##### Table of Contents



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 March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition from  to
 commission file number
 TEKNIK DIGITAL ARTS, INC.
  Nevada
    
    68- 0539517State or other jurisdiction of 
incorporation or organization
    
    (IRS 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 Subsidiaries
Form 10-QSB
For the Quarter Ended March 31, 2007  Table of Contents
 PART I FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of March
31, 2007 (Unaudited) and September 30, 2006
    
    
    1Unaudited Condensed Consolidated Statements of
Operations for the three and six months ended March
31, 2007 and 2006
    
    
    2Unaudited Condensed Consolidated Statement of
Changes in Stockholders Equity for the six months
ended March 31, 2007
    
    
    3Unaudited Condensed Consolidated Statements of Cash
Flows for the six months ended March 31, 2007 and 2006
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    11Item 3. Controls and Procedures
    
    
    14PART II OTHER INFORMATIONItem 1. Legal Proceedings.
    
    
    14Item 6. Exhibits.
    
    
    15EX-31EX-32




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Part I - FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements.
  
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)March 31,
    
    
    September 30,2007
    
    
    2006Current Assets:Cash and cash equivalents
    
    $
    244
    
    
    $
    42,387Accounts receivable
    
    
    109
    
    
    
    90Deposits
    
    
    7,500
    
    
    
    Prepaid expenses
    
    
    52,038
    
    
    
    238,072Total Current Assets
    
    
    59,891
    
    
    
    280,549Property and equipment, net
    
    
    7,716
    
    
    
    8,583Other Assets:Prepaid expenses  long term portion
    
    
    14,706
    
    
    
    71,176Licenses
    
    
    100
    
    
    
    100Security deposit
    
    
    1,000
    
    
    
    1,000Total Other Assets
    
    
    15,806
    
    
    
    72,276Total Assets
    
    $
    83,413
    
    
    $
    361,408Current Liabilities:Note payable  related party
    
    $
    71,745
    
    
    $
    882,500Accounts payable
    
    
    394,896
    
    
    
    372,689Due to related party
    
    
    300,000
    
    
    
    25,000Capital lease liability
    
    
    
    
    
    
    380Accrued interest
    
    
    73,643
    
    
    
    36,230Total Current Liabilities
    
    
    840,284
    
    
    
    1,316,799Long-Term Liabilities:Notes payable  convertible debt
    
    
    355,000
    
    
    
    355,000Total Liabilities
    
    
    1,195,284
    
    
    
    1,671,799Minority interest in joint ventures
    
    
    37,600
    
    
    
    37,600Total Liabilities and Minority Interest
    
    
    1,232,884
    
    
    
    1,709,399Stockholders Equity (Deficit):Common stock  $.001 par value; 50,000,000 shares
authorized, 14,989,704 and 9,989,704 shares issued;
14,395,588 and 9,489,704 outstanding at March 31, 2007
and September 30, 2006, respectively
    
    
    14,990
    
    
    
    9,990Additional paid-in capital
    
    
    7,075,408
    
    
    
    5,457,466Accumulated deficit
    
    
    (8,187,329
    )
    
    
    (6,814,672
    )(1,096,931
    )
    
    
    (1,347,216
    )Less: Treasury stock at cost, 594,116 and 500,000 shares
at March 31, 2007 and September 30, 2006, respectively
    
    
    (52,540
    )
    
    
    (775
    )Total Stockholders Deficit
    
    
    (1,149,471
    )
    
    
    (1,347,991
    )Total Liabilities and Stockholders Equity (Deficit)
    
    $
    83,413
    
    
    $
    361,408
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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 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Sales
    
    $
    18
    
    
    $
    3,246
    
    
    $
    23
    
    
    $
    3,246Cost of Sales
    
    
    3
    
    
    
    1,716
    
    
    
    4
    
    
    
    1,716Gross Profit
    
    
    15
    
    
    
    1,530
    
    
    
    19
    
    
    
    1,530General and
Administrative
Expenses
    
    
    883,047
    
    
    
    226,830
    
    
    
    1,319,890
    
    
    
    453,146Research and
Development Costs
    
    
    
    
    
    
    499
    
    
    
    254
    
    
    
    38,359Loss from Operations
    
    
    (883,032
    )
    
    
    (225,799
    )
    
    
    (1,320,125
    )
    
    
    (489,975
    )Other Income (Expense):Interest Expense
    
    
    (29,303
    )
    
    
    (17,387
    )
    
    
    (52,532
    )
    
    
    (32,282
    )(29,303
    )
    
    
    (17,387
    )
    
    
    (52,532
    )
    
    
    (32,282
    )Minority Interest
Portion of Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net Loss
    
    $
    (912,335
    )
    
    $
    (243,186
    )
    
    $
    (1,372,657
    )
    
    $
    (522,257
    )Basic and diluted loss
per share (Note 1)
    
    $
    (0.07
    )
    
    $
    (0.03
    )
    
    $
    (0.13
    )
    
    $
    (0.06
    )Weighted Average
Common Shares
Outstanding
    
    
    12,340,032
    
    
    
    9,030,556
    
    
    
    10,879,039
    
    
    
    9,078,297
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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
 (UNAUDITED)
 FOR THE SIX MONTHS ENDED MARCH 31, 2007
 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
    )Stock issued for conversion
of related party note payable
(unaudited)
    
    
    5,000,000
    
    
    
    5,000
    
    
    
    1,745,000
    
    
    
    
    
    
    
    
    
    
    
    1,750,000Adjust fair market value of
stock compensation
issued for services (unaudited)
    
    
    
    
    
    
    
    
    
    
    (127,058
    )
    
    
    
    
    
    
    
    
    
    
    (127,058
    )Net loss for the six months
ended March 31, 2007
(unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,372,657
    )
    
    
    (1,372,657
    )Balance at March 31, 2007
(unaudited)
    
    
    14,989,704
    
    
    $
    14,990
    
    
    $
    7,075,408
    
    
    $
    (52,540
    )
    
    $
    (8,187,329
    )
    
    $
    (1,149,471
    )
  3




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Six
    
    
    SixMonths Ended
    
    
    Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2006Increase/(Decrease) in Cash and Cash Equivalents:Cash flows from operating activities:Net Loss
    
    $
    (1,372,657
    )
    
    $
    (522,257
    )Adjustments to reconcile net loss to net cash
used by operating activities:Depreciation
    
    
    867
    
    
    
    674Common stock issued in excess of conversion
of related party note payable
    
    
    850,000
    
    
    
    Market value adjustment of compensation
    
    
    (178,823
    )
    
    
    Changes in Assets and Liabilities:Accounts receivable
    
    
    (19
    )
    
    
    (2,122
    )Prepaid expenses
    
    
    242,504
    
    
    
    23,880Deposits
    
    
    (7,500
    )
    
    
    Accounts payable
    
    
    22,207
    
    
    
    268,706Accrued vacation
    
    
    
    
    
    
    (1,154
    )Other accrued expenses
    
    
    
    
    
    
    592Accrued interest
    
    
    37,413
    
    
    
    8,680Net cash used by operating activities
    
    
    (406,008
    )
    
    
    (223,001
    )Cash flows from financing activities:Proceeds from note payable  related party
    
    
    89,245
    
    
    
    228,500Payments of note payable
    
    
    
    
    
    
    (11,069
    )Payments related to capital lease
    
    
    (380
    )
    
    
    (1,141
    )Due to related party
    
    
    275,000
    
    
    
    Net cash provided by financing activities
    
    
    363,865
    
    
    
    216,290Net change in cash and cash equivalents
    
    
    (42,143
    )
    
    
    (6,711
    )Cash and cash equivalents at beginning of period
    
    
    42,387
    
    
    
    7,060Cash and cash equivalents at end of period
    
    $
    244
    
    
    $
    349
  4




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 (UNAUDITED)
 Six
    
    
    SixMonths Ended
    
    
    Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2006Supplemental Information:Interest paid
    
    $
    
    
    
    $
    23,602Income taxes paid
    
    $
    
    
    
    $
    Non-cash Investing and Financing ActivitiesCancellation of consulting agreement
    
    $
    51,765
    
    
    $
    Common stock issued for conversion of related party note payable
    
    $
    1,750,000
    
    
    $
    Fixed 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)
 Recent Accounting Pronouncements
  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)
     Note 2
Related Party Transactions
    Note 3
Notes Payable
  8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Note 3
Notes Payable (Continued)
   Note 4
Equity
  Note 5
Going Concern
  Note 6
Subsequent Events
   9




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




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Summary Plan of Operations
   Revenue
  Expenses
     12




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Comparisons of the three months ended March 31, 2007 and 2006
  Comparisons of the six months ended March 31, 2007 and 2006
  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.
  Exhibit Index
 ExhibitNo.
    
    Description31
    
    
    Section 302 Certification of President, Chief Executive Officer
and Chief Financial Officer32
    
    
    Section 906 Certification
 
 SIGNATURES
  TEKNIK DIGITAL ARTS, INC.Dated: May 14, 2007By
    
    /s/ John R. WardJohn R. WardPresident, Chief Executive Officer,
and Chief Financial Officer
 15