##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 Form 10-QSB
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 TEKNIK DIGITAL ARTS, INC.
  Nevada
    
    
    
    68 053 9517State or jurisdiction of
incorporation or organization
    
    
    
    (I. R. S. Employer Identification No.)
  
   
  þ o
  o þ




---



Teknik Digital Arts, Inc. and Subsidiaries
 Form 10-QSB
For the Quarter Ended June 30, 2005
 Table of Contents
 PART I FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2005 (Unaudited) and September 30, 2004
    
    
    1Unaudited Condensed Consolidated Statements of Operations for the Nine Months Ended June 30, 2005 and 2004 and for the Three Months Ended June 30, 2005 and 2004
    
    
    2Unaudited Condensed Consolidated Statement of Changes in Stockholders Equity (Deficit)
    
    
    3Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2005 and 2004
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13PART II OTHER INFORMATIONItem 1.
    
    Legal Proceedings.
    
    
    17Item 6.
    
    Exhibits.
    
    
    17EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
    
    
    (Audited)June 30,
    
    
    September 30,2005
    
    
    2004Current Assets:Cash and cash equivalents
    
    $
    983
    
    
    $
    11,995Prepaid expenses
    
    
    36,853
    
    
    
    9,762Total Current Assets
    
    
    37,836
    
    
    
    21,757Property and equipment, net
    
    
    8,010
    
    
    
    1,124Other Assets:Security deposit
    
    
    3,200
    
    
    
    2,200Deferred compensation
    
    
    765,438
    
    
    
    768,638
    
    
    
    2,200Total Assets
    
    $
    814,484
    
    
    $
    25,081Current Liabilities:Note payable  related party (Note 2)
    
    $
    513,150
    
    
    $
    25,000Notes payable
    
    
    19,166
    
    
    
    Accounts payable
    
    
    239,787
    
    
    
    125,180Accrued vacation
    
    
    769
    
    
    
    2,406Capital lease liability
    
    
    3,233
    
    
    
    Accrued interest  related party (Note 2)
    
    
    7,689
    
    
    
    15,349Total Current Liabilities
    
    
    783,794
    
    
    
    167,935Minority Interest in Joint Venture (Note 6)
    
    
    37,500
    
    
    
    37,500Total Liabilities and Minority Interest
    
    
    821,294
    
    
    
    205,435Stockholders Equity (Deficit): (Notes 1 and 3)Common stock  $.001 par value; 50,000,000 shares
authorized, 9,125,000 and 8,805,000 shares issued and
outstanding, respectively
    
    
    9,125
    
    
    
    8,805Additional paid-in capital
    
    
    4,314,010
    
    
    
    3,202,830Deficit accumulated during development stage
    
    
    (4,329,945
    )
    
    
    (3,391,989
    )Total Stockholders Equity (Deficit)
    
    
    (6,810
    )
    
    
    (180,354
    )Total Liabilities and Stockholders Equity (Deficit)
    
    $
    814,484
    
    
    $
    25,081
  1




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##### Table of Contents



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Date of Inception,Nine
    
    
    Nine
    
    
    Three
    
    
    Three
    
    
    January 29, 2003,Months Ended
    
    
    Months Ended
    
    
    Months Ended
    
    
    Months Ended
    
    
    ThroughJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005Sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Cost of Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gross Profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    General and Administrative Expenses
    
    
    708,874
    
    
    
    127,644
    
    
    
    170,553
    
    
    
    26,391
    
    
    
    1,683,728Research and Development Costs
    
    
    211,476
    
    
    
    587,061
    
    
    
    66,880
    
    
    
    274,021
    
    
    
    2,619,265Loss from Operations
    
    
    (920,350
    )
    
    
    (714,705
    )
    
    
    (237,433
    )
    
    
    (300,412
    )
    
    
    (4,302,993
    )Other Income (Expense):Interest Expense
    
    
    (19,778
    )
    
    
    (12,212
    )
    
    
    (9,725
    )
    
    
    (2,963
    )
    
    
    (36,543
    )Miscellaneous Income
    
    
    2,172
    
    
    
    13,597
    
    
    
    
    
    
    
    11,730
    
    
    
    9,591(17,606
    )
    
    
    1,385
    
    
    
    (9,725
    )
    
    
    8,767
    
    
    
    (26,952
    )Minority Interest Portion of Loss
    
    
    
    
    
    
    28,360
    
    
    
    
    
    
    
    28,360
    
    
    
    Net Loss
    
    $
    (937,956
    )
    
    $
    (684,960
    )
    
    $
    (247,158
    )
    
    $
    (263,285
    )
    
    $
    (4,329,945
    )Basic and diluted loss per share (Note 1)
    
    $
    (0.11
    )
    
    $
    (0.09
    )
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.58
    )Weighted Average Common Shares Outstanding
    
    
    8,824,414
    
    
    
    7,444,270
    
    
    
    8,857,967
    
    
    
    7,881,703
    
    
    
    7,513,182
  2




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##### Table of Contents



CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
 (Unaudited)
 For The Period From The Date of Inception, January 29, 2003 Through June 30, 2005
 DeficitAccumulated
    
    
    TotalAdditional
    
    
    During
    
    
    Stockholders'Common Stock
    
    
    Paid-in
    
    
    Development
    
    
    EquityShares
    
    
    Amount
    
    
    Capital
    
    
    Stage
    
    
    (Deficit)Balance at Inception,
January 29, 2003
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Issuance of common stock
for compensation and consulting
    
    
    6,635,000
    
    
    
    6,635
    
    
    
    0
    
    
    
    0
    
    
    
    6,635Net Loss from inception to
September 30, 2003
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (339,709
    )
    
    
    (339,709
    )Balance at September 30, 2003
    
    
    6,635,000
    
    
    
    6,635
    
    
    
    0
    
    
    
    (339,709
    )
    
    
    (333,074
    )Conversion of debt to
common stock
    
    
    1,000,000
    
    
    
    1,000
    
    
    
    499,000
    
    
    
    0
    
    
    
    500,000Proceeds from sale of stock
    
    
    190,000
    
    
    
    190
    
    
    
    94,810
    
    
    
    0
    
    
    
    95,000Warrants issued for compensation
    
    
    0
    
    
    
    0
    
    
    
    820,000
    
    
    
    0
    
    
    
    820,000Issuance of common stock
for compensation and consulting
    
    
    880,000
    
    
    
    880
    
    
    
    1,539,120
    
    
    
    0
    
    
    
    1,540,000Exercise of warrants
    
    
    100,000
    
    
    
    100
    
    
    
    249,900
    
    
    
    0
    
    
    
    250,000Net Loss for the twelve months
ended September 30, 2004
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (3,052,280
    )
    
    
    (3,052,280
    )Balance at September 30, 2004
    
    
    8,805,000
    
    
    
    8,805
    
    
    
    3,202,830
    
    
    
    (3,391,989
    )
    
    
    (180,354
    )Issuance of common stock
for compensation and consulting
    
    
    20,000
    
    
    
    20
    
    
    
    49,980
    
    
    
    0
    
    
    
    50,000Warrants issued for compensation
    
    
    0
    
    
    
    0
    
    
    
    234,000
    
    
    
    0
    
    
    
    234,000Stock and warrants issued in
conjunction with equity conversion
    
    
    300,000
    
    
    
    300
    
    
    
    827,200
    
    
    
    
    
    
    
    827,500Net Loss for the nine months
ended June 30, 2005 (Unaudited)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (937,956
    )
    
    
    (937,956
    )Balance at June 30, 2005
(Unaudited)
    
    
    9,125,000
    
    
    $
    9,125
    
    
    $
    4,314,010
    
    
    $
    (4,329,945
    )
    
    $
    (6,810
    )
  3




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##### Table of Contents



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Date of Inception,Nine
    
    
    Nine
    
    
    January 29, 2003,Months Ended
    
    
    Months Ended
    
    
    ThroughJune 30,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005Decrease in Cash and Cash Equivalents:Cash flows from operating activities:Net Loss
    
    $
    (937,956
    )
    
    $
    (684,960
    )
    
    $
    (4,329,945
    )Adjustments to reconcile net loss to net cash
used by operating activities:Depreciation
    
    
    917
    
    
    
    0
    
    
    
    956Minority interest portion of loss
    
    
    0
    
    
    
    (28,360
    )
    
    
    0Common stock and warrants issued
for compensation and consulting
    
    
    284,000
    
    
    
    171,000
    
    
    
    2,650,635Common stock and warrants issued
in conjunction with equity conversion
    
    
    62,062
    
    
    
    
    
    
    
    62,062Changes in Assets and Liabilities:Prepaid expenses
    
    
    (27,091
    )
    
    
    5,187
    
    
    
    (36,853
    )Security deposit
    
    
    (1,000
    )
    
    
    0
    
    
    
    (3,200
    )Accounts payable
    
    
    114,607
    
    
    
    63,176
    
    
    
    239,787Other accrued expenses
    
    
    (1,637
    )
    
    
    625
    
    
    
    769Accrued interest  related party
    
    
    (7,660
    )
    
    
    11,723
    
    
    
    7,689Net cash used by operating activities
    
    
    (513,758
    )
    
    
    (461,609
    )
    
    
    (1,408,100
    )Cash flows from investing activities:Purchase of fixed assets
    
    
    (3,239
    )
    
    
    0
    
    
    
    (4,402
    )Net cash used in investing activities
    
    
    (3,239
    )
    
    
    0
    
    
    
    (4,402
    )Cash flows from financing activities:Proceeds from debt payable  related party
    
    
    488,150
    
    
    
    331,638
    
    
    
    1,197,388Proceeds from debt payable
    
    
    19,166
    
    
    
    0
    
    
    
    19,166Proceeds from stock offering
    
    
    0
    
    
    
    345,000
    
    
    
    345,000Repayment of debt  related party
    
    
    0
    
    
    
    (184,238
    )
    
    
    (184,238
    )Payments related to capital lease
    
    
    (1,331
    )
    
    
    0
    
    
    
    (1,331
    )Proceeds from Joint Venture
    
    
    0
    
    
    
    37,500
    
    
    
    37,500Net cash provided by financing activities
    
    
    505,985
    
    
    
    529,900
    
    
    
    1,413,485Net change in cash and cash equivalents
    
    
    (11,012
    )
    
    
    68,291
    
    
    
    983Cash and cash equivalents at beginning of period
    
    
    11,995
    
    
    
    16,664
    
    
    
    0Cash and cash equivalents at end of period
    
    $
    983
    
    
    $
    84,955
    
    
    $
    983
  4




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 (UNAUDITED)
 Date of Inception,January 29, 2003,Nine months Ended
    
    
    Nine months Ended
    
    
    Through June 30,June 30, 2005
    
    
    June 30, 2004
    
    
    2005Supplemental Information:Interest paid
    
    $
    23,958
    
    
    $
    
    
    
    $
    23,958Income taxes paid
    
    $
    
    
    
    $
    
    
    
    $
    Non-cash Investing and
Financing ActivitiesIssuance of common stock
for repayment of
debt related party
    
    $
    
    
    
    $
    500,000
    
    
    $
    500,000Common Stock and warrants
issued for compensation
and consulting
    
    $
    1,111,500
    
    
    $
    171,000
    
    
    $
    3,478,135Capital lease obligation
    
    $
    3,233
    
    
    $
    
    
    
    $
    3,233
  5




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1
 Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)
 Presentation of Interim Information:
   Nature of Corporation
   Liquidity
  Revenue Recognition
  Software Development Costs
   6




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##### Table of Contents



NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 1
 Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)
  Consolidated Statements
  Use of Estimates
  Loss Per Share
   Stock-Based Compensation
  7




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Note 1
 Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)
 Stock-Based Compensation (Continued)
   (Unaudited)(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    Date of Inception,Nine
    
    
    Nine
    
    
    Three
    
    
    Three
    
    
    January 29, 2003,Months Ended
    
    
    Months Ended
    
    
    Months Ended
    
    
    Months Ended
    
    
    ThroughJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,Net loss:
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005As reported
    
    $
    (937,956
    )
    
    $
    (684,960
    )
    
    $
    (247,158
    )
    
    $
    (263,285
    )
    
    $
    (4,329,945
    )Deduct: Total stock-based employee
compensation expense determined under
the fair value based method for all awards,
net of related tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pro forma net loss
    
    $
    (937,956
    )
    
    $
    (684,960
    )
    
    $
    (247,158
    )
    
    $
    (263,285
    )
    
    $
    (4,329,945
    )Basic loss per share:As reported
    
    $
    (0.11
    )
    
    $
    (0.09
    )
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.58
    )Pro forma
    
    $
    (0.11
    )
    
    $
    (0.09
    )
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.58
    )Diluted loss per share:As reported
    
    $
    (0.11
    )
    
    $
    (0.09
    )
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.58
    )Pro forma
    
    $
    (0.11
    )
    
    $
    (0.09
    )
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.58
    )
  SFAS 123R Share-Based Payment.
 8




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##### Table of Contents



NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 2
 Related Party Transactions
   Note 3
 Stock Options
    WeightedAverageNumber of
    
    
    ExerciseOptions
    
    
    PriceOutstanding at January 29, 2003
    
    
    
    
    
    $
    Granted
    
    
    330,000
    
    
    
    1.00Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at September 30, 2003
    
    
    330,000
    
    
    
    1.00Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at September 30, 2004
    
    
    330,000
    
    
    $
    1.00Granted
    
    
    150,000
    
    
    
    1.00Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (130,000
    )
    
    
    1.00Outstanding at June 30, 2005 (Unaudited)
    
    
    350,000
    
    
    $
    1.00
 9




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##### Table of Contents



NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 3
 Stock Options (Continued)
  Options Outstanding
    
    
    Options ExercisableWeightedAverageRemaining
    
    
    Weighted
    
    
    
    
    
    
    WeightedContractural
    
    
    Average
    
    
    Number
    
    
    AverageExercise
    
    Number of
    
    
    Life
    
    
    Exercise
    
    
    of
    
    
    ExercisePrice
    
    Shares
    
    
    (In Years)
    
    
    Price
    
    
    Shares
    
    
    Price$1.00
    
    
    350,000
    
    
    
    1.75
    
    
    $
    1.00
    
    
    
    300,000
    
    
    $
    1.00
   Note 4
 Warrants
   Warrants Outstanding
    
    
    Warrants ExercisableWeightedAverageRemaining
    
    
    
    
    
    
    WeightedContractural
    
    
    Number
    
    
    AverageExercise
    
    Number of
    
    
    Life
    
    
    of
    
    
    ExercisePrice
    
    Shares
    
    
    (In Years)
    
    
    Shares
    
    
    Price
    
    
    Fair Value$2.50
    
    
    2,900,000
    
    
    
    1.50
    
    
    
    2,900,000
    
    
    $
    2.50
    
    
    $
    0.26$5.00
    
    
    400,000
    
    
    
    2.50
    
    
    
    400,000
    
    
    $
    5.00
    
    
    $
    0.10$2.50
    
    
    250,000
    
    
    
    3.00
    
    
    
    250,000
    
    
    $
    2.50
    
    
    $
    0.31
 Note 5
 Commitments and Contingencies
  10




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NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 5
 Commitments and Contingencies (Continued)
  Year EndingSeptember 30
    
    Amount2005
    
    $8,9672006
    
    $37,1132007
    
    $32,8872008
    
    $4,318
       Note 6
 Investments  Joint Venture
  11




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NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 6
 Investments  Joint Venture (Continued)
      Note 7
 Going Concern
  12




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Special Note Regarding Forward-Looking Statements
      Overview
  Fear Factor Next Action Star
  Summary Plan of Operations
  13




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Fear Factor Next Action Star, Fear Factor Next Action Star
 Revenue
  Expenses
    14




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Comparisons of the three months ended June 30, 2005 and 2004
  Comparisons of the nine months ended June 30, 2005 and 2004
  Liquidity and capital resources
  15




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Off-Balance sheet arrangements
  Item 3. Controls and Procedures.
  16




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 6. Exhibits.
  Exhibit
    
    
    
    MethodNo.
    
    Description
    
    of Filing10.1
    
    Engagement Letter between Teknik Digital Arts, Inc. and Keith B. Dimond
    
    
    (1
    )31.1
    
    Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended
    
    
    *31.2
    
    Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended
    
    
    *32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
    
    
    *32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
    
    
    *
 
 (1)
    
    Previously filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 22, 2005.*
    
    Filed herewith 17




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##### Table of Contents



SIGNATURES
  TEKNIK DIGITAL ARTS, INC.
  By
    /s/ John R. WardJohn R. WardPresident and Chief Executive Officer By
    /s/ Keith B. DimondKeith B. DimondChief Financial Officer 18




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##### Table of Contents



Index to Exhibits
 10.1
    
    Engagement Letter between Teknik Digital Arts, Inc. and Keith B. Dimond31.1
    
    Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended31.2
    
    Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 19