10QSB 1 v029500_childrensint-10qsb.txt UNITED STATES 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 September 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 [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of October 31, 2005, the number of shares of common stock issued and outstanding was 26,842,138. 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 - September 30, 2005 1 Unaudited Statements of Operations - For the nine months and three 2 months ended September 30, 2005 and 2004, and the period from inception to September 30, 2005 Unaudited Statements of Cash Flows - For the nine months 3 ended September 30, 2005 and 2004, and the period from inception to September 30, 2005 Notes to Unaudited Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Conditions and Plan of Operation 8 Item 3. Controls and Procedures 12 PART II - OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 15 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE CHILDREN'S INTERNET, INC. (A Development Stage Company) BALANCE SHEET September 30, 2005 (Unaudited) ASSETS Current Assets: Cash $ 13,956 Deposit Held in Escrow 37,378 ------------ Total Current Assets 51,334 ------------ Equipment: Equipment at Cost 7,030 Accumulated Depreciation (263) ------------ Book value of Equipment 6,767 ------------ Other Assets: Deferred Charges - Related Company 5,670,000 Deferred Tax Asset (net of valuation allowance of $543,561) -- ------------ TOTAL ASSETS $ 5,728,101 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable and Accrued Expenses $ 117,361 Accrued Officer's Salary 135,000 Income Taxes Payable 2,640 ------------ Total Current Liabilities 255,001 ------------ Long-Term Liabilities: Due to Parent Company 372,826 ------------ TOTAL LIABILITIES 627,827 ------------ 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; 26,834,138 shares issued and outstanding 26,834 Additional paid-in capital 7,865,799 Deficit accumulated during the development stage (2,792,359) ------------ TOTAL STOCKHOLDERS' EQUITY 5,100,274 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,728,101 ============ 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 Nine Months Ended September 30, Ended September 30, From ------------ ------------ ------------ ------------ Inception 2005 2004 2005 2004 to Date ------------ ------------ ------------ ------------ ------------ (restated) (restated) ------------ ------------ REVENUE $ -- $ -- $ -- $ -- $ -- General and Administrative Expenses 207,345 105,180 986,225 287,449 2,789,159 ------------ ------------ ------------ ------------ ------------ Operating Loss before provision for income taxes (207,345) (105,180) (986,225) (287,449) (2,789,159) Provision for Income Taxes -- -- 800 800 3,200 ------------ ------------ ------------ ------------ ------------ NET LOSS $ (207,345) $ (105,180) $ (987,025) $ (288,249) $ (2,792,359) ============ ============ ============ ============ ============ Net Loss per Common Share, after giving retroactive effect to 2 for 1 stock split on March 11, 2005, to the periods ended September 30, 2004 - basic and diluted $ (0.01) $ (0.01) $ (0.04) $ (0.02) $ (0.40) ============ ============ ============ ============ ============ Weighted Average Number of Common Shares Outstanding 26,819,750 13,523,510 24,606,115 13,523,510 6,953,611 ============ ============ ============ ============ ============ PRO FORMA INCOME DATA Net Loss as reported (2004 restated) $ (207,345) $ (105,180) $ (987,025) $ (288,249) Effect of errors corrected (net of tax) -- (17,240) -- 12,131 ------------ ------------ ------------ ------------ Net Loss previously reported $ (207,345) $ (122,420) $ (987,025) $ (276,118) ============ ============ ============ ============ Net Loss previously reported per Common Share, after giving retroactive effect to 2 for 1stock split on March 11, 2005, to the periods ended September 30, 2004 - basic and diluted $ (0.01) $ (0.01) $ (0.04) $ (0.02) ============ ============ ============ ============

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 Nine Months Ended September 30, 2005, 2004 and From Inception (Unaudited)

Restated Inception 2005 2004 to Date ------------ ------------ ------------ CASH FLOWS USED IN OPERATING ACTIVITIES: Net Loss $ (987,025) $ (288,249) $ (2,792,359) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation on equipment 263 -- 263 Services paid with bargain stock option 315,000 -- 315,000 Shares issued for services 119,760 -- 695,116 Services performed as capital contribution -- 135,000 595,000 Expenses paid by former officer on behalf of company -- -- 5,000 Increase in current assets - Deposit Held in Escrow (37,378) -- (37,378) Increase in current liabilities - Accounts Payable and Accrued Expenses 41,118 9,771 120,001 Accrued Officer's Salary 135,000 -- 135,000 ------------ ------------ ------------ Net cash used in operating activities (413,262) (143,478) (964,357) ------------ ------------ ------------ CASH USED IN INVESTING ACTIVITIES: Acquisition of equipment (7,030) -- (7,030) ------------ ------------ ------------ Net cash used in investing activities (7,030) -- (7,030) ------------ ------------ ------------ CASH PROVIDED BY FINANCING ACTIVITIES: Issuance of common stock -- -- 155,605 Advances from parent company, net 434,248 143,478 829,738 ------------ ------------ ------------ Net cash provided by financing activities 434,248 143,478 985,343 ------------ ------------ ------------ Net change in cash and cash equivalents 13,956 -- 13,956 Cash and cash equivalents - beginning of period -- -- -- ------------ ------------ ------------ Cash and cash equivalents - end of period $ 13,956 $ -- $ 13,956 ============ ============ ============

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 September 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 nine months ended September 30, 2005, an additional 13,310,628 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 26,834,138 at September 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. Additionally, the Company is a development stage company because we are devoting the majority of our efforts to activities focused on marketing The Children's Internet(R) service and on financial planning, raising capital, developing sales strategies and new marketing materials and implementing our business plan. Therefore, the Company is considered to be a development stage company in that its planned principal operations have commenced, but there have been no significant revenues earned by the Company to date. Additionally, the Company is not a shell company as defined in Rule 12b-2 of the Exchange Act. 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 nine months ended September 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 nine months ended September 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 each year whether to make the payment in cash, shares of the Company's restricted common stock, or a combination of both. Accordingly, for the nine months ended September 30, 2005, $135,000 has been accrued and charged to General and Administrative Expense. During the nine months ended September 30, 2004, Sholeh Hamedani provided services to the Company at a fair market value of $135,000, 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 which was based upon the only recorded direct sale of shares by the Company to date which occurred in July of 2002. 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 of its restricted shares in reliance on an exemption from registration pursuant to Section 4 (1-1/2) of the Securities Act of 1933, to approximately 130 investors between July 2004 and June 2005. In addition, Shadrack paid for services valued at $35,000 with 70,000 restricted shares of the Company's common stock. None of the restrictive legends have been removed. 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 52.3% without giving effect to any presently exercisable options. 5 Beneficial Ownership The Company, Shadrack and Two Dog Net, Inc. (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 September 30, 2005 owns 52.3% 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. 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., 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 to purchase the Company's currently restricted common stock as described below. Stock Options Granted As noted above, on February 15, 2005, the Company issued an option to purchase up to 18,000,000 shares of the Company's restricted common stock at an exercise price of $0.07 per share which was based upon the only recorded direct sale of shares by the Company to date which occurred in July of 2002, and a full value of $5,670,000 if all the options were to be converted. 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. Also on February 15, 2005, the Company's Board of Directors granted Tyler Wheeler, the Company's Chief Software Architect Consultant and a director, an option to purchase up to 1,000,000 shares of the Company's restricted common stock at an exercise price of $0.07, and a full value of $315,000 if all the options were to be converted. 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. Both options to purchase Company shares were valued at $0.315 per share. Both of the above options were valued using the Black-Scholes option pricing model, which was developed for estimating the fair value of traded options, and taking into account that all of the acquirable shares are restricted. 6 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 nine months ended September 30, 2005, Crosslink had received a total of 256,000 restricted shares of the Company's common stock under this agreement. On August 23, 2005, the Company signed a client services agreement with Mercury Media of Santa Monica, CA. to exclusively manage the distribution of the Company's television infomercials. Mercury Media is an advertising agency that specializes in purchasing airtime for different types of direct response advertising. The term of the contract is annual until terminated by either party by written notice of not less than 30 days. For media time bookings under this contract, the Company will pay a 10% commission on the gross amount charged by broadcast, satellite or cable television outlets. 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 - INCOME TAXES State Franchise Taxes have been recorded as an expense. All returns due have been filed and the 2005 tax was paid when due. The Company has made a provision for the amount due for 2002 through 2004 and is awaiting notification by the Franchise Tax Board of the actual amount owed. In management's opinion, the amount set aside is adequate to cover the tax due, including any additional charges for interest and penalties. NOTE 6 - NON-MONETARY TRANSACTIONS Deferred Charge As explained in Note 2, the Company's Board of Directors granted an option to Two Dog Net, Inc. to purchase currently restricted common shares. This option was 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, to purchase restricted common shares. This option was 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 nine months ended September 30, 2005. 7 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. 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 September 30, 2005 and for the nine months ended September 30, 2005 as compared to the nine months ended September 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. 8 -------------------------------------------------------------------------------- For the period from September 25, 1996 For the nine For the nine (inception) months ended months ended through September 30, September 30, September 30, 2005 2004 2005 -------------------------------------------------------------------------------- Statement of Operations Data -------------------------------------------------------------------------------- Net sales -- -- -- -------------------------------------------------------------------------------- Operating expenses $ 986,225 $ 287,449 $ 2,789,159 -------------------------------------------------------------------------------- Operating loss ($ 986,225) ($ 287,449) ($ 2,789,159) -------------------------------------------------------------------------------- Net loss ($ 987,025) ($ 288,249) ($ 2,792,359) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- As of September 30, 2005 -------------------------------------------------------------------------------- Balance Sheet Data: -------------------------------------------------------------------------------- Total assets $5,728,101 -------------------------------------------------------------------------------- Total liabilities $ 627,827 -------------------------------------------------------------------------------- Total stockholders' equity $5,100,274 -------------------------------------------------------------------------------- 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. We believe The Children's Internet(R) service provides 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. 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. 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 anticipated for 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. 9 Simultaneously, the Company entered into a Loan Agreement with five shareholders, none of whom was an affiliate of the Company, nor a shareholder of Shadrack. 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, 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 September 30, 2005, we had net loss from inception of approximately $2,792,000, 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), $859,000 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, $135,000 represents accrued officers compensation and the balance of $313,000 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 nine months ended September 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 $373,000. 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. 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. 10 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 August 23, 2005, the Company signed a client services agreement with Mercury Media of Santa Monica, CA. to exclusively manage the distribution of the Company's television infomercials. Mercury Media is an advertising agency that specializes in purchasing airtime for different types of direct response advertising. The term of the contract is annual until terminated by either party by written notice of not less than 30 days. For media time bookings under this contract, the Company will pay a 10% commission on the gross amount charged by broadcast, satellite or cable television outlets. 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. 11 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 outside counsel, we have reevaluated our disclosure and controls procedures. We have identified material weaknesses in our internal controls and procedures relating to the handling and disclosure of material agreements. In order to prevent the same 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 outside counsel. Agreements will be forwarded by the President to the Company's 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. 12 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 amount claimed was reduced subsequently to $37,378.43, which was deposited in an escrow account by the Company on July 5, 2005. 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. 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 March 20, 2006. 13 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 nine months ended September 30, 2005, Crosslink received a total of 256,000 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. 14 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 (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: November 15, 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) 15