SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 000-29611
THE CHILDREN'S INTERNET, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 20-1290331
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5000 Hopyard Rd., Suite 320, Pleasanton, California 94588
(Address of principal executive offices)
(925) 737-0144
(Issuer's telephone number)
------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 past 90 days. Yes [X] No |_|
As of June 30, 2005, the number of shares of common stock issued and outstanding
was 26,810,138.
Transitional Small Business Disclosure Format (check one): Yes |_| No [X]
THE CHILDREN'S INTERNET, INC
INDEX
Page
Number
PART I - FINANCIAL INFORMATION 1
Item 1. Financial Statements (Unaudited) 1
Unaudited Balance Sheet - June 30, 2005 1
Unaudited Statements of Operations - For the six months and three 2
months ended June 30, 2005 and 2004, and the period from
inception to June 30, 2005
Unaudited Statements of Cash Flows - For the six months 3
ended June 30, 2005 and 2004, and the period from
inception to June 30, 2005
Notes to Unaudited Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Conditions and Plan of Operation 7
Item 3. Controls and Procedures 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE CHILDREN'S INTERNET, INC.
(A Development Stage Company)
BALANCE SHEET
June 30, 2005
(Unaudited)
ASSETS
Current Assets:
Cash $ 57,796
-----------
Total Current Assets 57,796
Other Assets:
Deferred Charges - Related Company 5,670,000
Deferred Tax Asset (net of valuation allowance of
$442,374) --
-----------
TOTAL ASSETS $ 5,727,796
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Expenses $ 127,833
Taxes Payable 2,640
-----------
Total Current Liabilities 130,473
Long-Term Liabilities:
Due to Parent Company 213,464
Accrued Officer's Salary 90,000
-----------
Total Long-Term Liabilities 303,464
-----------
TOTAL LIABILITIES 433,937
-----------
COMMITMENTS AND CONTINGENCIES --
-----------
STOCKHOLDERS' EQUITY
Preferred Stock, $0.001 par value; 10,000,000 shares
authorized; zero shares issued and outstanding --
Common stock, $0.001 par value; 75,000,000 shares
authorized; 26,810,138 shares issued and outstanding 26,810
Additional paid-in capital 7,852,063
Deficit accumulated during the development stage (2,585,014)
-----------
TOTAL STOCKHOLDERS' EQUITY 5,293,859
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,727,796
===========
The accompanying notes are an integral part of the financial statements.
1
THE CHILDREN'S INTERNET, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30, From
---------------------------- ---------------------------- Inception
2005 2004 2005 2004 to Date
------------ ------------ ------------ ------------ ------------
(restated) (restated)
REVENUE $ -- $ -- $ -- $ -- $ --
General and Administrative Expenses 296,658 85,678 778,880 182,269 2,581,814
------------ ------------ ------------ ------------ ------------
Operating Loss before provision for
income taxes (296,658) (85,678) (778,880) (182,269) (2,581,814)
Provision for Income Taxes 800 800 800 800 3,200
------------ ------------ ------------ ------------ ------------
NET LOSS $ (297,458) $ (86,478) $ (779,680) $ (183,069) $ (2,585,014)
============ ============ ============ ============ ============
Net Loss per Common Share, after giving
retroactive effect to 2 for 1 stock
split on March 11, 2005, to the period
ended June 30, 2004 - basic and diluted $ (0.01) $ (0.01) $ (0.03) $ (0.01) $ (0.41)
============ ============ ============ ============ ============
Weighted Average Number of Common
Shares Outstanding 26,795,808 13,523,510 23,480,932 13,523,510 6,382,458
============ ============ ============ ============ ============
PRO FORMA INCOME DATA
Net Loss as reported (2004 restated) $ (297,458) $ (86,478) $ (779,680) $ (183,069)
Effect of errors corrected (net of tax) -- 1,981 -- 29,371
------------ ------------ ------------ ------------
Pro forma Net Loss previously reported $ (297,458) $ (84,497) $ (779,680) $ (153,698)
============ ============ ============ ============
Pro forma Net Loss per Common Share,
after giving retroactive effect to
2 for 1 stock split on March 11,
2005, to the period ended June 30, 2004
- basic and diluted $ (0.01) $ (0.01) $ (0.03) $ (0.01)
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
2
THE CHILDREN'S INTERNET, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2005, 2004 and From Inception
(Unaudited)
Restated Inception
2005 2004 to Date
----------- ----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss $ (779,680) $ (183,069) $(2,585,014)
Adjustments to reconcile net loss to net cash
used in operating activities:
Services performed as capital contribution -- 90,000 595,000
Expenses paid by former officer on behalf of company -- -- 5,000
Increase in assets
Deferred Charges (5,670,000) -- (5,670,000)
Increase in liabilities
Accounts payable and accrued expenses 141,590 3,205 220,473
Due to Parent Company -- 89,864 213,464
----------- ----------- -----------
Decrease in liabilities
Due to Parent Company (182,026) -- --
----------- ----------- -----------
Net cash used in operating activities (6,490,116) -- (7,221,077)
----------- ----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES:
Issuance of common stock 562,912 -- 1,293,873
Stock options granted 5,985,000 -- 5,985,000
----------- ----------- -----------
Net cash provided by financing activities 6,547,912 -- 7,278,873
----------- ----------- -----------
Net change in cash and cash equivalents 57,796 -- 57,796
Cash and cash equivalents - beginning of period -- -- --
----------- ----------- -----------
Cash and cash equivalents - end of period $ 57,796 $ -- $ 57,796
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
3
THE CHILDREN'S INTERNET, INC.
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2005
NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Children's Internet, Inc. [(formerly D.W.C. Installations) ("Company")] was
incorporated under the laws of the State of Nevada on September 25, 1996.
On July 3, 2002, Shadrack Films, Inc. (Parent Company) purchased 2,333,510 newly
issued post-split shares of our common stock for $150,000, thereby obtaining a
majority ownership interest and becoming our parent company. Total issued and
outstanding shares were increased to 4,575,510 post-split shares as a result of
this sale.
On October 11, 2002, 8,948,000 newly issued restricted post-split shares of
common stock were issued as a debt financing fee.
During the six months ended June 30, 2005, an additional 13,286,628 restricted
post-split shares of common stock were issued as explained in Notes 2 and 3,
bringing the total of the Company's issued and outstanding post-split shares to
26,810,138 at June 30, 2005.
Development Stage Enterprise
The Company is a development stage enterprise as defined by Statement of
Financial Accounting Standards (SFAS) No. 7, "Accounting and Reporting by
Development Stage Enterprises." All losses accumulated since the inception of
the Company (formerly D.W.C. Installations) have been considered as part of the
Company's development stage activities. The Company's focus is on marketing The
Children's Internet(R) service.
Interim Financial Information
The accompanying unaudited interim financial statements have been prepared by
the Company in accordance with accounting principles generally accepted in the
United States of America pursuant to Regulation S-B of the Securities and
Exchange Commission. 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. Accordingly, these interim financial statements should be
read in conjunction with the Company's audited financial statements and related
notes as contained in the Company's Form 10-KSB for the year ended December 31,
2004. In the opinion of management, the interim financial statements reflect all
adjustments, including normal recurring adjustments, necessary for fair
presentation of the interim periods presented. The results of operations for the
six months ended June 30, 2005 are not necessarily indicative of results of
operations to be expected for the full year.
4
Going Concern
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. As reflected in
the accompanying financial statements, the Company had net losses and a negative
cash flow from operations for the six months ended June 30, 2005. These factors
raise substantial doubt about its ability to continue as a going concern. The
ability of the Company to continue as a going concern is dependent on the
Company's ability to raise additional funds and implement its business plan. The
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
NOTE 2 - RELATED PARTY TRANSACTIONS
Services Provided
On January 26, 2005, the Company's Board of Directors resolved that starting
January 1, 2005, all salary due and payable to the Company's President, Chief
Executive Officer, Chief Financial Officer, and Director, Sholeh Hamedani, would
be accrued when earned. The decision will be made at the end of the year whether
to make the payment in cash, shares of the Company's restricted common stock, or
a combination of both. Accordingly, for the six months ended June 30, 2005,
$90,000 has been accrued and charged to General and Administrative Expense.
During the six months ended June 30, 2004, Sholeh Hamedani provided services to
the Company at a fair market value of $90,000, which was contributed to
Additional Paid-in Capital. Accordingly, she will not seek payment for the
services provided during that period.
Advances
In February 2005, the Company owed Shadrack Films, Inc., our parent company,
approximately $457,000 representing loans made by Shadrack to the Company since
activating the development stage on July 3, 2002 when it agreed to fund all of
the Company's operations. On February 15, 2005, the Company's Board of Directors
authorized and approved the conversion of the debt owed by the Company to
Shadrack, into 13,054,628 post-split shares of the Registrant's restricted
common stock at a conversion price of $.07 per share.
Shadrack Films, Inc. is an entity owned and controlled by the Company's
President, Chief Executive Officer, Chief Financial Officer and Chairman of the
Board, Sholeh Hamedani, who is the sole officer, director and shareholder of
Shadrack. Shadrack also owned 2,333,510 post-split shares of the Company's
common stock, of which it sold 1,276,150 shares to approximately 130 investors
between July 2004 and June 2005. In addition, Shadrack paid for services valued
at $35,000 with 70,000 shares of the Company's common stock. Together with the
13,054,628 post-split shares issued upon conversion of the debt, Shadrack owns
an aggregate of 14,041,988 post-split shares of the Company's common stock or
52.4% without giving effect to any presently exercisable options. The shares
issued to Shadrack upon conversion are exempt from registration pursuant to
Section 4 (2) of the Securities Act of 1933, as amended.
5
Licensing Agreement
On February 15, 2005, the Company's Board of Directors authorized and approved
an amendment to the Wholesale Sales and Marketing Agreement between the Company
and Two Dog Net, Inc. (TDN), dated March 3, 2003. The amended license agreement
reduces the license fee for The Children's Internet(R) technology payable to TDN
from $3.00 to $1.00 per monthly subscription. In consideration for the reduction
of the fee, the Company granted TDN or its designees an option (the "Option") to
purchase up to 18,000,000 post-split shares of the Company's restricted common
stock at an exercise price of $.07 per share based upon the most recent sale of
a share of the Company's common stock which occurred in October 2002 in a
private transaction. The Option is exercisable, in whole or in part at any time
and from time to time, for a period of five years from the date of grant. The
Option also provides TDN with "piggyback" registration rights for all shares
underlying the Option on any registration statement filed by the Company for a
period of one year following any exercise of the Option.
Beneficial Ownership
The Company, Shadrack and TDN are related parties, in that, the Company's
President, Chief Executive Officer, Chief Financial Officer, and Director,
Sholeh Hamedani, is the sole shareholder of Shadrack which as of June 30, 2005
owns 52.4% of the Company's common stock. Ms. Hamedani was President of TDN
until she resigned on August 1, 2002 and is a 10% shareholder of TDN. In
addition, the current President, Chairman and Founder of TDN, Nasser Hamedani,
is the father of the Company's President, Chief Executive Officer, Chief
Financial Officer, and Director, Sholeh Hamedani.
Stock Options Granted
On February 15, 2005, the Company's Board of Directors granted Tyler Wheeler,
the Company's Chief Software Architect and a director, an option to purchase up
to 1,000,000 post-split shares of the Company's restricted common stock at an
exercise price of $0.07 per share. The option is exercisable, in whole or in
part at any time and from time to time, for a period of five years from the date
of grant.
An option to purchase shares of the Company's restricted common stock was also
granted to TDN, as explained under "Licensing Agreement" above and in Note 5.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
On February 25, 2005, the Company entered into a one-year agreement with
Crosslink Financial Communications, Inc., a California corporation, for
consulting services related to stockholder communications and public relations
with existing shareholders, brokers, dealers and other investment professionals.
As compensation for these services, Crosslink received 200,000 restricted shares
of the Company's common stock valued at $0.33 per share, monthly stock
compensation of 8,000 restricted shares of common stock, and $5,000 per month
from which Crosslink will pay for complementary services (e.g., other mailing
services, email services, data base extensions) of not less than $1,500 per
month up to an average of $2,500 per month. During the six months ended June 30,
2005, Crosslink had received a total of 232,000 restricted shares of the
Company's common stock under this agreement.
6
NOTE 4 - COMMON STOCK
On February 15, 2005, the Company's Board of Directors authorized a 2 for 1
forward split of the Company's issued and outstanding common stock to
shareholders of record on March 7, 2005, in the form of a 100% stock dividend.
The effective date of the forward split was March 11, 2005.
NOTE 5 - NON-MONETARY TRANSACTIONS
Stock Options Granted
Deferred Charge
As explained in Note 2, the Company's Board of Directors authorized and approved
an amendment to the Wholesale Sales and Marketing Agreement between the Company
and Two Dog Net, Inc., and granted an option to purchase up to 18,000,000
post-split restricted common shares valued at $5,670,000. This amount has been
recorded as a deferred charge and will be amortized into expense as subscription
revenues are recognized.
Non-employee Compensation
As explained in Note 2, the Company's Board of Directors granted an option to
Tyler Wheeler, the Company's Chief Software Architect and a director, to
purchase up to 1,000,000 post-split restricted common shares valued at $315,000.
This amount has been recorded as an expense for services and is included with
general and administrative expenses in the Company's Statement of Operations for
the six months ended June 30, 2005.
These options were valued using the Black-Scholes option pricing model, which
was developed for estimating the fair value of traded options.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION
The following discussion and analysis should be read in conjunction with our
financial statements, including the notes thereto, appearing elsewhere in this
Report.
Forward-Looking Statements
The following information contains certain forward-looking statements of
management of the Company. Forward-looking statements are statements that
estimate the happening of future events and are not based on historical fact.
Forward-looking statements may be identified by the use of forward-looking
terminology, such as "may," "could," "expect," "estimate," "anticipate," "plan,"
"predict," "probable," "possible," "should," "continue," or similar terms,
variations of those terms or the negative of those terms. The forward-looking
statements specified in the following information have been compiled by our
management on the basis of assumptions made by management and considered by
management to be reasonable. Our future operating results, however, are
impossible to predict and no representation, guaranty, or warranty is to be
inferred from those forward-looking statements.
7
Critical Accounting Policies and Estimates
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. The preparation of
these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the 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.
Selected Financial Data
The following selected statement of operations and balance sheet data for the
period from September 25, 1996, the date of our inception, through June 30, 2005
and for the six months ended June 30, 2005 as compared to the six months ended
June 30, 2004 were derived from our financial statements and notes thereto
included in this report which are unaudited. Historical results are not
necessarily indicative of results that may be expected for any future period.
The following data should be read in conjunction with "Plan of Operation" and
our unaudited financial statements, including the related notes to the financial
statements.
- ---------------------------------------------------------------------------------------------------------------------
For the period from
September 25, 1996
For the six months For the six months (inception) through
ended June 30, 2005 ended June 30, 2004 June 30, 2005
- ---------------------------------------------------------------------------------------------------------------------
Statement of Operations Data
- ---------------------------------------------------------------------------------------------------------------------
Net sales -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Operating expenses: $778,880 $182,269 $2,581,814
- ---------------------------------------------------------------------------------------------------------------------
Operating loss ($778,880) ($182,269) ($2,581,814)
- ---------------------------------------------------------------------------------------------------------------------
Net Loss ($779,680) ($183,069) ($2,585,014)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
As of June 30, 2005
- ---------------------------------------------------------------------------------------
Balance Sheet Data:
- ---------------------------------------------------------------------------------------
Total assets $5,727,796
- ---------------------------------------------------------------------------------------
Total liabilities $433,937
- ---------------------------------------------------------------------------------------
Total stockholders' equity $5,293,859
- ---------------------------------------------------------------------------------------
Plan of Operation
The plan of operation should be read in conjunction with the Company's financial
statements, including the notes thereto, appearing elsewhere in this Report.
On September 10, 2002, we entered into a License Agreement with Two Dog Net for
an exclusive worldwide license to market and sell The Children's Internet(R)
service. However, because this agreement did not reflect the intent of the
parties, we replaced the royalty and license agreement with a Wholesale Sales &
Marketing Agreement dated March 3, 2003. The new agreement provides for us to be
the exclusive marketers of Two Dog Net's proprietary and patent pending secured
Internet service for pre-school to junior high school aged children called The
Children's Internet(R). We further amended this agreement in February 2005 to
decrease the per user fee from $3.00 to $1.00. In consideration for this
decrease, Two Dog Net was granted an option to acquire 18,000,000 post-split
shares of the Company's restricted common stock at an exercise price of $.07 per
share for five years from the date of grant. The shares underlying the option
have "piggyback" registration rights for a period of one year following any
exercise of the option.
8
Through the License Agreement with Two Dog Net, Inc. ("Two Dog Net"), we are the
exclusive marketers of Two Dog Net's proprietary and patent pending secured
Internet service for pre-school to junior high school aged children called The
Children's Internet(R). The Children's Internet(R) service allows to have
completely safe, unrestricted live access to the Internet. The cornerstone of
our consumer marketing plan is a national television advertising campaign which
includes a 30-minute infomercial that was produced over a two-year period of
time by Two Dog Net and is ready to air. We intend to utilize the infomercial to
introduce The Children's Internet(R) service to the public, as well as build
brand recognition and generate customer subscriptions. We plan to first conduct
a media test in the fourth quarter of 2005. We believe the results from the
media test will give us the platform to launch the advertising campaign on a
national basis thereafter and be the basis for the ongoing infomercial media
schedule for 2005 and 2006.
In a Stock Purchase Agreement dated October 11, 2002, our original shareholders
sold then 2,237,000 post-split shares of our common stock to various purchasers,
two of whom are related parties to our management, Nasser Hamedani, Sholeh
Hamedani's father, and Soraiya Hamedani, Sholeh Hamedani's sister. Some of these
purchasers were introduced to the original shareholders by Sholeh Hamedani, our
President, Chief Financial Officer, and a Director.
Simultaneously, the Company entered into a Loan Agreement with five
shareholders, none of whom was an affiliate of the Company nor a shareholder of
either Shadrack or Two Dog Net. These Shareholders then loaned some of the
proceeds to Two Dog Net, which in turn loaned some of these funds to our parent
company, Shadrack Films, which in turn has loaned the Company all of its
operating capital to date. In consideration for this agreement, each such
shareholder or their designee, was issued four shares of the Company's
restricted common stock in exchange for every one freely tradable share owned by
the five shareholders, as a debt financing fee.
As of June 30, 2005, we had net loss from inception of approximately $2,585,000.
Of this amount, approximately $595,000 represents the estimated fair market
value for the cost of wages, if paid, for the services rendered by our
President, Chief Executive Officer and an outside consultant (we have recorded
these amounts for the cost of wages, since they did not charge the Company, as
additional paid in capital), $729,000 represents professional fees such as legal
and accounting expenses, $575,000 represents a debt financing fee, $315,000
represents officers compensation for which options to purchase common stock were
issued, $90,000 represents accrued officers compensation and the balance of
$281,000 consists primarily of occupancy and telecommunications costs including
internet costs. To date, our parent company, Shadrack, has funded all of our
expended costs.
Currently, we are dependent on funding from Shadrack for our current operations
and for providing office space and utilities that, for the six months ended June
30, 2005, averaged $10,400 per month in operating costs, exclusive of
professional fees and time donated by employees. The accrued account payable due
to Shadrack Films is an open account payable. Currently, the accrued balance of
this account is approximately $213,000. Shadrack is under no obligation to
continue to fund our operations and could stop at any time without notice. We
estimate that we need a minimum of $350,000 in cash to continue our operations
for the next twelve months. At February 15, 2005, the amount due Shadrack was
approximately $457,000. Consequently on February 15, 2005, the Company's Board
of Directors authorized the conversion of all debt owed to Shadrack of
approximately $457,000 into 13,054,628 post-split shares of restricted common
stock at a conversion price of $0.07 per share.
9
Where practicable we plan to contract with third party companies to market The
Children's Internet Service as well as to provide administrative support
services such as billing, level one technical support, and the like. We have
already entered into two agreements with Infolink Communications, Ltd, a third
party company, for the marketing of our service. However, there is no assurance
that we will be able to enter into additional arrangements for marketing and
administrative support services.
On February 25, 2005, we entered into a Consulting Agreement with Crosslink
Financial Communications, Inc., a California corporation (herein referred to as
"Consultant") for a term commencing February 25, 2005 and ending twelve months
thereafter. Consultant is to represent the Company in stockholder communications
and public relations with existing shareholders, brokers, dealers and other
investment professionals as to the Company's current and proposed activities,
and to consult with management.
For undertaking this engagement the Company agreed to issue to the Consultant a
"Commencement Bonus" payable in the form of 200,000 restricted shares of the
Company's common stock. In addition, the Company agreed to a monthly stock
compensation of 8,000 restricted shares of common stock every month on the
contract anniversary date, and a cash fee of $5,000 per month for the term of
the Agreement. Out of this fee, Consultant will pay for complementary services
(e.g., other mailing services, email services, data base extensions) up to an
average of $2,500 per month, never less than $1,500 per month.
On May 5, 2004, our registration statement on Form SB-2 ("SB-2") was declared
effective by the SEC. The SB-2 registered 2,237,000 post-split shares for resale
by our selling shareholders and an additional 8,000,000 post-split shares were
registered for public sale directly by us. We had planned on using the proceeds,
if any, from the sale of the shares registered for sale by us to fund the
Company's business plans and operations. However, management determined to
de-register the 8,000,000 post-split shares and on October 19, 2004 we filed a
post-effective amendment to the SB-2 that was declared effective by the SEC on
October 25, 2004. As a result, we did not realize any of the anticipated funding
we may have received from the sale of these shares. Since such time, we have not
had any financing except from loans received from Shadrack.
Need for Additional Funds
Since our anticipated offering of shares to the public was terminated as
described above, we have relied exclusively on loans from Shadrack to fund all
of our expenses. There is no assurance that Shadrack will be able or willing to
continue such funding indefinitely. We will be required to obtain additional
funds through private placements of our debt or equity securities or by
borrowing money. We do not have any arrangements with potential investors or
lenders to provide such funds and there is no assurance that such additional
financing will be available when required in order to proceed with our business
plan. Further, our ability to respond to competition or changes in the market
place or to exploit opportunities will be significantly limited by lack of
available capital financing. If we are unsuccessful in securing the additional
capital needed to continue operations within the time required, we will not be
in a position to continue operations. In this event, we would attempt to sell
the Company or file for bankruptcy.
10
Off-Balance Sheet Arrangements
None.
ITEM 3. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
(a) Restatement.
As previously disclosed in the Company's Form 10-KSB for the fiscal year
ended December 31, 2004 ("Form 10-KSB"), in the course of the due
diligence for the Form 10-KSB, our management identified an agreement that
the Company had entered into with five of our shareholders on October 11,
2002. This agreement provided that in consideration for the agreement of
these shareholders to loan an affiliate of the Company proceeds from the
sale of their shares of common stock of the Company to third parties, the
Company would issue four shares of its restricted common stock for every
one share owned. The aggregate number of shares of restricted common stock
that the Company was obligated to issue pursuant to the agreement was
4,474,000 pre-split (8,948,000 post-split) shares. The agreement was not
disclosed in any of the Company's previous SEC filings or otherwise
included as an exhibit as a result of an error of omission. In addition,
the 4,474,000 pre-split (8,948,000 post-split) shares to be issued were
not included in any of the Company's financial statements for the fiscal
years ended December 31, 2003 or 2002 or in any interim reporting period.
Management brought this matter to the attention of its Board of Directors
and the Board of Directors brought it to the attention of the Company's
new independent auditor. After discussions with management, the Board of
Directors determined that previously reported financial information for
the Company be restated to reflect the agreement. In light of the expected
restatement, the Company filed a Form 8-K on April 21, 2005 under Item
4.02 (a) advising that due to an error, its previously issued financial
statements for the fiscal years ended December 31, 2003 and 2002 and such
interim periods covered thereby and for the interim periods in fiscal 2004
should no longer be relied upon.
(b) Evaluation of Disclosure Controls and Procedures and Remediation.
In connection with the restatement, under the direction of our Chief
Executive Officer and Controller and new outside counsel, we have
reevaluated our disclosure and controls procedures. We have identified a
material weakness in our internal controls and procedures relating to the
handling and disclosure of material agreements. In order to prevent the
kind of mistake noted above, the Company has implemented a new review
system whereby all agreements which have a material effect on the Company
will be reviewed by the Company's President and new outside counsel.
Agreements will be forwarded by the President to the Company's new auditor
which will keep copies in its files for reporting purposes. Additional
copies will be forwarded to the Company's accounting department where it
will be logged and processed for follow-up.
11
We are confident that, as of the date of this filing, the process
enumerated above will remediate the weakness that we identified in our
internal controls and procedures and further that all relevant personnel
understand and will apply the rules relating to disclosure of material
agreements.
In connection with this Form 10-QSB, under the direction of our Chief
Executive Officer, we have evaluated our disclosure controls and
procedures as currently in effect, including the remedial actions
discussed above, and we have concluded that, as of this date, our
disclosure controls and procedures are effective.
It should be noted that while our management believes our new disclosure
controls and procedures will provide a greater and more "reasonable" level of
assurance, they do not expect that these disclosure controls and procedures or
internal controls will prevent all errors or all fraud. All control systems, no
matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of inherent limitations in all control systems, there can be no
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been or could be detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by acts of collusion of two or more people, or by management
override of the controls. The design of any system of internal control is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected. In order to prevent this the company will continually
review and refine and make any necessary changes if warranted and if within
financial reason to keep the company's disclosure controls and procedures
current and effective.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 24, 2004, Oswald & Yap, A Professional Corporation ("O&Y") filed a
complaint in the Superior Court of California, County of Orange, Case No.
04CC11623, against the Company, seeking recovery of allegedly unpaid legal fees
in the amount of $50,984.86 in connection with the legal representation of the
Company. The complaint includes causes of action for breach of contract, account
stated, and quantum merit. The Company disputes the amounts alleged owed,
alleging that some payments have not been credited by O&Y and that O&Y's
services were otherwise unsatisfactory. O&Y ultimately submitted an Offer to
Compromise for a $0 payment by the Company to O&Y in exchange for mutual
releases that the Company rejected.
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The Company has cross-claimed against O&Y alleging breach of contract,
professional negligence, negligent representation, and breach of good faith and
fiduciary duty. The Company is seeking damages in an unspecified amount for
costs, legal fees and losses incurred. O&Y has vigorously disputed the claims
set forth in the cross-complaint and has indicated its intention, should it
prevail in defending the cross-claim, to institute a malicious prosecution
action against the Company, Nasser Hamedani, Sholeh Hamedani and Company
counsel. Trial is set in the matter for November 14, 2005.
On September 30, 2004, the Company received a demand for arbitration from its
former auditor, Stonefield Josephson, relating to the collection of
approximately $21,700 in fees allegedly owed by the Company for accounting
services that were disputed by the Company. The parties settled their dispute
and on November 30, 2004 entered into a Settlement Agreement and Mutual General
Release, which was executed on December 10, 2004. Pursuant to the Settlement
Agreement the Company agreed to pay Stonefield Josephson the sum of $15,500 in
two installments. The first installment of $7,750 was paid on January 18, 2005
and the second and final installment of $7,750 was paid on March 4, 2005.
On July 19, 2005, the Company and its Auditors and its former Auditors received
correspondence from the Office of Enforcement of the Securities and Exchange
Commission stating that they had commenced an "informal inquiry" to determine if
there have been "any violations of the federal securities laws" by the Company.
The Company is cooperating fully with the Commission in its inquiry and will
report their findings when they are released by the Commission.
We are not aware of any other pending or threatened litigation that could have a
material adverse effect on our business.
ITEM 2. UNREGISTRED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Pursuant to the terms of the agreement between the Company and Crosslink
Financial Communications, Inc., ("Crosslink") dated February 25, 2005, the
Company agreed to issue Crosslink 200,000 restricted shares of the Company's
common stock valued at $0.33 per share and a monthly stock compensation of 8,000
restricted shares of common stock as part of its compensation for services
provided to the Company during the one year term of the agreement. During the
six months ended June 30, 2005, Crosslink received a total of $232,000
restricted shares of common stock under this agreement. The shares are exempt
from registration issued pursuant to Section 4(2) of the Securities Act of 1933,
as amended.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this Report:
(a) Exhibits:
No. Title
- --- -----
31.1 Certification of Chief Executive Officer Pursuant to the Securities
Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to the Securities
Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
10.13 Loan Agreement, dated October 11, 2002
(b) Reports on Form 8-K: None
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, duly authorized.
DATED: August12, 2005 The Children's Internet, Inc.
/S/ SHOLEH HAMEDANI
----------------------------------------
By: Sholeh Hamedani
Its: President, Chief Executive Officer,
and Chief Financial Officer
(Principal Executive Officer,
Principal Financial Officer
and Principal Accounting Officer)
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