Halitron 10QSB 2007 Q2 Quarterly report (small business)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

Form 10-QSB


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

For the quarterly period ended March 31, 2007


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

For the transition from to

commission file number

TEKNIK DIGITAL ARTS, INC.

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


Nevada		68- 0539517

State or other jurisdiction of incorporation or organization		(IRS Employer Identification No.)

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

On May 3, 2007, the registrant had outstanding 14,395,588 shares of Common Stock, par value $0.001 per share.

Transitional Small Business Disclosure Format: Yeso Noþ

Teknik Digital Arts, Inc. and Subsidiaries
Form 10-QSB
For the Quarter Ended March 31, 2007
Table of Contents


PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2007 (Unaudited) and September 30, 2006			1
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2007 and 2006			2
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the six months ended March 31, 2007			3
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2007 and 2006			4
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			11

Item 3. Controls and Procedures			14

PART II OTHER INFORMATION

Item 1. Legal Proceedings.			14

Item 6. Exhibits.			15
EX-31
EX-32

Part I -— FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

TEKNIK DIGITAL ARTS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	(Unaudited)
	March 31,				September 30,
	2007				2006
Current Assets:
Cash and cash equivalents	$	244			$	42,387
Accounts receivable		109				90
Deposits		7,500				—
Prepaid expenses		52,038				238,072

Total Current Assets		59,891				280,549

Property and equipment, net		7,716				8,583


Other Assets:
Prepaid expenses — long term portion		14,706				71,176
Licenses		100				100
Security deposit		1,000				1,000

Total Other Assets		15,806				72,276

Total Assets	$	83,413			$	361,408


Current Liabilities:
Note payable — related party	$	71,745			$	882,500
Accounts payable		394,896				372,689
Due to related party		300,000				25,000
Capital lease liability		—				380
Accrued interest		73,643				36,230

Total Current Liabilities		840,284				1,316,799
Long-Term Liabilities:
Notes payable — convertible debt		355,000				355,000

Total Liabilities		1,195,284				1,671,799
				��
Minority interest in joint ventures		37,600				37,600

Total Liabilities and Minority Interest		1,232,884				1,709,399


Stockholders’ Equity (Deficit):
Common stock — $.001 par value; 50,000,000 shares authorized, 14,989,704 and 9,989,704 shares issued; 14,395,588 and 9,489,704 outstanding at March 31, 2007 and September 30, 2006, respectively		14,990				9,990
Additional paid-in capital		7,075,408				5,457,466
Accumulated deficit		(8,187,329	)			(6,814,672	)

		(1,096,931	)			(1,347,216	)

Less: Treasury stock at cost, 594,116 and 500,000 shares at March 31, 2007 and September 30, 2006, respectively		(52,540	)			(775	)

Total Stockholders’ Deficit		(1,149,471	)			(1,347,991	)

Total Liabilities and Stockholders’ Equity (Deficit)	$	83,413			$	361,408

See accompanying notes to condensed consolidated financial statements

TEKNIK DIGITAL ARTS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three			Three			Six			Six
	Months Ended			Months Ended			Months Ended			Months Ended
	March 31,			March 31,			March 31,			March 31,
	2007			2006			2007			2006
Sales	$	18		$	3,246		$	23		$	3,246

Cost of Sales		3			1,716			4			1,716


Gross Profit		15			1,530			19			1,530

General and Administrative Expenses		883,047			226,830			1,319,890			453,146
Research and Development Costs		—			499			254			38,359


Loss from Operations		(883,032	)		(225,799	)		(1,320,125	)		(489,975	)


Other Income (Expense):
Interest Expense		(29,303	)		(17,387	)		(52,532	)		(32,282	)

		(29,303	)		(17,387	)		(52,532	)		(32,282	)


Minority Interest Portion of Loss		—			—			—			—


Net Loss	$	(912,335	)	$	(243,186	)	$	(1,372,657	)	$	(522,257	)


Basic and diluted loss per share (Note 1)	$	(0.07	)	$	(0.03	)	$	(0.13	)	$	(0.06	)


Weighted Average Common Shares Outstanding		12,340,032			9,030,556			10,879,039			9,078,297

See accompanying notes to condensed consolidated financial statements

TEKNIK DIGITAL ARTS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

FOR THE SIX MONTHS ENDED MARCH 31, 2007


														Total
					Additional			Treasury						Stockholders’
	Common Stock				Paid-in			Stock			Accumulated			Equity
	Shares		Amount		Capital			at Cost			Deficit			(Deficit)
Balance at September 30, 2006		9,989,704	$	9,990	$	5,457,466		$	(775	)	$	(6,814,672	)	$	(1,347,991	)

Cancellation of consulting agreement (unaudited)		—		—		—			(51,765	)		—			(51,765	)

Stock issued for conversion of related party note payable (unaudited)		5,000,000		5,000		1,745,000			—			—			1,750,000

Adjust fair market value of stock compensation issued for services (unaudited)		—		—		(127,058	)		—			—			(127,058	)

Net loss for the six months ended March 31, 2007 (unaudited)		—		—		—			—			(1,372,657	)		(1,372,657	)


Balance at March 31, 2007 (unaudited)		14,989,704	$	14,990	$	7,075,408		$	(52,540	)	$	(8,187,329	)	$	(1,149,471	)

See accompanying notes to condensed consolidated financial statements

TEKNIK DIGITAL ARTS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six			Six
	Months Ended			Months Ended
	March 31,			March 31,
	2007			2006
Increase/(Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Net Loss	$	(1,372,657	)	$	(522,257	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation		867			674
Common stock issued in excess of conversion of related party note payable		850,000			—
Market value adjustment of compensation		(178,823	)		—
Changes in Assets and Liabilities:
Accounts receivable		(19	)		(2,122	)
Prepaid expenses		242,504			23,880
Deposits		(7,500	)		—
Accounts payable		22,207			268,706
Accrued vacation		—			(1,154	)
Other accrued expenses		—			592
Accrued interest		37,413			8,680

Net cash used by operating activities		(406,008	)		(223,001	)


Cash flows from financing activities:
Proceeds from note payable — related party		89,245			228,500
Payments of note payable		—			(11,069	)
Payments related to capital lease		(380	)		(1,141	)
Due to related party		275,000			—

Net cash provided by financing activities		363,865			216,290

Net change in cash and cash equivalents		(42,143	)		(6,711	)
Cash and cash equivalents at beginning of period		42,387			7,060

Cash and cash equivalents at end of period	$	244		$	349

See accompanying notes to condensed consolidated financial statements

TEKNIK DIGITAL ARTS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)


	Six		Six
	Months Ended		Months Ended
	March 31,		March 31,
	2007		2006
Supplemental Information:
Interest paid	$	—	$	23,602
Income taxes paid	$	—	$	—

Non-cash Investing and Financing Activities
Cancellation of consulting agreement	$	51,765	$	—
Common stock issued for conversion of related party note payable	$	1,750,000	$	—
Fixed assets exchanged for treasury stock	$	—	$	775

See accompanying notes to condensed consolidated financial statements

TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES

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 10-KSB filed for the year ended September 30, 2006, as filed with the SEC under the Securities Exchange Act of 1934, as amended. 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 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 March 31, 2007, and the results of our operations and cash flows for the periods presented. The September 30, 2006 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 variations and the results of operations for the six months ended March 31, 2007 are not necessarily indicative of the results to be expected for the full year.

Nature of Corporation

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.

Liquidity

The Company has generated an accumulated net loss of ($8,187,329) (unaudited) from the date of inception January 29, 2003 through March 31, 2007. Our primary sources of liquidity are proceeds from borrowings from a related party note and, to a lesser extent, proceeds from the sale of equity securities.

Revenue Recognition

The Company derives its revenues primarily from the sale of interactive entertainment software through the Company’s website and distributors. Revenues are recognized at the time the sale is completed through the Company’s website or when the Company is notified of a sale by its distributors.

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. In prior periods amounts related to software development costs have been 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.

TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1
Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates (Continued)

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued (SFAS) No.159, “The Fair Value Option for Financial Assets and Financial Liabilities” — including an amendment of FASB Statement No. 155. SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company does not believe that the adoption of SFAS No. 159 will have a material effect on our results of operations or financial position.

Consolidated Statements

The consolidated financial statements include the accounts of Teknik Digital Arts, Inc. and its subsidiaries, Playentertainment-Teknik, LLC and Teknik Powergrid, LLC. All significant intercompany balances and transactions have been eliminated in consolidation. The Company owns 50% of the outstanding membership interests of Playentertainment-Teknik, LLC and Teknik Powergrid, LLC, however, the financial statements of the subsidiaries have been consolidated as the management and operations of Playentertainment-Teknik, LLC and Teknik Powergrid, LLC are substantially controlled by Teknik Digital Arts, Inc. The other ownership investments are presented as minority interests on the accompanying balance sheets.

Use of Estimates

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 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 and warrants 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, 2007, options to purchase 150,000 shares and warrants to purchase 1,077,500 shares of common stock were not included in the determination of diluted loss per share as their effect was anti-dilutive.

Stock-Based Compensation

Prior to January 1, 2006, the Company accounted for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”). Accordingly, compensation expense, if any, was measured as the excess of the underlying stock price over the exercise price on the date of grant. The Company complied with the disclosure provisions of Statement of Financial Accounting Standards Board No. 123 (“SFAS 123”) “Accounting for Stock Based Compensation” as amended by SFAS 148 “Accounting for Stock-Based Compensation-Transition and Disclosure,” which required pro-forma disclosure of compensation expense associated with stock options under the fair value method.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards Board No. 123(R), “Share–Based Payment,” using the modified prospective-transition method. Under this transition method, compensation expense recognized for the six months ended March 31, 2007 includes: (a) compensation expense for all share-based payments granted prior to, but not yet vested as of December 31, 2005 based on the grant date fair value estimated and (b) compensation expense for all share-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated. The fair value of option grants is estimated as of the

TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES

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)

date of grant utilizing the Black-Scholes option-pricing model and amortized to expense over the options’ vesting period.

As of March 31, 2007, the Company had 150,000 options outstanding and exercisable. The options had no intrinsic value as of March 31, 2007, as the exercise price of all outstanding and exercisable options is greater than the trading price of the Company’s common stock at March 31, 2007. All options were 100% vested as of March 31, 2005, and therefore will result in no future compensation expense to the Company. The options have a weighted average remaining life of 1.00 year and a weighted average exercise price of $1.00.

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 0-10%, and a 0% dividend yield. The fair value of the options outstanding at March 31, 2007 was $234,000, determined on the respective date of grant.

As a result of adopting SFAS 123(R), the Company’s net loss for the six month period ended March 31, 2007 is unchanged from the net loss that would be reported if it had continued to account for share-based compensation under APB 25 as all options granted by the Company were fully vested as of December 31, 2005.

Note 2
Related Party Transactions

The Company had an uncollateralized line of credit of $1,000,000 with a related party as of September 30, 2005, with the principal and interest due March 1, 2006. On March 1, 2006, the line of credit was terminated and the outstanding balance was converted to a term note, which bears interest at the rate of 7% per annum with all outstanding principal and interest due on March 1, 2007. On February 5, 2007, the Company issued 5,000,000 shares of common stock as payment towards $900,000 of the related party note. The due date of the remaining outstanding principal and interest balance on the note was extended to March 1, 2008 and continues accruing interest at 7% per annum. As of March 31, 2007 and September 30, 2006, the Company’s balance on the related party note payable was $71,745 and $882,500, respectively.

As of March 31, 2007 and September 30, 2006, there was interest accrued on the note of $54,100 and $30,887, respectively.

The Company pays a monthly fee to its joint venture partner, Powergrid Fitness, Inc. for services related to equipment manufacturing, management, engineering management and sales management. On April 26, 2007, the Company amended their joint venture agreement with Powergrid Fitness, Inc. Under the terms of the amended agreement, the Company shall contract Powergrid Fitness, Inc. to provide consulting services for an irrevocable advance against its future joint venture revenue of $500,000 in the first year of the agreement (August 1, 2006 to July 31, 2007). During the six months ended March 31, 2007 and March 31, 2006, the Company accrued $300,000 and $0, of management fees, respectively. Amounts due to Powergrid Fitness, Inc. at March 31, 2007 and September 30, 2006 totaled $300,000 and $25,000, respectively.

Note 3
Notes Payable

During the year ended September 30, 2006, the Company entered into an agreement to issue convertible debt. Under the terms of the agreement, the Company intended to offer a maximum of $1,500,000 of debt during the period commencing May 5, 2006 to January 15, 2007. The notes accrue interest at a rate of 8% per annum with principal and interest due on June 1, 2008. The note holder may convert the note and accrued interest at any time prior to June 1, 2008, into shares of the Company’s common stock at a purchase price per share of $.75, subject to any subsequent

TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3
Notes Payable (Continued)

issuances of convertible debt at a more favorable conversion rate. The conversion price of $0.75 was less than the fair value of the Company’s common stock at the time of issuance. As a result, the Company recorded a beneficial conversion feature in the amount of $35,333. In addition, upon commencement of the agreement, the placement agent was issued 250,000 common stock warrants to purchase the Company’s common stock at a price of $.75 per share. The Company issued additional warrants to the placement agent to purchase .5 shares of common stock at $.75 per share for each $1.00 of debt sold up to an additional 250,000 shares of common stock. As of March 31, 2007, the placement agent had raised an aggregate of $355,000, which entitles the placement agent to an additional 177,500 common stock warrants. The fair value of warrant grants is estimated as of the date of grant utilizing the Black-Scholes option-pricing model with the following weighted average assumptions for the aforementioned grants: expected life of warrants of 3 years, risk-free interest rates between 4.83% and 5.26%, volatility between 135% and 138%, and a 0% dividend yield. This resulted in the warrants having been valued at $293,400 during the year ended September 30, 2006.

As of March 31, 2007 and September 30, 2006 the Company’s balance on the note payable was $355,000 and there was interest accrued on the note of $19,543 and $5,343, respectively.

Note 4
Equity

On November 22, 2006, the Company terminated a consulting agreement with a service provider. This transaction resulted in 94,116 shares of common stock being returned to the Company. The common stock has a value of $51,765 and is included in treasury stock as of March 31, 2007.

Note 5
Going Concern

As discussed in the Company’s Form 10-KSB for the fiscal year ended September 30, 2006, 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.

Note 6
Subsequent Events

On April 17, 2007 the Company entered into a revolving line of credit agreement that will allow the Company to borrow up to $2,000,000. Under the terms of the agreement, the Company is required to file a registration statement within 120 days of the effective date of the agreement. The registration statement will be issued in conjunction with an agreement entered into on April 27, 2006, as mentioned below. Interest will accrue on the principal amount outstanding under the revolving line at a floating per annum rate equal to the sum of two percent (2.00%) plus the prime rate in effect from time to time, until the Company has filed the registration statement and the registration statement is effective. Thereafter, the Company will pay interest at a rate of one percent (1.00%) plus the prime rate in effect from time to time, with interest due monthly. In addition, the Company is required to pay a fee equal to three-eighths of one percent (0.375%) per annum of the average unused portion of the revolving line, as determined by the lender. The fee is payable quarterly, in arrears, on a calendar year basis.

On April 26, 2007, the Company amended their joint venture agreement with Powergrid Fitness, Inc. Under the terms of the original agreement, the Company was required to pay a fee of $100,000 per month beginning August 1, 2006, for services related to equipment manufacturing, management, engineering management and sales management. Under the

TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6
Subsequent Events (Continued)

terms of the amended agreement, the Company shall contract Powergrid Fitness, Inc. to provide consulting services for an irrevocable advance against its future joint venture revenue of $500,000 in the first year of the agreement (August 1, 2006 to July 31, 2007) and $65,000 per month thereafter for the remaining term of the agreement.

On April 27, 2007, the Company entered into an equity line of credit agreement with an investor, whereas, the investor shall invest up to ten million dollars ($10,000,000) to purchase the Company’s common stock over 36 months after a registration statement of the stock has been declared effective. The Company shall, within twenty-one (21) days of the date of this agreement, file a registration statement and the Company shall use all reasonable efforts to have the registration statement declared effective by the SEC within ninety (90) calendar days after the execution date of this equity line of credit agreement. The Company is entitled to deliver a “put” notice to the investor, which states the dollar amount (the “put amount”), which the Company intends to sell to the investor on a closing date (the “put”). The amount the Company shall be entitled to request on each “put” shall be equal to either $250,000 or 200% of the average daily volume multiplied by the average of the three daily closing prices immediately preceding the request date.

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 subsidiaries.

Overview

Teknik Digital Arts, Inc. publishes and distributes physically interactive video game systems for play on personal computers and video game consoles, and instructional and game software for play on mobile telephones. Through our joint venture with Powergrid Fitness, Inc., we are currently developing and applying all of our resources to the first physically interactive online video game league, The Power Gaming League. We plan to continue to license highly visible consumer personalities, such as popular motion picture, television show, and sports figures, to promote the healthy aspects of our Power Gaming League.

In August 2006, we formed a joint venture with Powergrid Fitness to develop the Power Gaming League and distribute the exclusively-licensed Exerstation™ physically interactive video game controller. The Exerstation™ was awarded the 2006 Consumer Electronics Show Electronic Gaming innovation of the year. The controller is isometric based, works with all games on personal computers, XBox, Sony Playstation 2, and Ninetendo’s GameCube. According to clinical medical trials, the video game player can burn up to 350 calories per hour and build muscle fitness utilizing the controller. The Power Gaming League and Exerstation™ distribution is scheduled to launch by September 2007.

We will provide the day-to-day operations and financial management for the joint venture, while the management of Powergrid Fitness will provide engineering, manufacturing, and marketing management for the joint venture. We have contracted with third party software developers to program the Power Gaming League.

Customers will be able to join the Power Gaming League and purchase the Exerstation™ online. The Company believes the Exerstation™ will be available from retailers such as Best Buy, Sharper Image, Target, Amazon.com and others based on commitments to carry the product over the past year, however, there is no guarantee that these retailers will carry the product now or in the future. The league currently plans to charge customers a monthly fee of $15 a month to play in the league and $199 retail for the controller. All Exerstation™ equipment will be delivered by a contracted fulfillment house to individual customers and retailers. This arrangement will save the Company the overhead of operating a distribution warehouse and work with major retailers who require independent fulfillment houses to manage distribution of this type of consumer electronic product.

Since our inception, our aggregate loss from operations is ($8,187,329) (unaudited). This loss has been primarily related to research, development and general and administrative costs. As of March 31, 2007, we had two full time employees, including one in sales and marketing and one in finance and administration. 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

As of the date of this report, we require approximately $60,000 to $80,000 per month to fund our recurring operations. This amount may increase as we expand our development efforts to include additional product offerings. Our cash needs are primarily attributable to funding the Teknik-Powergrid JV, LLC, insurance costs, payroll related 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, which has been converted to a term note as of March 1, 2006, and, to a lesser extent, from the sale of equity securities. 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 intend to continue to devote our research and development resources to the development of our physically interactive gaming project.

Revenue

During the six months ended March 31, 2007, the Company generated a small amount of revenue related to our mobile phone game applications. Our business model contemplates that we will derive revenue from one-time fees charged in connection with the initial sale of our products and monthly subscriptions. We anticipate generating minimal revenue from the sale of applications for mobile phones, personal computers and console game systems and the majority, if not all of our revenues will be generated from our physically interactive gaming products.

Expenses

We intend to focus our resources on the joint venture created with Powergrid Fitness to develop the Power Gaming League and distribute the exclusively-licensed Exerstation™ physically interactive video game controller.

We will incur operational costs associated with customer support and maintaining our web presence. In the future, we believe a majority 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 we do not expect this will be a requirement for our core market. 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 the Company’s products. We expect our sales and marketing expenses will increase materially when operations increase 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, occupancy charges and professional fees.

We have incurred significant expenses from inception through March 31, 2007 primarily attributable to charges incurred during our development stage. Since our inception, we have incurred a net loss of ($8,187,329) (unaudited). Approximately $5,229,000 (unaudited) of expenses have been attributable to non-cash charges taken since inception related to stock issuances for compensation, consulting, debt, a legal settlement, as well as stock and warrants issued in relation to software development costs.

Comparisons of the three months ended March 31, 2007 and 2006

Our general and administrative expenses increased approximately 289.3% from $226,830 for the three months ended March 31, 2006 to $883,047 for the three months ended March 31, 2007. The increase is primarily attributable to non-cash costs incurred in connection with the Company issuing common stock to satisfy a portion of the related party note payable, as well as costs incurred in connection with the Teknik-Powergrid JV, LLC, during the three months ended March 31, 2007. Research and development costs decreased 100% from $499 for the three months ended March 31, 2006 to $0 for the three months ended March 31, 2007. This decrease is primarily attributable to the discontinuation of our mobile applications software development.

Comparisons of the six months ended March 31, 2007 and 2006

Our general and administrative expenses increased approximately 191.3% from $453,146 for the six months ended March 31, 2006 to $1,319,890 for the six months ended March 31, 2007. The increase is primarily attributable to non-cash costs incurred in connection with the Company issuing common stock to satisfy a portion of the related party note payable, as well as costs incurred in connection with funding the operations of the Teknik-Powergrid JV, LLC, during the six months ended March 31, 2007. Research and development costs decreased approximately 99% from $38,359 for the six months ended March 31, 2006 to $254 for the six months ended March 31, 2007. This decrease is primarily attributable to the discontinuation of our mobile applications software development.

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. On March 1, 2006, our line of credit was terminated and the outstanding balance on the line of credit was converted to a term note, which bears interest at the rate of 7% per annum with principal and interest due on March 1, 2007. On February 5, 2007, the Company issued 5,000,000 shares of common stock in satisfaction of $900,000 of the note and extended the due date of the remaining balance on the note payable to March 1, 2008. The note is held by a related party, CodeFire Acquisition Corp., or CAC, which holds 36.9% of our issued and outstanding common stock. As of March 31, 2007 and September 30, 2006, we had an outstanding balance on the note of $71,745 and $882,500 respectively.

As of March 31, 2007 and September 30, 2006, there was interest accrued on the note of $54,100 and $30,887, respectively.

As of March 31, 2007 and September 30, 2006, we had cash and cash equivalents amounting to $244 and $42,387, respectively, and prepaid expenses of $66,744 and $309,248, respectively. The largest uses of our funds are funding the Teknik-Powergrid JV, LLC, professional fees and general and administrative expenses including salaries and related expenses.

As of March 31, 2007, we had total current liabilities of $840,284 and had total current assets of $59,891, with our current liabilities exceeding our current assets by $780,393. As of September 30, 2006, we had total current liabilities of $1,316,799 and total current assets of $280,549, with our current liabilities exceeding our current assets by $1,036,250.

We intend to meet our immediate financing needs from our new line of credit obtained on April 17, 2007, as discussed in Note 6. In addition, the Company believes that it will be able to continue to borrow additional funds from CAC. These borrowings, combined 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.

If our expenses exceed our borrowing capability, and we cannot raise money through the sale of equity or debt securities, 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 consolidated financial statements for the year ended September 30, 2006, 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, 2006. 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.

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. There are no lawsuits outstanding as of the date of this report.

Item 6. Exhibits.

(a) The following exhibits are filed herewith pursuant to Regulation S-B.

Exhibit Index


Exhibit
No.		Description
	31	Section 302 Certification of President, Chief Executive Officer and Chief Financial Officer

	32	Section 906 Certification

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 14, 2007
	By	/s/ John R. Ward
	John R. Ward
	President, Chief Executive Officer, and Chief Financial Officer

Halitron (HAON) 10QSB2007 Q2 Quarterly report (small business)