##### 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, 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.)
 7377 E. Doubletree Ranch Road, Suite #240, Scottsdale, Arizona 85258 
 (480) 443-1488 
 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the last
90 days. Yes x No o On
May 16, 2005, the registrant had outstanding 8,825,000 shares of Common Stock, par value
$0.001 per share. Transitional Small Business Disclosure Format: Yes o No x




---



##### Table of Contents



Teknik Digital Arts, Inc. and Subsidiaries
Form 10-QSB
For the Quarter Ended March 31, 2005 Table of Contents PART I FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of March
31, 2005 (Unaudited) and September 30, 2004
    
    
    2Unaudited Condensed Consolidated Statements of
Operations for the Six Months Ended March 31, 2005
and 2004 and for the Three Months Ended March 31,
2005 and 2004
    
    
    4Unaudited Condensed Consolidated Statement of
Changes in Stockholders Equity
    
    
    5Unaudited Condensed Consolidated Statements of Cash
Flows for the Six Months Ended March 31, 2005 and
2004 and for the Three Months Ended March 31, 2005
and 2004
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    16PART II OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    20Item 6.
    
    Exhibits
    
    
    22EXHIBIT 31EXHIBIT 32
 1




---



##### Table of Contents



Part 1. - FINANCIAL INFORMATION 
 Item 1. Financial Statements. TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY) 
 CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
    
    
    (Audited)March 31,
    
    
    September 30,2005
    
    
    2004Current Assets:Cash and cash equivalents
    
    $
    3,566
    
    
    $
    11,995Prepaid expenses
    
    
    8,400
    
    
    
    9,762Total Current Assets
    
    
    11,966
    
    
    
    21,757Property and equipment, net
    
    
    8,347
    
    
    
    1,124Other Assets:Security deposit
    
    
    3,200
    
    
    
    2,200Total Assets
    
    $
    23,513
    
    
    $
    25,081Current Liabilities:Note payable  related party (Note 2)
    
    $
    389,300
    
    
    $
    25,000Accounts payable
    
    
    173,954
    
    
    
    125,180Accrued vacation
    
    
    385
    
    
    
    2,406Capital lease liability
    
    
    3,804
    
    
    
    Accrued interest  related party (Note 2)
    
    
    5,722
    
    
    
    15,349Total Current Liabilities
    
    
    573,165
    
    
    
    167,935Minority Interest in Joint Venture (Note 6)
    
    
    37,500
    
    
    
    37,500Total Liabilities and Minority Interest
    
    
    610,665
    
    
    
    205,435Stockholders Equity (Deficit): (Notes 1 and 3)Common stock  $.001 par value; 50,000,000 shares
authorized, 8,825,000 and 8,805,000 shares issued and
outstanding, respectively
    
    
    8,825
    
    
    
    8,805Additional paid-in capital
    
    
    3,486,810
    
    
    
    3,202,830Deficit accumulated during development stage
    
    
    (4,082,787
    )
    
    
    (3,391,989
    )Total Stockholders Equity (Deficit)
    
    
    (587,152
    )
    
    
    (180,354
    )Total Liabilities and Stockholders Equity (Deficit)
    
    $
    23,513
    
    
    $
    25,081
 See Accompanying Notes to
Condensed Consolidated Financial Statements 2




---



##### Table of Contents



TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    Date of Inception,Six
    
    
    Six
    
    
    Three
    
    
    Three
    
    
    January 29, 2003,Months Ended
    
    
    Months Ended
    
    
    Months Ended
    
    
    Months Ended
    
    
    ThroughMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005Sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Cost of Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gross Profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    General and Administrative Expenses
    
    
    538,321
    
    
    
    223,069
    
    
    
    331,055
    
    
    
    82,725
    
    
    
    1,513,175Research and Development Costs
    
    
    144,596
    
    
    
    191,224
    
    
    
    68,058
    
    
    
    109,805
    
    
    
    2,552,385Loss from Operations
    
    
    (682,917
    )
    
    
    (414,293
    )
    
    
    (399,113
    )
    
    
    (192,530
    )
    
    
    (4,065,560
    )Other Income (Expense):Interest Expense
    
    
    (10,053
    )
    
    
    (9,249
    )
    
    
    (7,151
    )
    
    
    (1,452
    )
    
    
    (26,818
    )Miscellaneous Income
    
    
    2,172
    
    
    
    1,867
    
    
    
    420
    
    
    
    231
    
    
    
    9,591(7,881
    )
    
    
    (7,382
    )
    
    
    (6,731
    )
    
    
    (1,221
    )
    
    
    (17,227
    )Net Loss
    
    $
    (690,798
    )
    
    $
    (421,675
    )
    
    $
    (405,844
    )
    
    $
    (193,751
    )
    
    $
    (4,082,787
    )Basic and diluted loss per share (Note 1)
    
    $
    (0.08
    )
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.02
    )
    
    $
    (0.55
    )Weighted Average Common Shares
Outstanding
    
    
    8,807,637
    
    
    
    7,230,000
    
    
    
    8,810,333
    
    
    
    7,825,000
    
    
    
    7,358,668
 See Accompanying Notes to
Condensed Consolidated Financial Statements 3




---



##### Table of Contents



TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) For The Period From The Date of Inception, January 29, 2003 Through March 31, 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
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    20,000
    
    
    
    20
    
    
    
    49,980
    
    
    
    
    
    
    
    50,000Warrants issued for compensation
    
    
    
    
    
    
    
    
    
    
    234,000
    
    
    
    
    
    
    
    234,000Net Loss for the six months
ended March 31, 2005
(Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (690,798
    )
    
    
    (690,798
    )Balance at March 31, 2005
(Unaudited)
    
    
    8,825,000
    
    
    $
    8,825
    
    
    $
    3,486,810
    
    
    $
    (4,082,787
    )
    
    $
    (587,152
    )
 See Accompanying Notes to
Condensed Consolidated Financial Statements 4




---



##### Table of Contents



TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)(Unaudited)
    
    
    (Unaudited)
    
    
    Date of Inception,Six
    
    
    Six
    
    
    January 29, 2003,Months Ended
    
    
    Months Ended
    
    
    ThroughMarch 31,
    
    
    March 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005Decrease in Cash and Cash Equivalents:Cash flows from operating activities:Net Loss
    
    
    (690,798
    )
    
    
    (421,675
    )
    
    
    (4,082,787
    )Adjustments to reconcile net loss to net cash
used by operating activities:Depreciation
    
    
    581
    
    
    
    0
    
    
    
    620Common stock and warrants issued
for compensation and consulting
    
    
    284,000
    
    
    
    0
    
    
    
    2,650,635Changes in Assets and Liabilities:Prepaid expenses
    
    
    1,362
    
    
    
    10,025
    
    
    
    (8,400
    )Security deposit
    
    
    (1,000
    )
    
    
    (2,000
    )
    
    
    (3,200
    )Accounts payable
    
    
    48,774
    
    
    
    12,499
    
    
    
    173,954Other accrued expenses
    
    
    (2,021
    )
    
    
    374
    
    
    
    385Accrued interest  related party
    
    
    (9,627
    )
    
    
    9,188
    
    
    
    5,722Net cash used by operating activities
    
    
    (368,729
    )
    
    
    (391,589
    )
    
    
    (1,263,071
    )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
    
    
    364,300
    
    
    
    275,624
    
    
    
    1,073,538Proceeds from stock offering
    
    
    0
    
    
    
    100,000
    
    
    
    345,000Repayment of debt  related party
    
    
    0
    
    
    
    0
    
    
    
    (184,238
    )Payments related to capital lease
    
    
    (761
    )
    
    
    0
    
    
    
    (761
    )Proceeds from Joint Venture
    
    
    0
    
    
    
    0
    
    
    
    37,500Net cash provided by financing activities
    
    
    363,539
    
    
    
    375,624
    
    
    
    1,271,039Net change in cash and cash equivalents
    
    
    (8,429
    )
    
    
    (15,965
    )
    
    
    3,566Cash and cash equivalents at beginning of period
    
    
    11,995
    
    
    
    16,664
    
    
    
    0Cash and cash equivalents at end of period
    
    
    3,566
    
    
    
    699
    
    
    
    3,566
 See Accompanying Notes to
Condensed Consolidated Financial Statements 5




---



##### Table of Contents



TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED) (Unaudited)(Unaudited)
    
    
    (Unaudited)
    
    
    Date of Inception,Six
    
    
    Six
    
    
    January 29, 2003,Months Ended
    
    
    Months Ended
    
    
    ThroughMarch 31,
    
    
    March 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005Supplemental Information:Interest paid
    
    $
    18,237
    
    
    $
    
    
    
    $
    18,237Income 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
    
    $
    284,000
    
    
    $
    
    
    
    $
    2,650,635Capital lease obligation
    
    $
    3,804
    
    
    $
    
    
    
    $
    3,804
 See Accompanying Notes to
Condensed Consolidated Financial Statements 6




---



##### Table of Contents



TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY) 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS   Note 1
 Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates
 
 Operations Teknik Digital Arts, Inc. is a corporation which was duly formed and organized under the laws of
the State of Nevada on January 29, 2003. The Company has not commenced principal operations as of March 31, 2005. As such, the Company is
deemed to be in the development stage formed for the purpose of developing interactive
entertainment software. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Teknik Digital Arts,
Inc. (the Company) have been prepared in accordance with generally accepted accounting (GAAP),
pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they
do not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the unaudited condensed consolidated financial statements
reflect all adjustments (which include only normal and recurring adjustments) necessary for a fair
presentation of the results for the interim periods presented have been made. All significant
intercompany transactions have been eliminated in consolidation. Operating results for the three
and six months ended March 31, 2005 are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 2005. For further information, refer to the
consolidated financial statements and footnotes thereto for the fiscal year ended September 30,
2004 included in our final prospectus filed on April 6, 2005. The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. Consolidated Statements The consolidated financial statements include the accounts of the Company and its subsidiaries,
Playentertainment-Teknik, LLC and Pep Pad-Teknik, LLC. All significant intercompany balances and
transactions have been eliminated in consolidation. The Company owns 50% of the membership interest
of both LLCs, however, the financial statements of the subsidiaries have been consolidated as the
management and operations of Playentertainment-Teknik, LLC and Pep Pad-Teknik, LLC are
substantially controlled by Teknik Digital Arts, Inc. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Revenue Recognition The Company will derive its revenues from the sale of interactive entertainment software through
the Company website.




---



##### Table of Contents



TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)   Note 1
 Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)
 
 Software Development Costs The Company capitalizes software development costs in accordance with Statement of Financial
Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed. Capitalization of software development costs begins upon the establishment of
technological feasibility of the product. The establishment of technological feasibility and the
ongoing assessment of the recoverability of these costs requires considerable judgment by
management with respect to certain external factors including, but not limited to, anticipated
future gross product revenue, estimated economic life, and changes in software and hardware
technology. Amortization of capitalized software development costs begins when the products are
available for general release to customers and is computed on a product-by-product basis using
straight-line amortization with useful lives of five years or, if less, the remaining estimated
economic life of the product. Amounts related to internal software development that could be
capitalized under this statement were immaterial. During the period ended September 30, 2004, the Company entered into an agreement to purchase
spam-filter software from Fortune Labs LLC for warrants valued at $40,000. In connection with the
agreement, Fortune Labs LLC and its affiliate, Chris Fortune, acquired 190,000 shares of common
stock for $95,000. Because the Company did not have a working prototype, the cost of the software
purchased was expensed due to the determination that the threshold of technological feasibility was
not definitively met. Income (Loss) Per Share Basic loss per share of common stock was computed by dividing the net loss by the
weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed based on the weighted average number of shares of common stock
and dilutive securities outstanding during the period. Dilutive securities are options that are
freely exercisable into common stock at less than the prevailing market price. Dilutive securities
are not included in the weighted average number of shares when inclusion would increase the
earnings per share or decrease the loss per share. As of March 31, 2004, options to purchase
330,000 shares of the Companys common stock were not included in the determination of diluted loss
per share as their effect was anti-dilutive. As of March 31, 2005, options to purchase 350,000
shares and warrants to purchase 3,300,000 shares of common stock were not included in the
determination of diluted loss per share as their effect was anti-dilutive. Stock-Based Compensation Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123), as amended by Statement of Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure  an amendment of FASB Statement No. 123
(SFAS No. 148), establishes a fair value method of accounting for stock-based compensation plans
and for transactions in which an entity acquires goods or services from non-employees in exchange
for equity instruments. SFAS 123 also encourages, but does not require, companies to record
compensation cost for stock-based employee compensation. The Company has elected to follow
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB25)
and the related interpretations in accounting for its employee stock options. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the fair market price of
the Companys common stock at the date of grant over the amount an employee must pay to acquire the
stock. 8




---



##### Table of Contents



TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY) 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) We have recorded compensation charges for issuance of stock awards where the exercise price was
less than the deemed fair value of the underlying stock for financial accounting purposes. The
Company has adopted the disclosure-only provisions of SFAS No. 123. Most stock options issued to employees or prospective key employees have an exercise price not less
than the fair market value of the Companys common stock on the date of grant. In accordance with
accounting for such options utilizing the intrinsic value method, there is no related compensation
expense recorded in the Companys financial statements for the period from the date of inception,
January 29, 2003, through December 31, 2004. Additional shares were issued during the three months
ended March 31, 2005, that were valued at $2.50 per share. Accordingly, compensation expense of
$234,000 was recorded using the Black Scholes model pricing method. The following table sets forth
the computation of pro forma basic and diluted earnings per share, based upon the fair value
method: (Unaudited)(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    Date of Inception,Six
    
    
    Six
    
    
    Three
    
    
    Three
    
    
    January 29, 2003,Months Ended
    
    
    Months Ended
    
    
    Months Ended
    
    
    Months Ended
    
    
    ThroughMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,Net loss:
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005As reported
    
    $
    (690,798
    )
    
    $
    (421,675
    )
    
    $
    (405,844
    )
    
    $
    (193,751
    )
    
    $
    (4,082,787
    )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
    
    $
    (690,798
    )
    
    $
    (421,675
    )
    
    $
    (405,844
    )
    
    $
    (193,751
    )
    
    $
    (4,082,787
    )Basic loss per share:As reported
    
    $
    (0.08
    )
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.02
    )
    
    $
    (0.55
    )Pro forma
    
    $
    (0.08
    )
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.02
    )
    
    $
    (0.55
    )Diluted loss per share:As reported
    
    $
    (0.08
    )
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.02
    )
    
    $
    (0.55
    )Pro forma
    
    $
    (0.08
    )
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.02
    )
    
    $
    (0.55
    )
 The fair value of option grants is estimated as of the date of grant utilizing the Black-Scholes
option-pricing model with the following weighted average assumptions for all grants: expected life
of options of 3 years, risk-free interest rates of 2%, volatility at 0-10%, and a 0% dividend
yield. This resulted in a portion of the options having been valued at $234,000 or $1.56 per option. 9




---



##### Table of Contents



TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)   Note 1
 Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)
 
 In December 2004, the FASB issued Statement No. 123R (SFAS 123R), Share-Based Payment.This
Statement focuses primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. It requires that the fair-value-based method be used
to account for these transactions for all public entities. SFAS 123R is effective for small
business issuers for the first reporting period after December 15, 2005 and will effect any stock
based compensation issued after that date. Note 2 
 Related Party Transactions
 
 On March 1, 2003, the Company established a line of credit with a related party, CodeFire
Acquisition Corp. (CAC). The line of credit bears interest at a rate of 7% per annum and was
originally due on March 1, 2004. The Company renewed the line of credit on March 1, 2004; the line
of credit was to remain in effect through March 1, 2005 unless otherwise terminated. On February
23, 2005, the Company renewed the revolving credit facility for an additional year, extending the
facility through March 1, 2006, and extending the deadline for amounts due on the note associated
with our borrowings under the facility from March 1, 2005 to March 1, 2006. We also renegotiated
the aggregate borrowing amount of the facility with CAC, increasing the aggregate amount of the
facility from $500,000 to $1,000,000. As of March 31, 2005 and September 30, 2004, the Company had
a line of credit of $1,000,000 and $500,000, respectively, related to the aforementioned line of
credit. As of March 31, 2005 and September 30, 2004, the Company had $610,700 (unaudited) and
$475,000 (audited) of available line of credit. As of March 31, 2005 and September 30, 2004, there was interest accrued on the note of $5,722
(unaudited) and $15,349 (audited), respectively. Note 3 
 Stock Options
 
 The Company, under its 2004 Stock Option Plan, is authorized to grant options for up to 2,000,000
shares of common stock, which consists of authorized, but unissued, or reacquired shares of stock
or any combination. Options may be granted as incentive stock options or non-statutory stock
options. Incentive Stock Options are granted at the fair market value of the common stock on the
date of the grant, and have exercise terms of up to ten years. The stock options issued to employees typically have an exercise price of not less than the fair
market value of the Companys common stock on the date of grant. In accordance with accounting for
such options utilizing the intrinsic value method, there was no related compensation expense
recorded in the Companys financial statements for the periods from the Date of Inception, January
29, 2003 through December 31, 2004. During the three months ended March 31, 2005, the Company
issued 150,000 nonqualified stock options exercisable at $1.00 per share, which is deemed to be
less than fair market value at the date of grant. Accordingly, compensation expense of $234,000 was
recorded using the Black Scholes model pricing method. 10




---



##### Table of Contents



TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)   Note 3
 Stock Options (Continued)
 
 A summary of the activity of options under the Plan is as follows: 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 March 31, 2005 (Unaudited)
    
    
    350,000
    
    
    $
    1.00
 Additional information about outstanding options to purchase the Companys common stock as of March
31, 2005 is as follows: 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
    
    
    
    2.00
    
    
    $
    1.00
    
    
    
    300,000
    
    
    $
    1.00
 As of July 1, 2003, options to purchase an aggregate of 330,000 shares of common stock options were
granted. Options to purchase 110,000 shares of the Companys common stock become exercisable upon
completion of the first six months of employment, and 110,000 more shares for each full year of
employment thereafter, for two years. Two employees resigned 11




---



##### Table of Contents



TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)   Note 3
 Stock Options (Continued)
 
 and forfeited 130,000 options prior to March 31, 2005. During the three months ended March 31,
2005, options to purchase 150,000 shares of the Companys common stock were granted and became
exercisable on March 31, 2005. All options expire three years after date of grant.   Note 4
 Warrants
 
 As of March 31, 2005, the Company had outstanding warrants to purchase an aggregate of 3,300,000
shares of common stock. Additional information about outstanding warrants as of March 31, 2005 is as follows: Warrants Outstanding
    
    
    Warrants ExercisableWeightedAverageRemaining
    
    
    
    
    
    
    WeightedContractural
    
    
    Number
    
    
    AverageExercise
    
    Number of
    
    
    Life
    
    
    of
    
    
    ExercisePrice
    
    Shares
    
    
    (In Years)
    
    
    Shares
    
    
    Price
    
    
    Fair Value$2.50
    
    
    2,900,000
    
    
    
    1.75
    
    
    
    2,900,000
    
    
    $
    2.50
    
    
    $
    0.26$5.00
    
    
    400,000
    
    
    
    2.75
    
    
    
    400,000
    
    
    $
    5.00
    
    
    $
    0.10
 Note 5 
 Commitments and Contingencies
 
 The Company entered into a lease agreement for office space on April 1, 2004 and subsequently
canceled it on May 20, 2004. The Company entered into a new non-cancelable lease for office space
October 1, 2004 expiring November 30, 2007. In addition, on March 16, 2005, the Company entered
into a separate non-cancellable lease for new office space for a term of two years beginning May 1,
2005 and expiring April 30, 2007. As of March 31, 2005, future minimum lease payments due under
both leases are as follows: Year EndingSeptember 30
    
    Amount2005
    
    $
    16,9372006
    
    $
    37,1132007
    
    $
    32,8872008
    
    $
    4,318
 12




---



##### Table of Contents



TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)   Note 5
 Commitments and Contingencies (Continued)
 
 Rent expense was $12,328 and $14,000 for the six months ended March 31, 2005 and 2004, respectively
(unaudited). For the three months ended March 31, 2005 and 2004, rent expense was $6,224 and
$2,000, respectively (unaudited). From the date of inception January 29, 2003, through March 31,
2005 rent expense is $43,328 (unaudited). The Company is a defendant in a lawsuit filed by Codefire, Inc. for alleged breach of contract and
other violations. No claim for damages has as yet been filed. The Company believes the suit is
without merit and intends to vigorously defend its position. As such, no amount has been accrued
in the accompanying financial statements for any potential loss arising from this claim. The Company has an employment agreement with one of its employees providing for annual compensation
of $100,000. As of March 31, 2005, there are 9 months remaining on the contract. On January 1, 2005, the Company entered into a three year royalty agreement with Ripken Baseball,
Inc. (RBI) for rights to develop a mobile interactive electronic baseball game product. Under the
terms of the agreement, we are obligated to compensate RBI 20% of all adjusted gross receipts from
the sale of such product. RBI also has a conversion option during the first two years of the
agreement allowing RBI to convert all future royalties for the greater of 125,000 shares of
restricted common stock or such number of shares as equates to an aggregate market value of
$250,000. All payments are to be made on a quarterly basis. As of March 31, 2005, the Company has
generated no revenue related to the product. Note 6 
 Investments  Joint Venture
 
 On March 24, 2004, the Company entered into a Joint Venture and Limited Liability Company Agreement
with Playentertainment, L.L.P. to form Playentertainment-Teknik, LLC. The Company owns 50% of the
joint venture and was obligated to contribute $37,500 as an initial capital contribution. Under
the terms of the joint venture, the Company will be allocated 50% of the net profits/losses
attributable to video games published pursuant to the Next Action Star License and 60% of the net
profits/losses to video games published pursuant to any other titles developed through the joint
venture. The agreement grants Playentertainment, L.L.P. the right to convert its membership interest in
Playentertainment-Teknik, LLC into 200,000 shares of restricted common stock during the first two
years of the joint venture. The membership interest conversion value shall not exceed 50% of the
then outstanding common stock. The joint venture will be accounted for under the consolidated method of accounting as the Company
is the managing member and has substantial control of the joint venture. 13




---



##### Table of Contents



TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)   Note 6
 Investments  Joint Venture (Continued)
 
 On October 14, 2004, the Company entered into a Joint Venture and Limited Liability Company
Agreement with PEP PAD, LLC to form Pep Pad-Teknik, LLC. The Company owns 50% of the joint venture
and will be allocated 50% of the net profits and losses attributable to video games published under
the joint venture. The joint venture agreement entitles PEP PAD, LLC to convert its 50% ownership interest in the
joint venture into shares of restricted common stock of the Company commencing one year after the
date of the joint venture agreement. PEP PAD, LLC, shall have the right to convert its membership
interest into the number of shares (not to exceed one million shares) obtained by dividing ten
times the share of the net pre-tax earnings of the joint venture for the most recent fiscal year
allocated to PEP PAD, LLC by the prior 90 day average market price per share of common stock. As
of March 31,2005, the one year waiting period for the conversion has not lapsed and there have been
no pre-tax earnings in the joint venture, therefore, this conversion feature has no current impact
on the Company. PEP PAD, LLC assigned its rights to the SDK license to the joint venture.
Although approximately $5,000 has been incurred by PEP PAD, LLC to develop the proprietary SDK
software, no value has been capitalized by the joint venture as technological feasibility has not
yet been established. The joint venture will be accounted for under the consolidated method of
accounting as the Company is the managing member and has substantial control of the joint venture. Note 7 
 Going Concern
 
 As discussed in Note 1 the company has been in the development stage since its inception on January
29, 2003. The Company has incurred operating losses and negative cash flows from its operations to
date. Realization of a major portion of the assets is dependent upon the companys ability to meet
its future financing requirements, and the success of future operations. These factors raise
substantial doubt about the Companys ability to continue as a going concern. The financial
statements do not include any adjustments that might be necessary if the Company is unable to
continue as a going concern. 14




---



##### Table of Contents



Item 2.
Managements Discussion and Analysis of Financial Condition and
Plan of
Operations. Special Note Regarding Forward-Looking Statements This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. In making such statements, we must rely on estimates and assumptions drawn in light of our
experience and our perception of historical trends, current conditions and expected future
developments, as well as other factors we believe are appropriate under the circumstances. These
estimates and assumptions are inherently subject to significant business, economic and competitive
uncertainties, many of which are beyond our control. These uncertainties and contingencies can
affect actual results and could cause actual results to differ materially from those expressed or
implied in any forward-looking statements made by us, or on our behalf. In particular, the words expect, anticipate, estimate, may, will, should,
intend, believe, and similar expressions are intended to identify forward-looking statements.
In light of the risks and uncertainties inherent in all forward-looking statements, you should not
consider the inclusion of forward-looking statements in this report to be a representation by us or
any other person that our objectives or plans will be achieved. Risks and uncertainties that could cause actual results to differ from our forward-looking
statements include those discussed under the caption Managements Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this report. We undertake no obligation to update our forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of unanticipated events. The Teknik Digital Arts family of related marks, images and symbols are our properties and
trademarks. All other trademarks, tradenames and service marks appearing in this report are the
property of their respective holders. References to Teknik Digital Arts, we, us, our, or
similar terms refer to Teknik Digital Arts Inc. together with its consolidated subsidiaries. Overview Teknik Digital Arts publishes interactive video game and instructional software for play on
mobile telephones, personal computers and video game consoles. We have developed a prototype game
and order processing system for personal computers and plan to shortly launch mobile phone video
games we have developed based on highly visible, exclusively-licensed consumer content. We plan to
continue to license highly visible consumer content, such as popular motion pictures, television
shows, characters, and sports figures, and develop mobile phone, personal computer and console
entertainment applications based on these licensed properties. We plan to launch mobile phone games based on Fear Factorand Next Action Starduring by the
third quarter of fiscal 2005. We have also obtained an exclusive license to develop a mobile phone
game around professional golfer Phil Mickelson, which will include an instructional series
developed by Mickelsons short game teacher, Dave Pelz, and his swing coach, Rick Smith. Since our
inception, our aggregate net expenditures of $4,082,787 have been devoted primarily to research and
development efforts. As of March 31, 2005, we had three full time employees, including one in product development,
one in sales and marketing and one in finance, general and administrative. We intend to hire
additional employees as needed. We also retain independent contractors from time to time to
provide various services, primarily in connection with our software development and sales
activities. We are not subject to any collective bargaining agreements and we believe that our
relationship with our employees is good. Summary Plan of Operations Presently, we require approximately $30,000 to $40,000 per month to fund our recurring
operations. This amount may increase as we expand our development efforts to include additional
product offerings. Substantially all of our cash needs are attributable to research and
development expenses. As of the date of this report, we have funded our working capital
requirements from past borrowings under our revolving line of credit and, to a lesser 15




---



##### Table of Contents



extent, from the sale of equity securities. Assuming our capital requirements remain
consistent with our current growth plan, we intend to fund our working capital requirements over
the next 12 months through availability under our revolving credit facility. As of March 31, 2005,
$610,700 is available for borrowing under our revolver. We currently anticipate that if our
capital requirements increase and we are, therefore, required to raise additional capital, we will
raise such additional funds through the sale of equity or debt securities and from the exercise of
outstanding warrants. The amount of funds raised, if any, will determine what additional projects
we will be able to undertake. No assurance can be given that we will be able to raise additional
capital, when needed or at all, or that such capital, if available, will be on terms acceptable to
us. In addition, no assurance can be given that our outstanding warrants will be exercised, if
ever, at a time when we may need such funds for our operations. Over the next 12 months, we plan to continue to devote research and development resources to
our planned mobile phone product offerings, Fear Factorand Next Action Star,as well as
development of our interactive golf and car racing entertainment software. We currently have
sufficient availability under our revolving credit facility to fund operations through the planned
launch of Fear Factorand Next Action Starby the third quarter of 2005. We anticipate that it will
take three months to develop the golf-related products and an additional three months to develop
the car racing video game, as each is discussed below. We also plan to begin work on developing a
physically interactive video game and instructional software as well as the car racing software for
personal computers and console game platforms. Revenue Although we have not yet generated revenue, our business model contemplates that we will
derive revenue from two sources: one time fees charged in connection with the initial sale of our
products and monthly subscriptions. We plan to generate revenue from the sale of applications for
mobile phones, personal computers and console game systems. Expenses The major expense we anticipate in the near term will be the direct cost of developing,
refining, and updating our mobile phone products and additional personal computer and console
products. We anticipate that we will incur an additional $50,000 to $75,000 in expenses in
developing Fear Factorif we launch this product by the third quarter of 2005. General and
administrative expenses consist primarily of employee salaries and related payroll expenses,
stock-based compensation, lease payments and utilities costs for our office facility, consulting
fees, professional fees, insurance, and office expenses. The President and Director of Art/Animation of the Company, Corey Comstock, has extensive
experience developing software products. Based on his knowledge and experience and the financial
management background of the other members of management, the Company executes detailed planning of
the scope and cost of each project before a development team, either internal or external, is
engaged. Our modular design philosophy assists with managing these costs as smaller projects are
far easier to predict and control than larger efforts. In some cases, we will license the name or
likeness of a well known person, character or object, such as sports teams and venues, comic book
characters, or movie stars, to include in the content under development. In the case of mobile
applications, these licenses may represent a significant portion of the upfront cost of the
project. The popularity of the person or object licensed can reduce the risk of the project by
creating instant recognition for the end product. We intend to continue to develop our products
both internally and through third parties. We expect that our research and development expenses
will increase as we expand our product offerings. As the Company grows, we may need to hire
additional employees in connection with the animation and software development efforts of new
products. We will incur operational costs associated with customer support and maintaining our web
presence. In the future, we believe much of the customer support for our online products may be
handled online via chat messaging or e-mail. Some expense may be incurred in the future to offer
customer service via phone but this will not be a requirement for our core market. Initial
customer service for our mobile products will be provided by the
carriers. We intend to maintain
our website and application servers in a professional hosting environment. The expenses incurred
to maintain a professional web presence consist of hosting space, including security, redundant
power supply, and fire suppression, as well as access to redundant broadband networks, personnel to
conduct preventive and emergency site maintenance, and backup/disaster recovery systems. 16




---



##### Table of Contents



Sales and marketing expenses will consist primarily of salaries and related expenses for our
direct sales force and marketing personnel, commissions to independent sales staff, marketing
programs and advertising campaigns. Management intends to use its experience and connections
within the software industry to promote and market our products. We expect our sales and marketing
expenses will increase materially when operations commence and we expand our product offerings and
launch an international presence. General and administrative expenses consist primarily of salaries and related expenses for
finance and other administrative personnel, facilities and occupancy charges, professional fees and
bad debt expense. We expect our general and administrative expenses to increase as we expand our
staff, build our infrastructure, grow our business and incur costs associated with being a public
company. As a percentage of revenue, we expect to see a reduction in general and administrative
expenses as our revenues increase. We have incurred significant expenses from inception through March 31, 2005 primarily
attributable to one-time, non-recurring charges incurred during our development stage. Since our
inception, we have incurred a net loss of $4,082,787. Approximately $2,650,635 of expenses have
been attributable to one-time, non-recurring, non-cash charges taken since inception related to
stock issuances for compensation and consulting. Comparisons of the three months ended March 31, 2005 and 2004 Our general and administrative expenses increased approximately 300% from $82,725 for the
three months ended March 31, 2004 to $331,055 for the three months ended March 31, 2005. The
increase was primarily due to non-cash compensation expense related to the issuance of stock
options and common stock as well as increased professional fees incurred in conjunction with the
filing of the prospectus. Research and development costs decreased approximately 38% from
$109,805 for the three months ended March 31, 2004 to $68,058 for the three months ended March 31,
2005. This decrease is attributable to more resources and up-front costs being required in the
early development phases of product development in the three months ended March 31, 2004. Comparisons of the six months ended March 31, 2005 and 2004 Our general and administrative expenses increased approximately 141% from $223,069 for the six
months ended March 31, 2004 to $538,321 for the six months ended March 31, 2005. The increase was
primarily due to non-cash compensation expense related to the issuance of stock options and common
stock as well as increased professional fees incurred in conjunction with the filing of the
prospectus. Research and development costs decreased approximately 24% from $191,224 for the six
months ended March 31, 2004 to $144,596 for the six months ended March 31, 2005. This decrease is
attributable to more resources and up-front costs being required in the early development phases of
product development during the six months ended March 31, 2004. Liquidity and capital resources Our primary sources of liquidity are proceeds from past borrowings under our revolving line of
credit and, to a lesser extent, proceeds from the sale of equity securities. Our line of credit
has a term of one year (renewable annually on March 1), and is being provided by a related party,
CodeFire Acquisition Corp., or CAC, which holds 11.3% of our issued and outstanding common stock.
There are no material affirmative or negative covenants under our line of credit. We had borrowing
availability under the line of credit of $500,000 at September 30, 2004, and $1,000,000 at March 31,
2005. We borrowed $25,000 under the line of credit through
September 30, 2004 and an aggregate of
$389,300 through March 31, 2005. Accordingly, as of
September 30, 2004 and March 31, 2005, we had
borrowing availability of $475,000 and $610,700, respectively, under the line of credit. As
of September 30, 2004 and March 31, 2005, we had cash and equivalents amounting to $11,995
and $3,566, respectively, and prepaid expenses of $9,762 and $8,400 respectively. Our liquidity
needs are primarily to fund working capital requirements, including general and administration and
developmental expenses. The largest use of our funds is developmental expenses, consisting
primarily of salaries and related expenses. As of March 31, 2005, we had total current liabilities of $573,165 and had total current
assets of $11,966, with our current liabilities exceeding our current assets by $561,199. As of
September 30, 2004, we had total current 17




---



##### Table of Contents



liabilities of $167,935 and had total current assets of $21,757, with our current liabilities
exceeding our current assets by $146,478. As a result of the renewal and the increase in borrowing availability under the revolving
credit facility, management believes that its borrowing capacity under its revolving line of
credit, together with future sales of equity or debt securities, will provide the Company with its
immediate financial requirements to enable it to continue as a going concern. The raising of
additional capital in public or private markets will primarily be dependent upon prevailing market
conditions and the demand for the Companys products and services. No assurances can be given that
the Company will be able to raise additional capital, when needed or at all, or that such capital,
if available, will be on terms acceptable to the Company. In the event we are unable to raise
additional funds, we could be required to either substantially reduce or terminate our operations.
Except for the factors set forth in the section of this report related to Risk Factors, we are
not aware of any material trend, event or capital commitment, which would potentially adversely
affect our liquidity. Although we are currently able to pay our debts as they become due, if our expenses exceed our
borrowing availability, which we do not presently anticipate, we may not have sufficient cash to
satisfy our liquidity needs for the upcoming twelve months. As a result of the operating losses and
negative cash flows incurred since our inception in January 2003, our independent auditor has
included an explanatory paragraph in its report on our financial statements, expressing substantial
doubt regarding our ability to continue as a going concern. This means that the auditor questions
whether we can continue in business. Investors in our securities should carefully review the report
prepared by our auditor. Our ability to continue in the normal course of business is dependent upon
our access to additional capital, as discussed above, and the success of our future operations.
The success of our future operations is dependent on our ability to deploy our products and
applications, generate significant revenue from the sale of our products and product applications
and licensing of related products and services and establish and maintain broad market acceptance
for our products. Off-Balance sheet arrangements We do not have any off-balance sheet arrangements, investments in special purpose entities or
undisclosed borrowings or debt. Additionally, we have not entered into any derivative contracts nor
do we have any synthetic leases. Item 3. Controls and Procedures. As of the end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of its Chief Executive Officer/Chief Financial
Officer, of the effectiveness of the Companys disclosure controls and procedures. Disclosure
controls and procedures are designed to ensure that information required to be disclosed in the
periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms. Based upon that evaluation, the Chief Executive Officer/
Chief Financial Officer concluded that the Companys disclosure controls and procedures were
effective as of the end of the quarterly period covered by this report. No change in the internal
control over financial reporting occurred during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the internal control over financial
reporting. 18




---



##### Table of Contents



PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings. The Company is from time to time involved in legal proceedings arising from the normal course
of business. The Company is a defendant in a lawsuit filed by Codefire, Inc. for alleged
breach of contract and other violations. No claim for damages has as yet been filed. The Company
believes the suit is without merit and intends to vigorously defend its position. As such, no
amount has been accrued in the accompanying financial statements for any potential loss arising
from this claim. 
 Item 6. Exhibits. (a) The following exhibits are filed herewith pursuant to Regulation S-B. No.
    
    Description31
    
    Section 302 Certification of Chief Executive Officer and Chief Financial Officer32
    
    Section 906 Certifications
 19




---



##### Table of Contents



SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized. TEKNIK DIGITAL ARTS, INC.Dated:  May 16, 2005
    By:
    /s/ John R. WardJohn R. WardChief Financial Officer
(Principal Accounting Officer) 20




---



##### Table of Contents



Exhibit Index Exhibit
    
    
    
    MethodNo.
    
    Description
    
    of Filing31
    
    Certification of Chief Executive Officer
    
    (a)32
    
    Certification Pursuant to18 U.S.C. Section 1350
    
    (a)
 (a) Filed herewith 21