Halitron 10QSB 2006 Q1 Quarterly report (small business)

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


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

TEKNIK DIGITAL ARTS, INC.

(Exact name of small business issuer as specified in its charter)


Nevada				68 053 9517

State 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)

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. Yesþ Noo

On February 8, 2006, the registrant had outstanding 9,125,000 shares of Common Stock, par value $0.001 per share.

Transitional Small Business Disclosure Format: Yeso Noþ

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 INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of December 31, 2005 (Unaudited) and September 30, 2005	1
	Unaudited 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	2
	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity	3
	Unaudited 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	4
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
PART II OTHER INFORMATION

Item 1.	Legal Proceedings.	14

Item 6.	Exhibits.	14
Exhibit 31.1
Exhibit 31.2
Exhibit 32

TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CONDENSED CONSOLIDATED BALANCE SHEETS


	(Unaudited)
	December 31,			September 30,
	2005			2005
Current Assets:
Cash and cash equivalents	$	1,071		$	7,060
Prepaid expenses		14,260			28,678


Total Current Assets		15,331			35,738

Property and equipment, net		7,336			7,673
Security deposit		3,200			3,200


Total Assets	$	25,867		$	46,611


Current Liabilities:
Note payable — related party (Note 2)	$	765,850		$	610,350
Notes payable		2,794			11,069
Accounts payable		425,850			311,667
Accrued vacation		—			1,154
Accrued payroll		4,227			—
Capital lease liability — current portion		2,092			2,283
Accrued interest — related party (Note 2)		12,084			17,667


Total Current Liabilities		1,212,897			954,190

Long-Term Liabilities
Capital lease liability — long term portion		—			380
Minority Interest in Joint Venture (Note 4)		37,500			37,500


Total Liabilities and Minority Interest		1,250,397			992,070


Stockholders’ Equity (Deficit): (Notes 1)
Common stock — $.001 par value; 50,000,000 shares authorized, 9,125,000 shares issued and outstanding		9,125			9,125
Additional paid-in capital		4,604,010			4,604,010
Deficit 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

See accompanying notes to condensed consolidated financial statements

TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


							Date of Inception,
	Three			Three			January 29, 2003,
	Months Ended			Months Ended			Through
	December 31,			December 31,			December 31,
	2005			2004			2005
Sales	$	—		$	—		$	—

Cost of Sales		—			—			—


Gross Profit		—			—			—
General and Administrative Expenses		226,316			207,266			3,079,198
Research and Development Costs		37,860			76,538			2,703,393


Loss 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

See accompanying notes to condensed consolidated financial statements

TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

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			Total
					Additional		During			Stockholders’
	Common Stock				Paid-in		Development			Equity
	Shares		Amount		Capital		Stage			(Deficit)
Balance at Inception, January 29, 2003		—	$	—	$	—	$	—		$	—

Issuance of common stock for compensation and consulting		6,635,000		6,635		��		—			6,635

Net 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		—			500,000

Proceeds from sale of stock		190,000		190		94,810		—			95,000

Warrants issued for compensation		—		—		820,000		—			820,000

Issuance of common stock for compensation and consulting		880,000		880		1,539,120		—			1,540,000

Exercise of warrants		100,000		100		249,900		—			250,000

Net 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		—			800,000

Options and warrants issued for compensation		—		—		601,500		—			601,500

Net 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	)

See accompanying notes to condensed consolidated financial statements

TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


							Date of Inception,
	Three			Three			January 29, 2003,
	Months Ended			Months Ended			Through
	December 31,			December 31,			December 31,
	2005			2004			2005
Increase/(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			1,631
Common stock, options, and warrants issued for compensation and consulting		—			—			3,768,135
Changes in Assets and Liabilities:
Prepaid expenses		14,418			(625	)		(14,260	)
Security deposit		—			—			(3,200	)
Accounts payable		114,183			72,478			425,850
Accrued vacation		(1,154	)		(2,406	)		—
Accrued payroll		4,227			—			4,227
Accrued interest — related party		(5,583	)		(12,461	)		12,084


Net 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			1,450,088
Payments of note payable		(8,275	)		—			2,794
Proceeds from sale of stock and exercise of warrants		—			—			345,000
Repayment of debt — related party		—			—			(184,238	)
Payments related to capital lease		(571	)		(190	)		(2,473	)
Proceeds from Joint Venture		—			—			37,500


Net cash provided by financing activities		146,654			259,810			1,648,671


Net change in cash and cash equivalents		(5,989	)		28,846			1,071

Cash 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

See accompanying notes to condensed consolidated financial statements

TEKNIK DIGITAL ARTS INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)


					Date of Inception,
	Three		Three		January 29, 2003,
	Months Ended		Months Ended		Through
	December 31,		December 31,		December 31,
	2005		2004		2005
Supplemental Information:
Interest paid	$	17,667	$	15,349	$	41,625
Income taxes paid	$	—	$	—	$	—

Non-cash Investing and Financing Activities
Issuance of common stock for repayment of debt related party	$	—	$	—	$	500,000
Common Stock and warrants issued for compensation and consulting	$	—	$	—	$	3,768,135
Capital lease obligation	$	—	$	4,565	$	4,565

See accompanying notes to condensed consolidated financial statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1

Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates

Presentation of Interim Information:

The condensed consolidated financial statements included herein have been prepared by Teknik Digital Arts Inc. (“we”, “us”, “our” or “Company”) without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and should be read in conjunction with our Form 10KSB filed for the year ended September 30, 2005 as filed with the SEC under the Securities and Exchange Act of 1933. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, as permitted by the SEC, although we believe the disclosures, which are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position at December 31, 2005 and the results of our operations and cash flows for the periods presented. The September 30, 2005 consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Interim results are subject to significant seasonal variations and the results of operations for the three months ended December 31, 2005 are not necessarily indicative of the results to be expected for the full year.

Nature of Corporation

Teknik Digital Arts, Inc. (the “Company”) was organized under the laws of the State of Nevada on January 29, 2003. The principal business purpose of the Company is to publish interactive video games and instructional software for play on mobile telephones, personal computers and video game consoles.

The Company has not commenced principal operations as of December 31, 2005. As such, the Company is deemed to be in the development stage formed for the purpose of developing interactive entertainment software.

Liquidity

The Company has generated an accumulated net loss of $5,837,665 (unaudited) from the date of inception January 29, 2003 through December 31, 2005. Our primary sources of liquidity are proceeds from borrowings under our revolving line of credit and, to a lesser extent, proceeds from the sale of equity securities.

Revenue Recognition

The Company will derive its revenues from the sale of interactive entertainment software through the Company website and distributors. As of December 31, 2005 the Company has generated no material revenues.

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 software development costs during the current year were expensed as the time between when technological feasibility and product marketability were indeterminate and therefore no costs were capitalized. Amounts related to internal software development that could be capitalized under this statement were immaterial.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1

Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)

Consolidated Statements

The consolidated financial statements include the accounts of the Company and its subsidiary, Playentertainment-Teknik, LLC. All significant intercompany balances and transactions have been eliminated in consolidation. The Company owns 50% of the membership interest of the LLC, however, the financial statements of the subsidiary has been consolidated as the management and operations of Playentertainment-Teknik, LLC is substantially controlled by Teknik Digital Arts, Inc.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

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 December 31, 2005, options to purchase 350,000 shares and warrants to purchase 3,550,000 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.

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 September 30, 2004. During the year ended September 30, 2005, 150,000 options were issued to an outside consultant who subsequently became an employee. These options were valued at $1.56 per option, accordingly, compensation expense of $234,000 was recorded using the Black Scholes model pricing method.

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)

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)			Date of Inception,
	Three			Three			January 29, 2003,
	Months Ended			Months Ended			Through
	December 31,			December 31,			December 31,
Net loss:	2005			2004			2005
As 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	)

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 rate of 2%, volatility at 0-90%, and a 0% dividend yield. This resulted in a portion of the options having been valued at $234,000 or approximately $1.50 per option.

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. This Statement 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. Management has complied with the standard and the implementation of this standard is consistent with amounts reflected in the pro forma net loss reflected in this report.

Note 2

Related Party Transactions

As of December 31, 2005 and September 30, 2005, the Company has an uncollateralized line of credit of $1,000,000 with a related party. The line of credit bears interest at the rate of 7% per annum and principal and interest are due on March 1, 2006. As of December 31, 2005 and September 30, 2005, the Company’s balance on this line of credit was $765,850 (unaudited) and $610,350 respectively and the Company had

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2
Related Party Transactions (Continued)

$234,150 and $389,650, respectively of available line of credit. As of December 31, 2005 and September 30, 2005, there was interest accrued on the note of $12,084 and $17,667, respectively.

Note 3
Commitments and Contingencies

The Company is a defendant in a lawsuit filed by Codefire, Inc. for alleged misappropriation of trade secrets and other violations. The Company is anticipating settling the lawsuit in the near future. As such, an amount of approximately $112,000 has been accrued in the accompanying financial statements for the potential settlement of this claim.

The Company has an employment agreement with one of its employees providing for annual compensation of $100,000. The initial term of the agreement concluded on December 31, 2005, however, the agreement automatically renews for a period of one year unless otherwise terminated. As of December 31, 2005 the agreement has been renewed for a one year period ending on December 31, 2006.

Note 4
Investments – Joint Venture

�� On March 24, 2004, Teknik Digital Arts, Inc. entered into a Joint Venture and Limited Liability Company Agreement with Playentertainment, L.L.P. Teknik Digital Arts, Inc. 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 entitles Playentertainment, L.L.P. the right to convert its Membership Interest 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 consolidation method of accounting as Teknik Digital Arts, Inc. is the managing member and has substantial control of the joint venture.

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 was to be allocated 50% of the net profits and losses attributable to video games published under the joint venture.

On June 20, 2005, PEP PAD, LLC converted its interest in the joint venture into 300,000 shares of the Company’s restricted common stock valued at $2.50 per share and 250,000 stock warrants of the Company exercisable at $2.50 per share. The warrants were valued at $1.47 per share using the Black Scholes option pricing model. This transaction resulted in the Company recording $1,117,500 of compensation expense during the year ended September 30, 2005.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 5
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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results 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 subsidiary.

Overview

Teknik Digital Arts, Inc. 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 have launched 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.

In December 2005, we released a mobile phone game based on the television showFear Factor.We also launched a mobile phone game around professional golfer Phil Mickelson that was released in December 2005. We have developed a proprietary mobile media player that is used for the instructional series developed by Mickelson’s short game teacher, Dave Pelz, and his swing coach, Rick Smith, as well as Phil Simms and Chris Simms Football, Cal Ripken Baseball, Phil Weber and Joe Johnson Basketball.

We have assembled a team with not only the creative expertise to generate compelling content but also the technical expertise to enable development of products across the mobile phone, personal computer and console game system platforms. Our principals have previously worked with companies and people such as DreamWorks Interactive, DreamWorks Animation and SquareSoft. We intend to leverage the reputations that our management team has built in the industry to form strategic partnerships that we believe will enable us to create or license digital content that is truly distinctive.

Customers will order and download mobile phone games through their mobile phone carriers, who will charge customers through their monthly phone bills and retain a percentage of these fees before remitting the balance to us. Customers may also order and download mobile phone games through our website. Electronic distribution of both our personal computer and mobile phone applications relieves us of the typical distribution challenges, such as packaging, shipping and the management of physical inventories.

As of December 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 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 $50,000 to $60,000 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 well as professional fees associated with being a public company. 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 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, game sales and possibly the sale of equity securities. As of December 31, 2005, $234,150 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 as well as the development of our physically interactive gaming software. We currently have sufficient availability under our revolving credit facility to fund operations through March 2006.

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

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.

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 as well as some non-cash related charges incurred in connection with issuing stock for services. 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.

We have incurred significant expenses from inception through December 31, 2005 primarily attributable to charges incurred during our development stage. Since our inception, we have incurred a net loss of $5,837,665. Approximately $3,768,000 of expenses have been attributable to non-cash charges taken since inception related to stock issuances for compensation, consulting, and stock and warrants issued in relation to software development costs.

Comparisons of the three months ended December 31, 2005 and 2004

Our general and administrative expenses increased approximately 9% from $207,266 for the three months ended December 31, 2004 to $226,316 for the three months ended December 31, 2005. The slight increase was primarily due to the Company accruing approximately $112,000 related to a potential lawsuit settlement with Codefire, Inc., offset by a decrease in non-cash compensation expense related to the issuance of stock for services and a decrease in professional fees that were incurred in conjunction with the filing of the prospectus during the three months ended December 31, 2004. Research and development costs decreased approximately 51% from $76,538 for the three months ended December 31, 2004 to $37,860 for the three months ended December 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 December 31, 2004.

The Company is a defendant in a lawsuit filed by Codefire, Inc. for alleged misappropriation of trade secrets and other violations. The Company believes the lawsuit will be settled in the near future, therefore, an estimate of $112,000 has been accrued during the three months ended December 31, 2005 related to the settlement of this claim.

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 7.23% of our issued and outstanding common stock. There are no material affirmative or negative covenants under our line of credit. The line of credit allows for borrowing of up to $1,000,000 at December 31, 2005 and September 30, 2005. We borrowed an aggregate of $765,850 through December 31, 2005, and $610,350 under the line of credit through September 30, 2005. Accordingly, as of December 31, 2005 and September 30, 2005, we had borrowing availability of $234,150 and $389,650, respectively, under the line of credit.

As of December 31, 2005 and September 30, 2005, we had cash and equivalents amounting to $1,071 and $7,060, respectively, and prepaid expenses of $14,260 and $28,678, 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 December 31, 2005, we had total current liabilities of $1,212,897 and had total current assets of $15,331, with our current liabilities exceeding our current assets by $1,197,566. As of September 30, 2005, we had total current liabilities of $954,190 and had total current assets of $35,738, with our current liabilities exceeding our current assets by $918,452.

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.

Although we are currently able to pay our debts as they become due, if our expenses exceed our borrowing availability, and we cannot renegotiate a higher limit with our revolving credit facility, 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 for the year ended September 30, 2005, 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 included in Form 10-KSB at September 30, 2005. 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 and 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 and 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.

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.

Exhibit Index


Exhibit
No.		Description

31.1		Section 302 Certification of Chief Executive Officer
31.2		Section 302 Certification of Chief Financial Officer
32		Section 906 Certifications

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: February 14, 2006
	By	/s/ John R. Ward

	John R. Ward
	President and Chief Executive Officer

	By	/s/ Keith B. Dimond

	Keith B. Dimond
	Chief Financial Officer

EXHIBIT INDEX


Exhibit
No.		Description

31.1		Section 302 Certification of Chief Executive Officer
31.2		Section 302 Certification of Chief Financial Officer
32		Section 906 Certifications

Halitron (HAON) 10QSB2006 Q1 Quarterly report (small business)