##### 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 March 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
    
    68 053 9517State or jurisdiction of
    
    (I. R. S. Employer Identification No.)incorporation or organization
  
   
  þ o
  o þ




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##### 



Teknik Digital Arts, Inc. and Subsidiary
Form 10-QSB
For the Quarter Ended March 31, 2006  Table of Contents
 PART I FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of March
31, 2006 (Unaudited) and September 30, 2005
    
    
    1Unaudited Condensed Consolidated Statements of
Operations for the three and six months ended March
31, 2006 and 2005
    
    
    2Unaudited Condensed Consolidated Statement of
Changes in Stockholders Equity
    
    
    3Unaudited Condensed Consolidated Statements of Cash
Flows for the six months ended March 31, 2006 and
2005
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    11PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    14Item 6. Exhibits
    
    
    15EX-31.1EX-32




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Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
    
    
    September 30,March 31, 2006
    
    
    2005Cash and cash equivalents
    
    $
    349
    
    
    $
    7,060Accounts receivable
    
    
    2,122
    
    
    
    Prepaid expenses
    
    
    4,798
    
    
    
    28,678Total Current Assets
    
    
    7,269
    
    
    
    35,738Property and equipment, net
    
    
    6,224
    
    
    
    7,673Security deposit
    
    
    3,200
    
    
    
    3,200Total Assets
    
    $
    16,693
    
    
    $
    46,611Current Liabilities:Note payable  related party (Note 2)
    
    $
    838,850
    
    
    $
    610,350Notes payable
    
    
    
    
    
    
    11,069Accounts payable
    
    
    580,373
    
    
    
    311,667Accrued vacation
    
    
    
    
    
    
    1,154Capital lease liability  current portion
    
    
    1,522
    
    
    
    2,283Accrued other
    
    
    592
    
    
    
    Accrued interest  related party (Note 2)
    
    
    26,347
    
    
    
    17,667Total Current Liabilities
    
    
    1,447,684
    
    
    
    954,190Long-Term LiabilitiesCapital lease liability  long term portion
    
    
    
    
    
    
    380Minority Interest in Joint Venture (Note 4)
    
    
    37,500
    
    
    
    37,500Total Liabilities and Minority Interest
    
    
    1,485,184
    
    
    
    992,070Stockholders Equity (Deficit): (Notes 1)Common stock  $.001 par value; 50,000,000 shares
authorized, 9,125,000 shares issued and 8,625,000 and 9,125,000
outstanding, respectively
    
    
    9,125
    
    
    
    9,125Additional paid-in capital
    
    
    4,604,010
    
    
    
    4,604,010Accumulated
deficit
    
    
    (6,080,851
    )
    
    
    (5,558,594
    )(1,467,716
    )
    
    
    (945,459
    )Less:
Treasury stock at cost, 500,000 shares
    
    
    (775
    )
    
    
    Total Stockholders Equity
    
    
    (1,468,491
    )
    
    
    (945,459
    )Total Liabilities and Stockholders Equity
    
    $
    16,693
    
    
    $
    46,611
  1




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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three
    
    
    Three
    
    
    Six
    
    
    SixMonths Ended
    
    
    Months Ended
    
    
    Months Ended
    
    
    Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Sales
    
    $
    3,246
    
    
    $
    
    
    
    $
    3,246
    
    
    $
    Cost of Sales
    
    
    1,716
    
    
    
    
    
    
    
    1,716
    
    
    
    Gross Profit
    
    
    1,530
    
    
    
    
    
    
    
    1,530
    
    
    
    General and Administrative Expenses
    
    
    226,830
    
    
    
    331,055
    
    
    
    453,146
    
    
    
    538,321Research and Development Costs
    
    
    499
    
    
    
    68,058
    
    
    
    38,359
    
    
    
    144,596Loss from Operations
    
    
    (225,799
    )
    
    
    (399,113
    )
    
    
    (489,975
    )
    
    
    (682,917
    )Other Income (Expense):Interest Expense
    
    
    (17,387
    )
    
    
    (7,151
    )
    
    
    (32,282
    )
    
    
    (10,053
    )Miscellaneous Income
    
    
    
    
    
    
    420
    
    
    
    
    
    
    
    2,172(17,387
    )
    
    
    (6,731
    )
    
    
    (32,282
    )
    
    
    (7,881
    )Minority Interest Portion of Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net Loss
    
    $
    (243,186
    )
    
    $
    (405,844
    )
    
    $
    (522,257
    )
    
    $
    (690,798
    )Basic and diluted loss per share (Note 1)
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    $
    (0.06
    )
    
    $
    (0.08
    )Weighted Average Common Shares Outstanding
    
    
    9,030,556
    
    
    
    8,810,333
    
    
    
    9,078,297
    
    
    
    8,807,637
  2




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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
 (UNAUDITED)
 DeficitAccumulated
    
    
    TotalAdditional
    
    
    Treasury
    
    
    During
    
    
    StockholdersCommon Stock
    
    
    Paid-in
    
    
    Stock
    
    
    Development
    
    
    EquityShares
    
    
    Amount
    
    
    Capital
    
    
    at Cost
    
    
    Stage
    
    
    (Deficit)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
    
    
    320,000
    
    
    
    320
    
    
    
    799,680
    
    
    
    
    
    
    
    
    
    
    
    800,000Options and warrants issued
for compensation
    
    
    
    
    
    
    
    
    
    
    601,500
    
    
    
    
    
    
    
    
    
    
    
    601,500Net Loss for the twelve months
ended September 30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,166,605
    )
    
    
    (2,166,605
    )Balance at September 30, 2005
    
    
    9,125,000
    
    
    
    9,125
    
    
    
    4,604,010
    
    
    
    
    
    
    
    (5,558,594
    )
    
    
    (945,459
    )Treasury
stock, 500,000 shares (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (775
    )
    
    
    
    
    
    
    (775
    )Net Loss for the six months
ended March 31, 2006 (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (522,257
    )
    
    
    (522,257
    )Balance at March 31, 2006
(Unaudited)
    
    
    9,125,000
    
    
    $
    9,125
    
    
    $
    4,604,010
    
    
    $
    (775
    )
    
    $
    (6,080,851
    )
    
    $
    (1,468,491
    )
  3




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Six
    
    
    SixMonths Ended
    
    
    Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005Increase/(Decrease) in Cash and Cash Equivalents:Cash flows from operating activities:Net Loss
    
    $
    (522,257
    )
    
    $
    (690,798
    )Adjustments to reconcile net loss to net cash
used by operating activities:Depreciation
    
    
    674
    
    
    
    581Common stock and warrants issued
for compensation and consulting
    
    
    
    
    
    
    284,000Changes in Assets and Liabilities:Accounts receivable
    
    
    (2,122
    )
    
    
    Prepaid expenses
    
    
    23,880
    
    
    
    1,362Security deposit
    
    
    
    
    
    
    (1,000
    )Accounts payable
    
    
    268,706
    
    
    
    48,774Accrued vacation
    
    
    (1,154
    )
    
    
    Other accrued expenses
    
    
    592
    
    
    
    (2,021
    )Accrued interest  related party
    
    
    8,680
    
    
    
    (9,627
    )Net cash used by operating activities
    
    
    (223,001
    )
    
    
    (368,729
    )Cash flows from investing activities:Purchase of fixed assets
    
    
    
    
    
    
    (3,239
    )Net cash used in investing activities
    
    
    
    
    
    
    (3,239
    )Cash flows from financing activities:Proceeds from note payable  related party
    
    
    228,500
    
    
    
    364,300Payments of note payable
    
    
    (11,069
    )
    
    
    Payments related to capital lease
    
    
    (1,141
    )
    
    
    (761
    )Net cash provided by financing activities
    
    
    216,290
    
    
    
    363,539Net change in cash and cash equivalents
    
    
    (6,711
    )
    
    
    (8,429
    )Cash and cash equivalents at beginning of period
    
    
    7,060
    
    
    
    11,995Cash and cash equivalents at end of period
    
    $
    349
    
    
    $
    3,566
  4




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 (UNAUDITED)
 Six
    
    SixMonths Ended
    
    Months EndedMarch 31,
    
    March 31,2006
    
    2005Supplemental Information:Interest paid
    
    $
    23,602
    
    
    $
    18,237Income taxes paid
    
    $
    
    
    
    $
    Non-cash Investing and Financing ActivitiesIssuance of common stock for repayment of debt related party
    
    $
    
    
    
    $
    Common Stock and warrants issued for compensation and consulting
    
    $
    
    
    
    $
    284,000Capital lease obligation
    
    $
    
    
    
    $
    4,565Fixed assets exchanged for treasury stock
    
    $
    775
    
    
    $
    
  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)
 Consolidated Statements
  Use of Estimates
  Loss Per Share
   Stock-Based Compensation
   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)
 Stock-Based Compensation (Continued)
  (Unaudited)
    
    
    (Unaudited)Three
    
    
    SixMonths Ended
    
    
    Months EndedMarch 31, 2006
    
    
    March 31, 2006Stock based compensation expense by type of award:Stock options
    
    $
    
    
    
    $
    Total stock based compensation expense
    
    $
    
    
    
    $
    Tax effect on stock based compensation expense
    
    $
    
    
    
    $
    Net effect on net income available to common shareholders
    
    $
    
    
    
    $
    Effect on earnings per share:Basic
    
    $
    
    
    
    $
    Diluted
    
    $
    
    
    
    $
    
  (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
    )
 8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 2
Related Party Transactions
   Note 3
Commitments and Contingencies
   Note 4
Investments  Joint Venture
     9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 4
Investments  Joint Venture (Continued)
  Note 5
Going Concern
  
 10




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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
  Fear Factor.
    11




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Summary Plan of Operations
   Revenue
  Expenses
      12




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Comparisons of the three months ended March 31, 2006 and 2005
   Comparisons of the six months ended March 31, 2006 and 2005
  Liquidity and capital resources
     13




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Off-Balance sheet arrangements
  Item 3. Controls and Procedures.
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  14




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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: May 15, 2006By
    
    /s/ John R. WardJohn R. WardPresident, Chief Executive Officer, and
Chief Financial Officer
 16




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Index to Exhibits
 ExhibitNo.
    
    Description31.1
    
    Section 302 Certification of President, Chief Executive Officer
and Chief Financial Officer32
    
    Section 906 Certification
 17