##### 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 December 31, 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
    
    
    
    (I. R. S. Employer Identification No.)incorporation or organization
 P.O. Box 2800-314, Carefree, Arizona 85377(Address of principal executive offices)
 (480) 443-1488(Issuers telephone number)
 þ o
  o þ




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Teknik Digital Arts, Inc. and Subsidiary (A Development Stage Company)
Form 10-QSB
For the Quarter Ended December 31, 2005  Table of Contents
 PART I FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of December 31, 2005 (Unaudited) and September 30, 2005
    
    
    1Unaudited Condensed Consolidated Statements of Operations for the three months ended December 31, 2005 and 2004 and for the period from Inception January 29, 2003 through December 31, 2005
    
    
    2Unaudited Condensed Consolidated Statement of Changes in Stockholders Equity
    
    
    3Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2005 and 2004 and for the period from Inception January 29, 2003 through December 31, 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.
    
    
    14Exhibit 31.1Exhibit 31.2Exhibit 32




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)December 31,
    
    
    September 30,2005
    
    
    2005Current Assets:Cash and cash equivalents
    
    $
    1,071
    
    
    $
    7,060Prepaid expenses
    
    
    14,260
    
    
    
    28,678Total Current Assets
    
    
    15,331
    
    
    
    35,738Property and equipment, net
    
    
    7,336
    
    
    
    7,673Security deposit
    
    
    3,200
    
    
    
    3,200Total Assets
    
    $
    25,867
    
    
    $
    46,611Current Liabilities:Note payable  related party (Note 2)
    
    $
    765,850
    
    
    $
    610,350Notes payable
    
    
    2,794
    
    
    
    11,069Accounts payable
    
    
    425,850
    
    
    
    311,667Accrued vacation
    
    
    
    
    
    
    1,154Accrued payroll
    
    
    4,227
    
    
    
    Capital lease liability  current portion
    
    
    2,092
    
    
    
    2,283Accrued interest  related party (Note 2)
    
    
    12,084
    
    
    
    17,667Total Current Liabilities
    
    
    1,212,897
    
    
    
    954,190Long-Term LiabilitiesCapital lease liability  long term portion
    
    
    
    
    
    
    380Minority Interest in Joint Venture (Note 4)
    
    
    37,500
    
    
    
    37,500Total Liabilities and Minority Interest
    
    
    1,250,397
    
    
    
    992,070Stockholders Equity (Deficit): (Notes 1)Common stock  $.001 par value; 50,000,000 shares
authorized, 9,125,000 shares issued and outstanding
    
    
    9,125
    
    
    
    9,125Additional paid-in capital
    
    
    4,604,010
    
    
    
    4,604,010Deficit accumulated during development stage
    
    
    (5,837,665
    )
    
    
    (5,558,594
    )Total Stockholders Equity (Deficit)
    
    
    (1,224,530
    )
    
    
    (945,459
    )Total Liabilities and Stockholders Equity (Deficit)
    
    $
    25,867
    
    
    $
    46,611
  1




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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Date of Inception,Three
    
    
    Three
    
    
    January 29, 2003,Months Ended
    
    
    Months Ended
    
    
    ThroughDecember 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005Sales
    
    $
    
    
    
    $
    
    
    
    $
    Cost of Sales
    
    
    
    
    
    
    
    
    
    
    Gross Profit
    
    
    
    
    
    
    
    
    
    
    General and Administrative Expenses
    
    
    226,316
    
    
    
    207,266
    
    
    
    3,079,198Research and Development Costs
    
    
    37,860
    
    
    
    76,538
    
    
    
    2,703,393Loss from Operations
    
    
    (264,176
    )
    
    
    (283,804
    )
    
    
    (5,782,591
    )Other Income (Expense):Interest Expense
    
    
    (14,895
    )
    
    
    (2,902
    )
    
    
    (64,665
    )Miscellaneous Income
    
    
    
    
    
    
    1,752
    
    
    
    9,591(14,895
    )
    
    
    (1,150
    )
    
    
    (55,074
    )Minority Interest Portion of Loss
    
    
    
    
    
    
    
    
    
    
    Net Loss
    
    $
    (279,071
    )
    
    $
    (284,954
    )
    
    $
    (5,837,665
    )Basic and diluted loss per share (Note 1)
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.75
    )Weighted Average Common Shares Outstanding
    
    
    9,125,000
    
    
    
    8,805,000
    
    
    
    7,791,134
  2




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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
 (UNAUDITED)
 For The Period From The Date of Inception, January 29, 2003 Through December 31, 2005
 Accumulated
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    6,635Net Loss from inception to
September 30, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (339,709
    )
    
    
    (339,709
    )Balance at September 30, 2003
    
    
    6,635,000
    
    
    
    6,635
    
    
    
    
    
    
    
    (339,709
    )
    
    
    (333,074
    )Conversion of debt to
common stock
    
    
    1,000,000
    
    
    
    1,000
    
    
    
    499,000
    
    
    
    
    
    
    
    500,000Proceeds from sale of stock
    
    
    190,000
    
    
    
    190
    
    
    
    94,810
    
    
    
    
    
    
    
    95,000Warrants issued for compensation
    
    
    
    
    
    
    
    
    
    
    820,000
    
    
    
    
    
    
    
    820,000Issuance of common stock
for compensation and consulting
    
    
    880,000
    
    
    
    880
    
    
    
    1,539,120
    
    
    
    
    
    
    
    1,540,000Exercise of warrants
    
    
    100,000
    
    
    
    100
    
    
    
    249,900
    
    
    
    
    
    
    
    250,000Net Loss for the twelve months
ended September 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (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
    
    
    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
    )Net Loss for the three months
ended December 31, 2005(Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (279,071
    )
    
    
    (279,071
    )Balance at December 31, 2005
(Unaudited)
    
    
    9,125,000
    
    
    $
    9,125
    
    
    $
    4,604,010
    
    
    $
    (5,837,665
    )
    
    $
    (1,224,530
    )
  3




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Date of Inception,Three
    
    
    Three
    
    
    January 29, 2003,Months Ended
    
    
    Months Ended
    
    
    ThroughDecember 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005Increase/(Decrease) in Cash and Cash Equivalents:Cash flows from operating activities:Net Loss
    
    $
    (279,071
    )
    
    $
    (284,954
    )
    
    $
    (5,837,665
    )Adjustments to reconcile net loss to net cash
used by operating activities:Depreciation
    
    
    337
    
    
    
    243
    
    
    
    1,631Common stock, options, and warrants issued
for compensation and consulting
    
    
    
    
    
    
    
    
    
    
    3,768,135Changes in Assets and Liabilities:Prepaid expenses
    
    
    14,418
    
    
    
    (625
    )
    
    
    (14,260
    )Security deposit
    
    
    
    
    
    
    
    
    
    
    (3,200
    )Accounts payable
    
    
    114,183
    
    
    
    72,478
    
    
    
    425,850Accrued vacation
    
    
    (1,154
    )
    
    
    (2,406
    )
    
    
    Accrued payroll
    
    
    4,227
    
    
    
    
    
    
    
    4,227Accrued interest  related party
    
    
    (5,583
    )
    
    
    (12,461
    )
    
    
    12,084Net cash used by operating activities
    
    
    (152,643
    )
    
    
    (227,725
    )
    
    
    (1,643,198
    )Cash flows from investing activities:Purchase of fixed assets
    
    
    
    
    
    
    (3,239
    )
    
    
    (4,402
    )Net cash used in investing activities
    
    
    
    
    
    
    (3,239
    )
    
    
    (4,402
    )Cash flows from financing activities:Proceeds from note payable  related party
    
    
    155,500
    
    
    
    260,000
    
    
    
    1,450,088Payments of note payable
    
    
    (8,275
    )
    
    
    
    
    
    
    2,794Proceeds from sale of stock and exercise of warrants
    
    
    
    
    
    
    
    
    
    
    345,000Repayment of debt  related party
    
    
    
    
    
    
    
    
    
    
    (184,238
    )Payments related to capital lease
    
    
    (571
    )
    
    
    (190
    )
    
    
    (2,473
    )Proceeds from Joint Venture
    
    
    
    
    
    
    
    
    
    
    37,500Net cash provided by financing activities
    
    
    146,654
    
    
    
    259,810
    
    
    
    1,648,671Net change in cash and cash equivalents
    
    
    (5,989
    )
    
    
    28,846
    
    
    
    1,071Cash and cash equivalents at beginning of period
    
    
    7,060
    
    
    
    11,995
    
    
    
    Cash and cash equivalents at end of period
    
    $
    1,071
    
    
    $
    40,841
    
    
    $
    1,071
  4




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 (UNAUDITED)
 Date of Inception,Three
    
    Three
    
    January 29, 2003,Months Ended
    
    Months Ended
    
    ThroughDecember 31,
    
    December 31,
    
    December 31,2005
    
    2004
    
    2005Supplemental Information:Interest paid
    
    $
    17,667
    
    
    $
    15,349
    
    
    $
    41,625Income taxes paid
    
    $
    
    
    
    $
    
    
    
    $
    Non-cash Investing and Financing ActivitiesIssuance of common stock for repayment of debt related party
    
    $
    
    
    
    $
    
    
    
    $
    500,000Common Stock and warrants issued for compensation and consulting
    
    $
    
    
    
    $
    
    
    
    $
    3,768,135Capital lease obligation
    
    $
    
    
    
    $
    4,565
    
    
    $
    4,565
  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)
    
    
    (Unaudited)
    
    
    Date of Inception,Three
    
    
    Three
    
    
    January 29, 2003,Months Ended
    
    
    Months Ended
    
    
    ThroughDecember 31,
    
    
    December 31,
    
    
    December 31,Net loss:
    
    2005
    
    
    2004
    
    
    2005As reported
    
    $
    (279,071
    )
    
    $
    (284,954
    )
    
    $
    (5,837,665
    )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
    )
    
    $
    (284,954
    )
    
    $
    (5,837,665
    )Basic loss per share:As reported
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.75
    )Pro forma
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.75
    )Diluted loss per share:As reported
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.75
    )Pro forma
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.75
    )
  Share-Based Payment.
 
 Note 2
 Related Party Transactions
 
  8




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




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (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 December 31, 2005 and 2004
   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.
  
 Item 6. Exhibits.
  Exhibit Index
 ExhibitNo.
    
    Description31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32
    
    Section 906 Certifications
 14




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SIGNATURES
  TEKNIK DIGITAL ARTS, INC.Dated: February 14, 2006By
    
    /s/ John R. WardJohn R. WardPresident and Chief Executive OfficerBy
    
    /s/ Keith B. DimondKeith B. DimondChief Financial Officer
 15




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EXHIBIT INDEX
 ExhibitNo.
    
    Description31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32
    
    Section 906 Certifications
 16