ** **                                                                                                            | ** ** | **2005**          | ** ** | **2005**     | ** ** |
| ** **                                                                                                            | ** ** | **(Unaudited)**   | ** ** | ** **   | ** ** |
| **ASSETS**                                                                                                            | ** ** | ** **        | ** ** | ** **   | ** ** |
| **Current  Assets:**                                                                                                  |       |              |       |         |       |
| Cash and cash equivalents                                                                                             |       | $                 | 644,798    |         | $          | 1,361,717 |   |
| Accounts receivable – trade, net                                                                                 |       | 1,528,321         |       | 1,479,526    |       |
| Inventory                                                                                                             |       | 597,920           |       | 477,719      |       |
| Prepaid expenses and other current assets                                                                             |       | 287,607           |       | 268,373      |       |
|                                                                                                                  |       |              |       |         |       |
| **Total Current Assets**                                                                                              |       | 3,058,646         |       | 3,587,335    |       |
|                                                                                                                  |       |              |       |         |       |
| **Property  and equipment, net**                                                                                      |       | 409,749           |       | 374,269      |       |
| **Other  Assets**                                                                                                     |       | 276,074           |       | 330,882      |       |
|                                                                                                                  |       |              |       |         |       |
| **Total Assets**                                                                                                      |       | $                 | 3,744,469  |         | $          | 4,292,486 |   |
|                                                                                                                  |       |              |       |         |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)**                                                              | ** ** | ** **        | ** ** | ** **   | ** ** |
|                                                                                                                  |       |              |       |         |       |
| **Current  Liabilities:**                                                                                             |       |              |       |         |       |
| Current portion of long-term debt                                                                                     |       | $                 | 951,636    |         | $          | 998,061 |   |
| Accounts payable                                                                                                      |       | 478,754           |       | 423,396      |       |
| Accrued liabilities                                                                                                   |       | 606,032           |       | 436,180      |       |
| Deferred revenue                                                                                                      |       | 869,710           |       | 877,782      |       |
|                                                                                                                  |       |              |       |         |       |
| **Total Current Liabilities**                                                                                         |       | 2,906,132         |       | 2,735,419    |       |
|                                                                                                                  |       |              |       |         |       |
| **Long-term  debt, less current portion**                                                                             |       | 1,961,771         |       | 2,210,592    |       |
|                                                                                                                  |       |              |       |         |       |
| **Total Liabilities**                                                                                                 |       | 4,867,903         |       | 4,946,011    |       |
|                                                                                                                  |       |              |       |         |       |
| **Commitments:**                                                                                                      |       | —            |       | —       |       |
|                                                                                                                  |       |              |       |         |       |
| **Stockholders’  Equity (Deficit):**                                                                             |       |              |       |         |       |
| Common stock, $.005 par value, 50,000,000  shares authorized; 14,651,981 and 14,251,552 shares issued and outstanding |       | 73,261            |       | 71,258       |       |
| Contributed capital                                                                                                   |       | 9,509,860         |       | 9,269,497    |       |
| Accumulated deficit                                                                                                   |       | (10,706,555       | )          | (9,994,280   | )          |
|                                                                                                                  |       |              |       |         |       |
| **Total Stockholders’ Equity (Deficit)**                                                                         |       | (1,123,434        | )          | (653,525     | )          |
|                                                                                                                  |       |              |       |         |       |
| **Total Liabilities and Stockholders’ Equity  (Deficit)**                                                        |       | $                 | 3,744,469  |         | $          | 4,292,486 |   |

 

#### **SeeNotes to Consolidated Financial Statement**s

 

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#### **TIMEAMERICA, INC. AND SUBSIDIARY**

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **September 30,**      | ** ** |
| ** **                                         | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                               |       |                   |       |   |   |
| **Revenues:**                                      |       |                   |       |   |   |
| Product sales                                      |       | $                      | 1,017,564  |   | $ | 998,930 |   |
| Services revenue                                   |       | 453,249                |       | 454,895 |   |
|                                               |       |                   |       |   |   |
| **Total Revenues**                                 |       | 1,470,813              |       | 1,453,825 |   |
|                                               |       |                   |       |   |   |
| **Cost of  Revenues:**                             |       |                   |       |   |   |
| Product                                            |       | 534,431                |       | 398,732 |   |
| Services                                           |       | 212,759                |       | 167,221 |   |
|                                               |       |                   |       |   |   |
| **Total Cost of Revenues**                         |       | 747,190                |       | 565,953 |   |
|                                               |       |                   |       |   |   |
| **Gross  Profit**                                  |       | 723,623                |       | 887,872 |   |
|                                               |       |                   |       |   |   |
| **Costs  and Expenses:**                           |       |                   |       |   |   |
| Sales and marketing                                |       | 594,356                |       | 464,103 |   |
| Research and development                           |       | 364,616                |       | 287,772 |   |
| General and administrative                         |       | 337,880                |       | 235,579 |   |
|                                               |       |                   |       |   |   |
| **Total Costs and Expenses**                       |       | 1,296,852              |       | 987,454 |   |
|                                               |       |                   |       |   |   |
| **Net Loss  from Operations**                      |       | (573,229               | )          | (99,582 | ) |
|                                               |       |                   |       |   |   |
| **Other  Income (Expense):**                       |       |                   |       |   |   |
| Interest expense                                   |       | (176,416               | )          | (98,511 | ) |
| Other                                              |       | 31,504                 |       | — |   |
| Interest income                                    |       | 5,866                  |       | 5,762 |   |
|                                               |       |                   |       |   |   |
|                                               |       | (139,046               | )          | (92,749 | ) |
|                                               |       |                   |       |   |   |
| **Net Loss**                                       |       | $                      | (712,275   | ) | $ | (192,331 | ) |
|                                               |       |                   |       |   |   |
| **Basic  and Diluted Loss per Share**              |       | $                      | (0.05      | ) | $ | (0.01 | ) |
|                                               |       |                   |       |   |   |
| **Weighted  Average Number of Shares Outstanding** |       | 14,262,077             |       | 13,600,188 |   |

 

See Notes to Consolidated Financial Statements

 

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#### **TIMEAMERCIA, INC. AND SUBSIDIARY**

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEAR ENDED JUNE 30, 2005 AND

THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2005 (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        |       |             |       |            |       | 84,987          |       |        |       | 84,987 |   |
| Recission of  common stock for services |       | (50,000          | )          | (250            | )          | (31,250         | )          | —      |       | (31,500 | ) |
| Net loss                                |       | —           |       | —          |       | —          |       | (712,275    | )          | (712,275 | ) |
| Balance at  September 30, 2005     |       | 14,651,981       |       | $               | 73,261     |            | $          | 9,509,860   |       | $ | (10,706,555 | ) | $ | (1,123,434 | ) |

 

See Notes to Consolidated Financial Statements

 

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#### **TIMEAMERICA, INC. AND SUBSIDIARY**

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                   | ** ** | **September 30,**      | ** ** |
| ** **                                                                   | ** ** | **2005**               | ** ** | **2004** | ** ** |
| **Increase  (Decrease) in Cash and Cash Equivalents:**                       | ** ** | ** **             | ** ** | ** ** | ** ** |
| **Cash flows from operating activities:**                                    |       |                   |       |   |   |
| Net loss                                                                     |       | $                      | (712,275   | ) | $ | (192,331 | ) |
| Adjustments to reconcile net loss to net  cash used by operating activities: |       |                   |       |   |   |
| Depreciation                                                                 |       | 26,684                 |       | 18,582 |   |
| Common stock, stock options and warrants  issued for services                |       | 53,487                 |       | — |   |
| Induced conversion of debt charge                                            |       | 40,179                 |       | — |   |
| Changes in Assets and Liabilities:                                           |       |                   |       |   |   |
| Accounts receivable-trade, net                                               |       | (48,795                | )          | (310,444 | ) |
| Inventory                                                                    |       | (120,201               | )          | (72,403 | ) |
| Prepaid expenses and other current assets                                    |       | (19,234                | )          | 87,183 |   |
| Other assets                                                                 |       | 54,808                 |       | 21,976 |   |
| Accounts payable                                                             |       | 55,358                 |       | (47,915 | ) |
| Accrued liabilities                                                          |       | 66,952                 |       | 102,304 |   |
| Deferred revenue                                                             |       | (8,072                 | )          | 330,796 |   |
| **Net cash used by operating activities**                                    |       | (611,109               | )          | (62,252 | ) |
|                                                                         |       |                   |       |   |   |
| **Cash  flows from investing activities:**                                   |       |                   |       |   |   |
| Purchase of property and equipment                                           |       | (62,164                | )          | (19,644 | ) |
| **Net cash used by investing activities**                                    |       | (62,164                | )          | (19,644 | ) |
|                                                                         |       |                   |       |   |   |
| **Cash  flows from financing activities:**                                   |       |                   |       |   |   |
| Repayment of debt                                                            |       | (45,246                | )          | (136,568 | ) |
| Proceeds from exercise of options and warrants                               |       | 1,600                  |       | 361 |   |
| **Net cash provided (used) by financing  activities**                        |       | (43,646                | )          | (136,207 | ) |
|                                                                         |       |                   |       |   |   |
| Net change  in cash and cash equivalents                                     |       | (716,919               | )          | (218,103 | ) |
|                                                                         |       |                   |       |   |   |
| Cash and  cash equivalents at beginning of period                            |       | 1,361,717              |       | 2,058,929 |   |
|                                                                         |       |                   |       |   |   |
| Cash and  cash equivalents at end of period                                  |       | $                      | 644,798    |   | $ | 1,840,826 |   |
|                                                                         |       |                   |       |   |   |
| **Supplemental  disclosure of cash flow information:**                       |       |                   |       |   |   |
| Interest paid                                                                |       | $                      | 99,336     |   | $ | 98,511 |   |
| Income taxes paid                                                            |       | $                      | —     |   | $ | — |   |

 

See Notes to Consolidated Financial Statements

 

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## **SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

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

 

The accompanying unaudited consolidated financialstatements of Time America, Inc. and subsidiary (“Time America” or the“Company”) have been prepared in accordance with generally accepted accountingprinciples (“GAAP”), pursuant to the rules and regulations of the Securitiesand Exchange Commission, and are unaudited. Accordingly, they do not include all the information and footnotesrequired by GAAP for complete financial statements.  In the opinion of management, all adjustments(which include only normal recurring adjustments) necessary for a fairpresentation of the results for the interim periods presented have beenmade.  The results for the three monthperiod ended September 30, 2005, may not be indicative of the results for theentire year.  These financial statementsshould be read in conjunction with the Company’s Annual Report on Form 10-KSBfor the fiscal year ended June 30, 2005.

 

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

 

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

 

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

 

Diluted earnings per share are computed based on the weightedaverage number of shares of common stock and dilutive securities outstandingduring the period.  Dilutive securitiesare options and warrants that are freely exercisable into common stock at lessthan the prevailing market price. Dilutive securities are not included in theweighted average number of shares when inclusion would increase the earningsper share or decrease the loss per share.

 

**Note C - Stock Based Compensation:**

 

Prior to July 1, 2005,the Company accounted for stock-based compensation arrangements in accordancewith the provisions of Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” (“APB 25”). Accordingly, compensation expense, if any, was measured as the excess ofthe underlying stock price over the exercise price on the date of grant.  The Company complied with the disclosureprovisions of Statement of Financial Accounting Standards Board No. 123 (“SFAS123”) “Accounting for Stock Based Compensation” as amended by SFAS 148“Accounting for Stock-Based Compensation-Transition and Disclosure” whichrequired pro-forma disclosure of compensation expense associated with stockoptions 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”, usingthe modified prospective-transition method. Under this transition method, compensation expense recognized in thefirst quarter of fiscal 2006 includes: (a) compensation expense for all share-based payments granted prior to,but not yet vested as of June 30, 2005 based on the grant date fair valueestimated and (b) compensation

 

6

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expense for allshare-based payments granted subsequent to June 30, 2005, based on the grantdate fair value estimated in accordance with the provisions of SFAS 123(R).  Results for prior periods have notbeen 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.

 

Asa result of adopting SFAS 123(R) on July 1, 2005, the Company’s net loss forthe three months ended September 30, 2005 is $84,989 higher than if it had continuedto account for share-based compensation under APB 25.

 

The following tableillustrates the effect on the Company’s net loss and loss per share for thethree months ended September 30, 2004 if the Company had applied the fair valuerecognition provisions of SFAS 123 to options granted under the Company’s stockoption plans.

 
| ** **                                                                                                                                        | ** ** | **Three Months**        | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                        | ** ** | **Ended September 30,** | ** ** |
| ** **                                                                                                                                        | ** ** | **2004**                | ** ** |
| ** **                                                                                                                                        | ** ** | ** **              | ** ** |
| **Net  loss:**                                                                                                                                    |       |                    |       |
| As reported                                                                                                                                       |       | $                       | (192,331   | ) |
|                                                                                                                                              |       |                    |       |
| Deduct: Total stock-based employee  compensation expense determined under the fair value based method for all  awards, net of related tax effects |       | (46,573                 | )          |
|                                                                                                                                              |       |                    |       |
| Pro forma                                                                                                                                         |       | $                       | (238,904   | ) |
|                                                                                                                                              |       |                    |       |
| **Loss per  share:**                                                                                                                              |       |                    |       |
| As reported                                                                                                                                       |       | $                       | (0.01      | ) |
| Pro forma                                                                                                                                         |       | $                       | (0.02      | ) |

 

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

 

InSeptember 2005,the Company amended the conversion price on a portion of itsconvertible term note with Laurus Master Funds. The conversion price on thefirst $250,000 of the note was reduced to $0.56 per share.  In connectionwith the amendment, the Company took a non-cash charge of $40,179 in thecurrent quarter.

 

 

**Note E - New Accounting Pronouncements:**

 

InNovember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 151 (“SFAS 151”),“Inventory Costs.” SFAS 151 amends the guidance in APB No. 43,Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amountsof idle facility expense, freight, handling costs, and wasted material(spoilage). SFAS 151 requires that those items be recognized as currentperiod charges regardless of whether they meet the criteria of “so

 

7

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abnormal.” In addition,SFAS 151 requires that allocation of fixed production overheads to thecosts of conversion be based on the normal capacity of the productionfacilities. SFAS 151 is effective for financial statements issued forfiscal years beginning after June 15, 2005. The adoption of SFAS 151is not expected to have a material affect on our financial position or resultsof operations.

 

InDecember 2004, the FASB issued Statement of Financial Accounting StandardsNo. 153 (“SFAS 153”), “Exchanges of Nonmonetary Assets.”  SFAS 153 amends the guidance in APBNo. 29, “Accounting for Nonmonetary Assets.”  APB No. 29 was based on the principlethat exchanges of nonmonetary assets should be measured on the fair value ofthe assets exchanged. SFAS 153 amends APB No. 29 to eliminate theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance if the future cash flows of the entity are expectedto change significantly as a result of the exchange. SFAS 153 is effectivefor financial statements issued for fiscal years beginning after June 15,2005. The adoption of SFAS 153 is not expected to have a material affecton our financial position or results of operations.

 

In June 2005, theFASB issued Statement of Financial Accounting Standards No. 154,(“SFAS 154”), “Accounting Changes and Error Corrections, a replacement ofAPB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3,“Reporting Accounting Changes in Interim Financial Statements.”  SFAS 154 applies to all voluntary changes inaccounting principle and changes the requirements for accounting for andreporting a change in accounting principle. SFAS 154 requires the retrospectiveapplication to prior periods’ financial statements of the direct effect of avoluntary change in accounting principle unless it is impracticable. APB No. 20required that most voluntary changes in accounting principle be recognized byincluding in net income of the period of the change the cumulative effect ofchanging to the new accounting principle. FASB stated that SFAS 154 improvesfinancial reporting because its requirements enhance the consistency offinancial information between periods. Unless early adoption is elected, SFAS154 is effective 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.  Theadoption of SFAS 154 is not expected to have a material affect on ourfinancial position or results of operations.

 

**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

 

8

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believe our most critical accounting policiesare revenue recognition, software development costs and the allowance forpotentially uncollectible accounts receivable.

 

We licensesoftware and sell data collection hardware and related ancillary products toend-user customers through our direct sales force as well as reseller channelcustomers through independent resellers. Our software license revenue is earnedfrom perpetual licenses of off-the-shelf software requiring none or minormodification or customization. The software license, data collection hardwareand related ancillary product revenues from our end-user customers and resellerchannel customers are generally 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,which is typically FOB shipping point, is complete for the software (eitherphysically or electronically), data collection hardware and related ancillaryproducts;

•      Thecustomer’s fee is deemed to be fixed or determinable and free of contingenciesor significant uncertainties;

•      Collectibilityis probable; and

•      Objectiveevidence of fair value exists for all undelivered elements, typicallymaintenance and professional services.

 

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

 

As part of anarrangement, end-user customers typically purchase maintenance contracts aswell as professional services from us. Maintenance services include telephone and Web-based support as well asrights to unspecified upgrades and enhancements, when and if we make themgenerally available. Professional services are typically for implementation,installation of the software and data collection hardware, training, buildinginterfaces and custom features, and running test data.

 

Revenues frommaintenance services are recognized ratably over the term of the maintenancecontract period, which is usually one year. Maintenance services are typically stated separately in an arrangementand are also sold on a stand-alone basis in renewal agreements. We haveclassified the value of revenues pertaining to the contractual maintenanceobligations that exist for the 12-month period subsequent to the balance sheetdate as a current liability, and the contractual obligations with a term beyond12 months, if present, as a non-current liability.

 

Revenues fromcustomer support services are recognized as the services are delivered.  Revenues from professional services aregenerally recognized based on customer specific objective evidence of fairvalue when:

 

•      Anon-cancelable agreement for the services has been signed or a customer’spurchase order has been received;

•      Theprofessional services have been delivered;

 

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•      Thecustomer’s fee is deemed to be fixed or determinable and free of contingenciesor significant uncertainties; and

•      Collectibilityis probable.

 

Customerspecific objective evidence of fair value is based upon the price charged whenthese services are sold separately and are typically an hourly rate forprofessional services and a per-class rate for training. Based upon ourexperience in completing professional services, we have determined that theseservices are typically delivered within a 12-month period subsequent to thecontract signing and therefore classifies deferred professional services as acurrent liability.

 

Ourarrangements with end-user customers and reseller channel customers do notinclude any rights of return or price protection, nor do arrangements withreseller channel customers include any acceptance provisions. Our arrangementswith end-user customers generally include our standard acceptance provision.Our standard acceptance provision states that the customer’s acceptance of theproducts shall be deemed to occur upon completion of running our standarddiagnostic tests.

 

At the time weenter into an arrangement, we assess the probability of collection of the feeand the terms granted to the customer. For end-user customers, our typicalpayment terms include a deposit and subsequent payments, based on specific duedates, such that all payments for the software license, data collectionhardware and related ancillary products, as well as services included in theoriginal arrangement, are ordinarily due within one year of contract signing.Our payment terms for reseller channel customers are typically due within 30days of the invoice date.

 

If thearrangement includes a substantive acceptance provision, we defer revenue notmeeting the criterion for recognition under Statement of Position 97-2,“Software Revenue Recognition,” and classify this revenue as deferred revenue,including deferred product revenue. This revenue is recognized, assuming allother conditions for revenue recognition have been satisfied when theuncertainty regarding acceptance is resolved as generally evidenced by writtenacceptance or payment of the arrangement fee. If the payment terms for thearrangement are considered extended, we defer revenue on the arrangement untilthe payment of the arrangement fee becomes due. The deferred amounts related toarrangements with extended payment terms are removed from deferred revenue andaccounts receivable, as we have determined that these amounts do not representeither receivable or deferred revenue until the payment becomes due. We reportthe allocated fair value of revenues related to the product element ofarrangements as a current liability because of the expectation that theserevenues will be recognized within 12 months of the balance sheet date.

 

We capitalizesoftware development costs in accordance with Statement of Financial AccountingStandards No. 86, “Accounting for the Costs of Computer Software to be Sold,Leased, or Otherwise Marketed.” Capitalization of software development costsbegins upon the establishment of technological feasibility of theproduct.  The establishment of technological feasibility and the ongoingassessment of the recoverability of these costs require considerable judgmentby management with respect to certain external factors including, but notlimited to, anticipated future gross product revenue, estimated economic life,and changes in software and hardware technology.  Amortization ofcapitalized software development costs begins when the products are availablefor general release to customers and is computed on a product-by-product basisusing straight-line amortization with useful lives of five years or, if less,the remaining estimated economic life of the product.  Amounts related tointernal software development that could be capitalized under this statementwere deemed immaterial.

 

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We provide forpotentially uncollectible accounts receivable by use of the allowancemethod.  The allowance is provided basedupon a review of the individual accounts outstanding, and our prior history ofuncollectible accounts receivable.  It is our 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.

 

### **Resultsof Operations for the Three Months Ended September 30, 2005 and 2004**

 

Revenue:

 
| ** **        | ** ** | **Three Months Ended September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-------------------|------------|--------------------------------------|------------|------------|------------|----------------|------------|
| ** **        | ** ** | **2005**                             | ** ** | **2004**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Product  sales    |       | $                                    | 1,017,564  |       | 69         | %              | $          | 998,930 |   | 69 | % | $ | 18,634 |   | 2 | % |
| Services  revenue |       | 453,249                              |       | 31         | %          | 454,895        |       | 31 | % | (1,646 | ) | 0 | % |
|              |       |                                 |       |       |       |           |       |   |   |   |   |   |   |
| Total  revenues   |       | $                                    | 1,470,813  |       | 100        | %              | $          | 1,453,825 |   | 100 | % | $ | 16,988 |   | 1 | % |

 

Our revenuechange remained flat from the prior year quarter to the current years quarter.

 

Gross Profit:

 
| ** **            | ** ** | **Three Months Ended September 30,** | ** ** |
|-----------------------|------------|--------------------------------------|------------|
| ** **            | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Product  gross margin |       | 47                                   | %          | 60 | % |
| Service  gross margin |       | 53                                   | %          | 63 | % |
| Total gross  margin   |       | 49                                   | %          | 61 | % |

 

The decreasein overall and product gross profit is primarily due to the accounting for alarge contract with a Fortune 100 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 pilotprogram section of the contract is for $378,000.  We are accounting for the software portion ofthe pilot program using the percentage of completion method for long-termcontracts.  The estimated costs fordevelopment of the software exceed our revenues for the software and theCompany recorded an estimated loss of approximately $50,000 for the softwareportion of this contract in the quarter. If the revenue and costs under thiscontract were removed, our overall and product margins would be in line withour normal margins as discussed below. We do expect to achieve a gross profit on the contract in total as it isfulfilled over the next year.

 

Our grossprofit percentage on products is typically between 55% to 60% depending uponthe mix of software versus hardware sales and the makeup of hardwaresales.  Our product revenue is comprisedof software and hardware sales, with hardware sales yielding a significantlylower gross profit than software sales.  Hardware revenue is principally comprised of two versions of generaldata collection terminals,

 

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badge terminals and biometricunits.  The gross profit is greater onbadge terminals than biometric units because we add value to our badgeterminals by installing software on the terminals.

 

Our grossprofit percentage on services revenue decreased in the current quarter as wehave increased our service organizations labor costs over the prior quarter,but were unable to achieve an increase in service revenue in the currentquarter over the prior year quarter.

 

Operating Expenses:

 
| ** **                  | ** ** | **Three Months Ended September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|------------|------------|----------------|------------|
| ** **                  | ** ** | **2005**                             | ** ** | **2004**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Sales and  marketing        |       | $                                    | 594,356    |       | $          | 464,103        |       | $ | 130,253 |   | 28 | % |
| Research and  development   |       | 364,616                              |       | 287,772    |       | 76,844         |       | 27 | % |
| General and  administrative |       | 337,880                              |       | 235,579    |       | 102,301        |       | 43 | % |
| Total costs  and expenses   |       | $                                    | 1,296,852  |       | $          | 987,454        |       | $ | 309,398 |   | 31 | % |

 

The following table presentsreportable expenses as a percentage of total revenues:

 
| ** **                  | ** ** | **Three Months Ended September 30,** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Sales and  marketing        |       | 40                                   | %          | 32 | % |
| Research and  development   |       | 25                                   | %          | 20 | % |
| General and  administrative |       | 23                                   | %          | 16 | % |
| Total                       |       | 88                                   | %          | 68 | % |

 

The increasein sales and marketing expenses is primarily attributable to higher labor andemployee acquisition costs as we have increased our sales staff, including thehiring of a vice president of corporate sales in the current quarter.

 

The increasein research and development expenses is primarily attributable to labor andother costs associated with the development of our new data collection terminaland enhancement of our software offerings.

 

The increasein general and administrative expenses is primarily due to $65,000 in costs asa result of the adoption of FASB Statement No. 123(R) in the current quarter.

 

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Other Expense:

 
| ** **                    | ** ** | **Three Months Ended September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|------------|------------|----------------|------------|
|                          |       | **2005**                             | ** ** | **2004**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest  expense             |       | $                                    | (176,416   | )          | $          | (98,511        | )          | $ | (77,905 | ) | 79 | % |
| Other                         |       | 31,504                               |       | —     |       | 31,504         |       | N/A |   |
| Interest  income              |       | 5,866                                |       | 5,762      |       | 104            |       | 2 | % |
| Total other  income (expense) |       | $                                    | (139,046   | )          | $          | (92,749        | )          | $ | (46,297 | ) | 50 | % |

 

The following table presentsother income (expense) as of percentage of total revenues:

 
| ** **        | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------|------------|--------------------------------------|------------|
| ** **        | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Interest  expense |       | -12                                  | %          | -7 | % |
| Other             |       | 2                                    | %          | 0 | % |
| Interest  income  |       | 0                                    | %          | 0 | % |
| Total             |       | -10                                  | %          | -7 | % |

 

Theincrease in interest expense is principally due to recording of a $40,179charge in the current quarter incurred in relation to the changing of theconversion price on convertible debt.

 

# **Liquidity and CapitalResources**

 

Cash Flow Highlights:
| ** **                          | ** ** | **Three Months Ended September 30,** | ** ** | **Percentage** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                          | ** ** | **2005**                             | ** ** | **2004**       | ** ** | **Change** | ** ** |
| Net cash  from operations           |       | $                                    | (611,109   | )              | $          | (62,252 | ) | 882 | % |
| Purchase of  property and equipment |       | $                                    | (62,164    | )              | $          | (19,644 | ) | 216 | % |
| Repayment of  debt                  |       | $                                    | (45,246    | )              | $          | (136,568 | ) | -67 | % |
| Net change  is cash                 |       | $                                    | (716,919   | )              | $          | (218,103 | ) | 229 | % |
| Cash at end  of period              |       | $                                    | 644,798    |           | $          | 1,840,826 |   | -65 | % |

 

At September30, 2005, we had working capital of $152,514, compared to $1,681,324 atSeptember 30, 2004.  Cash and cashequivalents at those dates amounted to $644,798 and $1,840,826, respectively.

 

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We have funded our operations forthe past six years primarily through a combination of sales of equitysecurities and debt financing.

 

*Operations*.  The net cash used from operations in thecurrent quarter was primarily attributable to the net loss of $712,275.  Included in the net loss was a total of$120,350 of non-cash charges.  Alsocontributing to the net cash used were increases in accounts receivable of$48,795 and inventory of $120,201.  Netcash used during this period was partially offset by increases in accountspayable of $55,358 and accrued liabilities of $66,952.

 

*InvestmentActivities*. Our use of cash for property and equipmentincludes investments in information systems and infrastructure to supportexpanding operations.

 

*FinancingActivities*  Ourrepayment of debt in the current quarter decreased from the prior year quarteras we were able to make debt payments in the current quarter by converting theamounts due to common stock rather than pay with cash as was done in the prioryear quarter.

 

Our liquidity isaffected by many factors, some based on the normal ongoing operations of ourbusiness and others related to the uncertainties of the time and attendanceindustry and global economies.  Althoughour cash requirements will continue to fluctuate based on the timing and extentof these factors, we believe that our current cash reserves, cash generatedfrom operations, and our borrowing capacity under our two credit facilities,will be sufficient to satisfy commitments for capital expenditures and othercash requirements for the next 6 months. We are currently attempting to secureadditional financing for the Company.  Webelieve that we will be successful in obtaining the additional financing.  If we are successful in securing theadditional financing we believe that we will have sufficient cash to satisfycommitments for capital expenditures and other cash requirements for the next12 months. The raising of additional capital in public or private markets willprimarily be dependent upon prevailing market conditions and the demand for ourproducts and services.  No assurance canbe given that we will be able to raise additional capital, when needed or atall, or that such capital, if available, will be on acceptable terms. In theabsence of obtaining additional financing, the Company may be unable to fundits operations and may experience defaults under certain of its contractualagreements, including its lease agreements for its corporate headquarters.  These agreements are subject to terminationin the event of default.  Certain of theparties to these agreements could take legal action against the Company tocollect amounts owed to them. Accordingly, the Company’s financial condition could require that theCompany seek the protection of applicable reorganization laws in order to avoidor delay actions by third parties, which could materially adversely affect,interrupt or cause the cessation of the Company’s operations.

 

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**Item3. Controls and Procedures.**

 

As of the end of the period covered by this report, the Company carriedout an evaluation, under the supervision and with the participation of itsChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe Company’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 and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures were effective as of the end of the quarterly period covered by thisreport.  No change in the internalcontrol over financial reporting occurred during the last fiscal quarter thathas materially affected, or is reasonably likely to materially affect, theinternal control over financial reporting.

# ** **

# **FORWARD-LOOKINGINFORMATION**

 

The statementscontained in this Quarterly Report on Form 10-QSB that are not historical factare forward-looking statements (as such term is defined in the PrivateSecurities Litigation 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.  Theforward-looking statements contained herein are based on current expectationsthat involve a number of risks and uncertainties.  These statements can be identified by the useof forward-looking terminology such as “believes,” “expects,” “may,” “will,”“should,” or “anticipates,” or the negative thereof or other variations thereonor comparable terminology, or by discussions of strategy that involve risks anduncertainties.  The Company wishes tocaution the reader that these forward-looking statements that are nothistorical facts are only predictions. No assurances can be given that the future results indicated, whetherexpressed or implied, will be achieved. While sometimes presented with numerical specificity, these projectionsand other forward-looking statements are based upon a variety of assumptionsrelating to the business of the Company, which, although considered reasonableby the Company, may not be realized. Because of the number and range of assumptions underlying the Company’sprojections and forward-looking statements, many of which are subject to significantuncertainties and contingencies that are beyond the reasonable control of theCompany, some of the assumptions inevitably will not materialize, andunanticipated events and circumstances may occur subsequent to the date of thisreport.  These forward-looking statementsare based on current expectations and the Company assumes no obligation toupdate this information.  Therefore, theactual experience of the Company and the results achieved during the periodcovered by any particular projections or forward-looking statements may differsubstantially from those projected. Consequently, the inclusion of projections and other forward-lookingstatements should not be regarded as a representation by the Company or anyother person that these estimates and projections will be realized, and actualresults may vary materially.  There canbe no assurance that any of these expectations will be realized or that any ofthe forward-looking statements contained herein will prove to be accurate.

 

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##### **PARTII – OTHER INFORMATION**

 

**Item1. Legal Proceedings.**

 

The Company is from timeto time involved in legal proceedings arising from the normal course ofbusiness.   As of the date of thisreport, the Company is not currently involved in any legal proceedings.

 

**Item6. Exhibits**

 

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

 
| **No.** | ** ** | **Description**                                       |
|---------|------------|-------------------------------------------------------|
|    |       |                                                  |
| 31.1    |       | Section  302 Certification of Chief Executive Officer |
|    |       |                                                  |
| 31.2    |       | Section 302  Certification of Chief Financial Officer |
|    |       |                                                  |
| 32      |       | Section 906  Certifications                           |

 

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**SIGNATURES**

 

In 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:  November 14, 2005 |                           |
|                      |                           |
|                      | By                             | /s/ Craig J. Smith |   |
|                      | Craig J. Smith                 |
|                      | Chief Financial Officer        |
|                      | (Principal Accounting Officer) |

 

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