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UNITED STATES 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 December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 TEKNIK DIGITAL ARTS, INC.
  Nevada
    
    68- 0539517State or jurisdiction of 
incorporation or organization
    
    (I. R. S. Employer Identification No.)
 P.O. Box 2800-314, Carefree, Arizona 85377
   (Issuers telephone number)
 þ o
 o þ
  o þ




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Teknik Digital Arts, Inc. and Subsidiary
Form 10-QSB
For the Quarter Ended December 31, 2006  Table of Contents
 PART I FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements CondensedConsolidated
Balance Sheets as of December 31, 2006 (Unaudited) and September 30, 2006
    
    
    1Unaudited Condensed Consolidated Statements of Operations for the three months ended December 31, 2006 and 2005
    
    
    2Unaudited Condensed Consolidated Statement of Changes in Stockholders Equity for the three months ended December 31, 2006
    
    
    3Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2006 and 2005
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Controls and Procedures
    
    
    15PART II OTHER INFORMATIONItem 1. Legal Proceedings.
    
    
    15Item 6. Exhibits.
    
    
    15EX-31.1EX-32




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Part I  FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)December 31,
    
    
    September 30,2006
    
    
    2006Current Assets:Cash and cash equivalents
    
    $
    3,771
    
    
    $
    42,387Accounts receivable
    
    
    94
    
    
    
    90Prepaid expenses
    
    
    131,739
    
    
    
    238,072Total Current Assets
    
    
    135,604
    
    
    
    280,549Property and equipment, net
    
    
    8,150
    
    
    
    8,583Other Assets:Prepaid expenses  long term portion
    
    
    51,765
    
    
    
    71,176Licenses
    
    
    100
    
    
    
    100Security deposit
    
    
    1,000
    
    
    
    1,000Total Other Assets
    
    
    52,865
    
    
    
    72,276Total Assets
    
    $
    196,619
    
    
    $
    361,408Current Liabilities:Note payable  related party
    
    $
    948,600
    
    
    $
    882,500Accounts payable
    
    
    356,037
    
    
    
    372,689Due to related party
    
    
    300,000
    
    
    
    25,000Capital lease liability
    
    
    
    
    
    
    380Accrued interest
    
    
    59,460
    
    
    
    36,230Total Current Liabilities
    
    
    1,664,097
    
    
    
    1,316,799Long-Term Liabilities:Notes payable  convertible debt
    
    
    355,000
    
    
    
    355,000Total Liabilities
    
    
    2,019,097
    
    
    
    1,671,799Minority interest in joint ventures
    
    
    37,600
    
    
    
    37,600Total Liabilities and Minority Interest
    
    
    2,056,697
    
    
    
    1,709,399Stockholders Equity (Deficit):Common stock  $.001 par value; 50,000,000 shares
authorized, 9,989,704 shares issued; 9,395,588 and
9,489,704 outstanding at December 31 and
September 30, 2006, respectively
    
    
    9,990
    
    
    
    9,990Additional paid-in capital
    
    
    5,457,466
    
    
    
    5,457,466Accumulated deficit
    
    
    (7,274,994
    )
    
    
    (6,814,672
    )(1,807,538
    )
    
    
    (1,347,216
    )Less: Treasury stock at cost, 594,116 shares
    
    
    (52,540
    )
    
    
    (775
    )Total Stockholders Deficit
    
    
    (1,860,078
    )
    
    
    (1,347,991
    )Total Liabilities and Stockholders Equity (Deficit)
    
    $
    196,619
    
    
    $
    361,408
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three
    
    
    ThreeMonths Ended
    
    
    Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005Sales
    
    $
    5
    
    
    $
    Cost of Sales
    
    
    1
    
    
    
    Gross Profit
    
    
    4
    
    
    
    General and Administrative Expenses
    
    
    436,843
    
    
    
    226,316Research and Development Costs
    
    
    254
    
    
    
    37,860Loss from Operations
    
    
    (437,093
    )
    
    
    (264,176
    )Other Income (Expense):Interest Expense
    
    
    (23,229
    )
    
    
    (14,895
    )(23,229
    )
    
    
    (14,895
    )Minority Interest Portion of Loss
    
    
    
    
    
    
    Net Loss
    
    $
    (460,322
    )
    
    $
    (279,071
    )Basic and diluted loss per share
    
    $
    (0.05
    )
    
    $
    (0.03
    )Basic and Diluted Weighted Average Common Shares Outstanding
    
    
    9,449,807
    
    
    
    9,125,000
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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)  (UNAUDITED)  FOR THE THREE MONTHS ENDED DECEMBER 31, 2006
 TotalAdditional
    
    
    Treasury
    
    
    
    
    
    
    StockholdersCommon Stock
    
    
    Paid-in
    
    
    Stock
    
    
    Accumulated
    
    
    EquityShares
    
    
    Amount
    
    
    Capital
    
    
    at Cost
    
    
    Deficit
    
    
    (Deficit)Balance at September 30, 2006
    
    
    9,989,704
    
    
    
    9,990
    
    
    
    5,457,466
    
    
    
    (775
    )
    
    
    (6,814,672
    )
    
    
    (1,347,991
    )Cancellation of consulting
agreement (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51,765
    )
    
    
    
    
    
    
    (51,765
    )Net loss for the three months
ended December 31, 2006 (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (460,322
    )
    
    
    (460,322
    )Balance at December 31, 2006
(unaudited)
    
    
    9,989,704
    
    
    $
    9,990
    
    
    $
    5,457,466
    
    
    $
    (52,540
    )
    
    $
    (7,274,994
    )
    
    $
    (1,860,078
    )
  3




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Three
    
    
    ThreeMonths Ended
    
    
    Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005Increase/(Decrease) in Cash and Cash Equivalents:Cash flows from operating activities:Net Loss
    
    $
    (460,322
    )
    
    $
    (279,071
    )Adjustments to reconcile net loss to net cash
used by operating activities:Depreciation
    
    
    433
    
    
    
    337Changes in Assets and Liabilities:Accounts receivable
    
    
    (4
    )
    
    
    Prepaid expenses
    
    
    73,979
    
    
    
    14,418Accounts payable
    
    
    (16,652
    )
    
    
    114,183Due to related party
    
    
    275,000
    
    
    
    Accrued vacation
    
    
    
    
    
    
    (1,154
    )Accrued payroll
    
    
    
    
    
    
    4,227Accrued interest
    
    
    23,230
    
    
    
    (5,583
    )Net cash used by operating activities
    
    
    (104,336
    )
    
    
    (152,643
    )Cash flows from financing activities:Proceeds from note payable  related party
    
    
    66,100
    
    
    
    155,500Payments of note payable
    
    
    
    
    
    
    (8,275
    )Payments related to capital lease
    
    
    (380
    )
    
    
    (571
    )Net cash provided by financing activities
    
    
    65,720
    
    
    
    146,654Net change in cash and cash equivalents
    
    
    (38,616
    )
    
    
    (5,989
    )Cash and cash equivalents at beginning of period
    
    
    42,387
    
    
    
    7,060Cash and cash equivalents at end of period
    
    $
    3,771
    
    
    $
    1,071
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 (UNAUDITED)
 Three
    
    
    ThreeMonths Ended
    
    
    Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005Supplemental Information:Interest paid
    
    $
    
    
    
    $
    17,667Income taxes paid
    
    $
    
    
    
    $
    Non-cash Investing and Financing Activities
Cancellation of consulting agreement
    
    $
    51,765
    
    
    $
    
  5




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




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 1
Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)
 Recent Accounting Pronouncements
      7




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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
    8




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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)ThreeMonths EndedDecember 31,2005Net loss:As reported
    
    $
    (279,071
    )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
    
    $
    (279,071
    )Basic loss per share:As reported
    
    $
    (0.03
    )Pro forma
    
    $
    (0.03
    )Diluted loss per share:As reported
    
    $
    (0.03
    )Pro forma
    
    $
    (0.03
    )
 Note 2
Related Party Transactions
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 2
Related Party Transactions (Continued)
  Note 3
Notes Payable
   Note 4
Equity
  Note 5
Going Concern
  10




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 6
Subsequent Events
  11




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Special Note Regarding Forward-Looking Statements
      Overview
      12




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Summary Plan of Operations
   Revenue
  Expenses
      13




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Comparisons of the three months ended December 31, 2006 and 2005
  Liquidity and capital resources
       14




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Off-Balance sheet arrangements
  
 Item 3. Controls and Procedures.
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 6. Exhibits.
 (a)
    
    The following exhibits are filed herewith pursuant to Regulation S-B.
 Exhibit Index
 ExhibitNo.
    
    Description31.1
    
    Section 302 Certification of President, Chief Executive Officer
and Chief Financial Officer32
    
    Section 906 Certification
 15




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SIGNATURES
  TEKNIK DIGITAL ARTS, INC.Dated: February 13, 2007
    By
    /s/ John R. WardJohn R. WardPresident, Chief Executive Officer,
and Chief Financial Officer 16