Halitron 10QSB 2008 Q3 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 June 30, 2008


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		(IRS 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

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 1, 2008, the registrant had outstanding 17,167,810 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 June 30, 2008
Table of Contents


PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and September 30, 2007			1
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2008 and 2007			2
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Deficit for the nine months ended June 30, 2008			3
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2008 and 2007			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.			15

Item 6. Exhibits.			15
EX-31.1
EX-31.2
EX-32

TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES

Part I -— FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED BALANCE SHEETS


	(Unaudited)
	June 30,			September 30,
	2008			2007
Current Assets:
Cash and cash equivalents	$	321,277		$	21,162
Accounts receivable		159			140
Inventory		111,769			—
Deposit		—			84,777
Prepaid expenses		33,828			22,965


Total Current Assets		467,033			129,044


Property and equipment, net		150,743			173,440


Other Assets:
Licenses		100			100
Security deposit		1,000			1,000


Total Other Assets		1,100			1,100


Total Assets	$	618,876		$	303,584


Current Liabilities:
Note payable — related party	$	—		$	45,917
Notes payable		2,052,078			1,268,017
Accounts payable		255,722			333,728
Accrued payroll		—			3,368
Accrued interest		9,877			40,194


Total Current Liabilities		2,317,677			1,691,224

Minority interest in joint ventures		37,500			37,600


Total Liabilities and Minority Interest		2,355,177			1,728,824


Stockholders’ Equity (Deficit):
Common stock — $.001 par value; 50,000,000 shares authorized, 17,761,926 and 15,239,704 shares issued; 17,167,810 and 14,645,588 shares outstanding at June 30, 2008 and September 30, 2007, respectively		17,762			15,240
Additional paid-in capital		8,336,158			7,740,304
Accumulated deficit		(10,037,681	)		(9,128,244	)
Less: Treasury stock at cost, 594,116 shares		(52,540	)		(52,540	)


Total Stockholders’ Deficit		(1,736,301	)		(1,425,240	)


Total Liabilities and Stockholders’ Deficit	$	618,876		$	303,584

See accompanying notes to condensed consolidated financial statements

TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three			Three			Nine			Nine
	Months Ended			Months Ended			Months Ended			Months Ended
	June 30,			June 30,			June 30,			June 30,
	2008			2007			2008			2007
Sales, Net	$	(299,000	)	$	—		$	23		$	23

Cost of Sales		(111,768	)		—			4			4


Gross Profit (loss)		(187,232	)		—			19			19

General and Administrative Expenses		264,624			159,163			823,879			1,479,053
Research and Development Costs		—			—			—			254


Income / (Loss) from Operations		(451,856	)		(159,163	)		(823,860	)		(1,479,288	)


Other Income (Expense):
Interest Expense		(35,958	)		(3,642	)		(85,677	)		(56,174	)
Miscellaneous Income		—			—			100			—

		(35,958	)		(3,642	)		(85,577	)		(56,174	)

Minority interest portion of joint venture loss		—			106,460			—			106,460

Net Loss	$	(487,814	)	$	(56,345	)	$	(909,437	)	$	(1,429,002	)


Net Loss per common share, basic & diluted:	$	(0.03	)	$	(0.00	)	$	(0.06	)	$	(0.12	)


Shares used in computing net Loss per common share:
Weighted Average Common Shares Outstanding basic & diluted		15,157,493			14,401,083			14,907,753			12,053,054

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 NINE MONTHS ENDED JUNE 30, 2008


														Total
					Additional			Treasury						Stockholders’
	Common Stock				Paid-in			Stock			Accumulated			Equity
	Shares		Amount		Capital			at Cost			Deficit			(Deficit)
Balance at September 30, 2007		15,239,704	$	15,240	$	7,740,304		$	(52,540	)	$	(9,128,244	)		(1,425,240	)

Stock issued for services (unaudited)		550,000		550		95,450			—			—			96,000

Warrants granted for compensation (unaudited)		—		—		94,750			—			—			94,750

Capital contribution (unaudited)		—		—		53,229			—			—			53,229

Stock issued for conversion of note payable (unaudited)		1,972,222		1,972		353,028			—			—			355,000

Adjust fair market value of stock compensation issued for services (unaudited)		—		—		(603	)		—			—			(603	)

Net loss for the six months ended June 30, 2008 (unaudited)		—		—		—			—			(909,437	)		(909,437	)


Balance at June 30, 2008 (unaudited)		17,761,926	$	17,762	$	8,336,158		$	(52,540	)	$	(10,037,681	)	$	(1,736,301	)

See accompanying notes to condensed consolidated financial statements

TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine			Nine
	Months Ended			Months Ended
	June 30,			June 30,
	2008			2007
Increase/(Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Net Loss	$	(909,437	)	$	(1,429,002	)
Adjustments to reconcile net loss to net cash used by operating activities
Depreciation		31,121			2,301
Common stock issued in excess of conversion of related party note payable		—			850,000
Market value adjustment of compensation		(603	)		(187,295	)
Purchase of joint venture equity interest		(100	)		—
Common stock issued and warrants granted for compensation of consultants		190,750			57,500
Capital contribution for interest relief		53,229			—
Accrued management fees					300,000
Accrued financing fees		—			10,913
Changes in Assets and Liabilities:
Accounts receivable		(19	)		(19	)
Prepaid expenses		(10,863	)		263,916
Inventory		(111,769	)		—
Deposit		84,777			—
Security Deposit		—			—
Accounts payable		(78,006	)		(27,631	)
Accrued payroll		(3,368	)
Accrued interest		(30,317	)		(6,726	)
Minority interest portion of loss		—			(106,460	)


Net cash used by operating activities		(784,605	)		(272,503	)


Cash flows from investing activities:
Purchase of fixed assets		(8,424	)		(18,000	)


Net cash used in investing activities		(8,424	)		(18,000	)


Cash flows from financing activities:
Proceeds from note payable — related party		—			90,545
Proceeds from notes payable		1,149,500			400,000
Payments related to capital lease		—			(380	)
Payments on note payable — related party		(45,917	)		(11,691	)
Payments on notes payable		(10,439	)		—
Distribution to related party		—			(75,000	)


Net cash provided by financing activities		1,093,144			403,474


Net change in cash and cash equivalents		300,115			112,971

Cash and cash equivalents at beginning of period		21,162			42,387


Cash and cash equivalents at end of period	$	321,277		$	155,358

See accompanying notes to condensed consolidated financial statements

TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)


	Nine		Nine
	Months Ended		Months Ended
	June 30,		June 30,
	2008		2007
Supplemental Information:
Interest paid	$	84,450	$	62,900
Income taxes paid	$	—	$	—

Non-Cash Investing and Financing Activities
Cancellation of consulting agreement	$	—	$	51,765
Common stock and warrants issued for compensation and consulting	$	190,750	$	57,500
Purchase of joint venture equity interest	$	100	$	—
Common stock issued for conversion of related party note payable	$	—	$	1,750,000
Stock issued for conversion of notes payable	$	355,000	$	—
Capital contribution	$	53,229	$	—
Financing fees related to note payable	$	—	$	10,913
Conversion of due to related party to minority interest	$	—	$	211,250

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, 2007, 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 June 30, 2008, and the results of our operations and cash flows for the periods presented. The September 30, 2007 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 nine months ended June 30, 2008 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 was originally to publish interactive video games and instructional software for play on mobile telephones, personal computers and video game consoles. The Company has shifted its focus to developing physically interactive systems for play on personal computers and video game consoles.

Liquidity

The Company has generated an accumulated net loss of ($10,037,681) (unaudited) from the date of inception January 29, 2003 through June 30, 2008. Our primary sources of liquidity have been proceeds from the sale of equity securities, a revolving line of credit, as well as proceeds from a related party note, the majority of which was converted to equity securities during the year ended September 30, 2007.

Revenue Recognition

The Company derives its revenues primarily from the sale of interactive entertainment equipment and 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 December 2007, the FASB issued (SFAS) No.160, “Noncontrolling Interests in Consolidated Financial Statements” — including an amendment of ARB No. 51. SFAS 160 intends to improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements and is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of adopting this standard, however, we do not believe that the adoption of SFAS No. 160 will have a material effect on our results of operations or financial position.

In December 2007, the FASB issued (SFAS) No.141(R), “Business Combinations” SFAS 141(R)’s objective is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. The statement is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of adopting this standard, however, we do not believe that the adoption of SFAS No. 141(R) will have a material effect on our results of operations or financial position.

In March 2008, the FASB issued (SFAS) No.161, “Disclosures about Derivative Instruments and Hedging Activities” SFAS 161’s objective is to provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. This statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of FSP 142-3 on its financial position and results of operations.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The implementation of this standard will not have a material impact on our financial position and results of operations.

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. As of June 30, 2008, the Company owns 100% of the membership interest of Teknik Powergrid, LLC and 50% of the membership interest of Playentertainment-Teknik, LLC, however, the financial statements of Playentertainment-Teknik, LLC joint venture have been consolidated as the management and operations of Playentertainment-Teknik, LLC are substantially controlled by Teknik Digital Arts, Inc. The other ownership investment is 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.

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)

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 June 30, 2008, warrants to purchase 5,827,500 shares of common stock were not included in the determination of diluted loss per share as their effect was anti-dilutive.

Stock-Based Compensation

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 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). The fair value of option grants is estimated as of the date of grant utilizing the Black-Scholes option-pricing model and amortized to expense over the options’ vesting period. All options granted by the Company were fully vested as of December 31, 2005.

As of June 30, 2008, the Company had no options outstanding.

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 continued accruing interest at 7% per annum. During the nine months ended June 30, 2008, the remaining principal balance of the note was paid and the note was extinguished. As of June 30, 2008 and September 30, 2007, the Company’s balance on the related party note payable was $0 and $45,917, respectively.

As of June 30, 2008 and September 30, 2007, there was interest accrued on the note of $0 and $223, respectively.

TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2
Related Party Transactions (Continued)

The Company historically paid its joint venture partner, Interactive Laboratories, Inc. formerly known as 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 Interactive Laboratories, 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 terms of the amended agreement, the Company was to contract Interactive Laboratories, 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 further amended the agreement with Interactive Laboratories, Inc. Under the terms of this amended agreement, the Company contracted Interactive Laboratories, Inc. to provide consulting services for an irrevocable advance against its future joint venture revenue of $315,000 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 March 31, 2008, Interactive Laboratories, Inc. agreed to sell their 50% interest in the joint venture to the Company for management fees previously paid to Interactive Laboratories, Inc. through November 30, 2007, plus one dollar ($1) and future royalties from the sale of the XR Station^® directly to end users, distributors and the XRGames League. During the nine months ended June 30, 2008 and 2007, the Company incurred $130,000 and $300,000, of management fees, 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 was 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 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. This resulted in the Company recording a beneficial conversion feature in the amount of $35,333. As the convertible debt can be converted anytime after debt issuance, the Company recorded a charge to interest expense of $35,333 at the time of issuance. In addition, the placement agent was issued 250,000 common stock warrants upon commencement of the agreement 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 June 30, 2008, the placement agent has raised $355,000 entitling them to an additional 177,500 shares of 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. On June 1, 2008, the note payable and accrued interest was converted into 1,972,222 shares of common stock, As of June 30, 2008 and September 30, 2007, the Company’s balance on the note payable was $0 and $355,000, respectively, and there was interest accrued on the note of $0 and $223, respectively.

On April 17, 2007 the Company entered into a new revolving line of credit agreement with Silicon Valley Bank 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. 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. As of the date of this report, the registration statement is effective and the interest rate on the line of credit is one percent (1.00%) plus the prime rate. 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

TEKNIK DIGITAL ARTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3
Notes Payable (Continued)

line, as determined by the lender. The fee is payable quarterly, in arrears, on a calendar year basis. Principal and interest on the line of credit are due on April 17, 2009. As of June 30, 2008 and September 30, 2007, the Company’s balance on the note payable was $1,975,413 and $825,913, respectively, and there was interest accrued on the note of $9,877 and $5,991, respectively.

On August 20, 2007, the Company entered into a financing agreement to purchase a vehicle. Under the terms of the agreement the Company borrowed $87,104 on a five year note, with payments due monthly beginning October 13, 2007 and accruing interest at a rate of 10.50% per annum. As of June 30, 2008 and September 30, 2007, the Company’s balance on the note payable was $76,665 and $87,104, respectively, and accrued interest on the note was $0 and $0, respectively.

Note 4
Equity

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. As of June 30, 2008, the registration statement has been declared effective and the Company has not issued any common stock pursuant to this agreement.

Note 5
Revenues

The Company launched the physically interactive XR Station^® through the Power Gaming League and THE XR GAMES during the three months ended March 31, 2008 and recorded $299,000 of revenues associated with a sale to Westwind Academies. Subsequent to the sale, the Company had an opportunity to make the XR Station^® sold in the three months ended March 31, 2008 compatible with the XBOX360. The Company agreed to have all XR Station^® units previously sold, upgraded with a conversion board from the Chinese manufacturer for this upgrade. The Chinese manufacturer has informed the Company that the XR Station^® is now fully functioning with the XBOX 360. Since the Company has not tested the units for functionality, the prior quarter sale has been reversed in the three months ended June 30, 2008, until such testing is completed and the Company confirms functionality.

Note 6
Going Concern

As discussed in the Company’s Form 10-KSB for the fiscal year ended September 30, 2007, 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. As discussed in the Company’s form 10-KSB, our Company’s auditors expressed a going concern opinion for the fiscal year ended September 30, 2007.

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. 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 Interactive Laboratories, Inc. formerly known as Powergrid Fitness, Inc. to develop the Power Gaming League and distribute the exclusively-licensed XR Station^® physically interactive video game controller. The XR Station^® 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 250 calories per hour and build muscle fitness utilizing the controller. The Power Gaming League and XR Station^® launched during the nine months ended June 30, 2008. As of June 30, 2008, the Company has purchased Interactive Laboratories, Inc.’s interest in the joint venture and therefore owns 100% of the joint venture.

Customers will be able to join the Power Gaming League and purchase the XR Station^® online. The league currently plans to charge customers a monthly fee of $15 to play in the league and $199 retail for the controller. All XR Station^® 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. Additionally the Company has agreed to provide its online physically interactive video gaming technology, support and equipment to Westwind Community Schools, which offers the approved extracurricular activity THE XR GAMES. COM, an online video gaming league/club available to all Arizona students in grades K through 12.

Since our inception, our aggregate loss from operations is ($10,037,681) as of June 30, 2008. This loss has been primarily related to research, development and general and administrative costs. As of June 30, 2008, 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 $70,000 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 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 related party revolving line of credit, which has been converted to a term note as of March 1, 2006, and subsequently converted to equity securities, as well as a $2,000,000 line of credit with Silicon Valley Bank. We have a commitment for a $10,000,000 equity line of credit agreement with an investor. We believe that this will be sufficient for us to fund our recurring operations. 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. 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, which has been launched as of June 30, 2008.

Revenue

During the nine months ended June 30, 2008, 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 possible monthly or one-time subscriptions to various leagues. 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 and leagues.

Expenses

We intend to focus our resources on further developing the Power Gaming League and distribute the exclusively-licensed XR Station^® 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 will be handled via 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 June 30, 2008, which are primarily attributable to charges incurred during our development stage. Since our inception, we have incurred a net loss of $10,037,681. Approximately $6,127,000 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, financing, as well as a legal settlement.

Comparisons of the three months ended June 30, 2008 and 2007

Revenues decreased 100% from $0 for the three months ended June 30, 2007 to $(299,000) for the three months ended June 30, 2008. This was a result of the Company launching the physically interactive XR Station^® through the Power Gaming League and THE XR GAMES during the three months ended March 31, 2008 and recording $299,000 of revenues associated with a sale to Westwind Academies. Subsequent to the sale, the Company had an opportunity to make the XR Station^® sold in the three months ended March 31, 2008 compatible with the XBOX360. The Company agreed to have all XR Station^® units previously sold, upgraded with a conversion board from the Chinese manufacturer for this upgrade. The Chinese manufacturer has informed the Company that the XR Station^® is now fully functioning with the XBOX 360. Since the Company has not tested the units for functionality, the prior quarter sale has been reversed in the three months ended June 30, 2008, until such testing is completed and the Company confirms functionality. Although management believes the sale was properly recorded in the three months ended March 31, 2008, management felt it was strategically important to provide this additional functionality to enhance our relationship with Westwind Academy for future opportunities. Our general and administrative expenses increased approximately 66.3% from $159,163 for the three months ended June 30, 2007 to $264,624 for the three months ended June 30, 2008. The increase is primarily attributable to expenses incurred during the three months ended June 30, 2008, related to non-cash expenses for stock issued for services and common stock warrants related to convertible debt that was converted during the three months ended June 30, 2008.

Comparisons of the nine months ended June 30, 2008 and 2007

Revenues were $23 for the nine months ended June 30, 2007 and June 30, 2008. Our general and administrative expenses decreased approximately 44.3% from $1,479,053 for the nine months ended June 30, 2007 to $823,879 for the nine months ended June 30, 2008. The decrease 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 nine months ended June 30, 2007. In addition, the Company restructured their agreement with Interactive Laboratories, Inc. resulting in a decrease in management fees incurred during the nine months ended June 30, 2008. Research and development costs decreased 100% from $254 for the nine months ended June 30, 2007 to $0 for the nine months ended June 30, 2008. This decrease is 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 was held by a related party, CodeFire Acquisition Corp., or CAC, which holds 35.0% of our issued and outstanding common stock. As of June 30, 2008, the note has been completely paid off. As of June 30, 2008 and September 30, 2007, we had an outstanding balance on the note of $0 and $45,917 respectively.

As of June 30, 2008 and September 30, 2007, there was interest accrued on the note of $0 and $223, respectively.

On April 17, 2007 the Company entered into a new revolving line of credit agreement with Silicon Valley Bank 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 Company filed the original registration statement on June 20, 2007. The registration was declared effective on March 14, 2008. Interest accrued 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 filed the registration statement and the registration statement was 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. As of June 30, 2008 and September 30, 2007, the Company’s balance on the note payable was $1,975,413 and $825,913, respectively, and there was interest accrued on the note of $9,877 and $5,991, respectively.

As of June 30, 2008 and September 30, 2007, we had cash and cash equivalents amounting to $321,277 and $21,162, respectively, and prepaid expenses of $33,828 and $22,965, respectively. Our liquidity needs are primarily to fund working capital requirements, including general and administration and developmental expenses. The largest use of our funds has been used in funding the Teknik-Powergrid JV, LLC, professional fees and general and administrative expenses including salaries and related expenses.

As of June 30, 2008, we had total current liabilities of $2,317,677 and had total current assets of $467,033, with our current liabilities exceeding our current assets by $1,850,644. As of September 30, 2007, we had total current liabilities of $1,691,224 and had total current assets of $129,044, with our current liabilities exceeding our current assets by $1,562,180.

Management believes that 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 availability, 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 registered public accounting firm has included an explanatory paragraph in its report on our consolidated 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.

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

31.1		Section 302 Certification of President and Chief Executive Officer

31.2		Section 302 Certification of 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: August 14, 2008	By /s/ John R. Ward
	John R. Ward
	President, Chief Executive Officer, and Chief Financial Officer

Halitron (HAON) 10QSB2008 Q3 Quarterly report (small business)