U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 2000
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission File No. 0-30584
OPEN DOOR ONLINE, INC.
(Exact name of small business issuer as specified in its charter)
New Jersey 05-0460102
State or Other Jurisdiction of (I.R.S.Employer Identification No.)
Incorporation or Organization)
46 Old Flat River Road, Coventry, Rhode Island 02816
(Address of Principal Executive Offices)
(401) 397-5987
(Issuers Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the last practicable date.
Common Stock, $.0001 par value per share, 11,834,898 shares
outstanding at November 15, 2000
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
OPEN DOOR ONLINE, INC.
INDEX TO FORM 10-QSB
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 2000 and December 31, 1999 4
Statements of Operations for the three months ended
September 30, 2000 and September 30, 1999 5
Statements of Cash Flows for the three months ended
September 30, 2000 and September 30, 1999 6
Statements of Operations for the nine months ended
September 30, 2000 and September 30, 1999 7
Statements of Cash Flows for the nine months ended
September 30, 2000 and September 30, 1999 8
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submissions of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
2
FORWARD LOOKING STATEMENTS
When used in this report, the words "may, will, expect, anticipate,
continue, estimate, project or intend" and similar expressions identify
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E Securities Exchange Act of 1934 regarding events,
conditions and financial trends that may effect our future plan of operation,
business strategy, operating results and financial position. Current
stockholders and prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those included
within the forward-looking statements as a result of various factors. Such
factors are described under the headings "Business-Certain Considerations,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the financial statements and their associated notes.
Important factors that may cause actual results to differ from projections
include, for example:
* the success or failure of management's efforts to implement their
business strategy;
* our ability to protect our intellectual property rights;
* our ability to compete with major established companies;
* our ability to attract and retain qualified employees; and
* other risks which may be described in future filings with the SEC.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OPEN DOOR ONLINE, INC.
BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2000 1999
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 0 $ 34,567
Accounts receivable, net of allowance $103 357,811 204,489
Inventories 8,603
Recoupable artist advances 146,468
Loans receivable 5,988 30,750
------------ ------------
Total current assets 518,870 269,806
Property and equipment, net 61,958 98,049
Web site development, net 69,538 43,556
Music library 10,255,005 10,255,005
------------ ------------
TOTAL ASSETS $ 10,905,371 $ 10,666,416
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current liabilities:
Current portion of long-term debt $ 75,000 $ 75,000
Accounts payable and accrued expenses 499,768 498,837
Accrued payroll 180,834
Reserve for discontinued operations 500,000 500,000
Short-term notes payable 240,105 442,200
Accrued royalties 195,583
Accrued interest on notes payable 19,770 9,000
------------ ------------
Total current liabilities 1,711,060 1,525,037
Long-term debt, net of current portion 75,000 150,000
------------ ------------
Total liabilities 1,786,060 1,675,037
Stockholders' equity:
Common stock, $.0001 par value; authorized, 50,000,000 shares;
issued and outstanding, 11,291,465 shares and 10,133,185 shares
at September 30, 2000 and December 31, 1999, respectively 1,129 1,013
Additional paid-in capital 10,085,151 9,610,372
Accumulated deficit (966,969) (620,006)
------------ ------------
Total Stockholders' equity 9,119,311 8,991,379
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,905,371 $ 10,666,416
============ ============
See accompanying notes to these financial statements
4
OPEN DOOR ONLINE, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
September 30, September 30,
2000 1999
------------ ------------
Revenues
Net sales $ (23,364) $ 458
Cost of sales (9,123) 700
------------ ------------
Gross profit (14,241) (242)
Operating Expenses:
Payroll and payroll taxes 92,920 27,500
Selling Expenses 1,500
Consulting Expenses 57,636 14,740
Depreciation and amortization 9,578
Professional fees 10,012
Rent 1,950 8,288
Supplies 7,337 74
Telephone 3,042 3,262
Travel and entertainment 14,192 9,394
Other 8,561 24,217
------------ ------------
Total operating expenses 195,216 98,987
Operating income (loss) (209,457) (99,229)
Interest income (expense) (6,332) --
------------ ------------
NET INCOME (LOSS) $ (215,789) $ (99,229)
============ ============
Net loss per common share $ (0.21) $ (0.14)
============ ============
Weighted average number of common shares outstanding 10,446,347 7,000,000
============ ============
See accompanying notes to these financial statements
5
OPEN DOOR ONLINE, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
September 30, September 30,
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $(215,789) $ (99,229)
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities:
Depreciation and amortization 9,578 --
--------- ---------
Changes in cash flows provided (used in) operating activities (206,211) $ (99,229)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 112,186
(Increase) decrease in loans receivable 3,788
(Increase) decrease in inventories -- --
(Increase) decrease in other assets 6,044
Increase (decrease) in accounts payable (56,807) 46,119
Increase (decrease) in royalties payable (364)
Increase (decrease) in accrued expenses 4,408 (2,500)
--------- ---------
Net cash (used in) operating activities (136,956) (55,610)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of web site (17,983) (1,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal advances on notes payable and long-term debt 154,689 33,946
Principal repayment of short-term debt
Sale of common stock -- --
--------- ---------
Net cash (used in) provided by financing activities 154,689 33,946
--------- ---------
NET INCREASE (DECREASE) IN CASH (250) (22,664)
Cash and cash equivalents - beginning of period 250 22,664
--------- ---------
Cash and cash equivalents - end of period $ 0 $ 0
========= =========
See accompanying notes to these financial statements
6
OPEN DOOR ONLINE, INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
September 30, September 30,
2000 1999
------------ ------------
Revenues:
Net sales $ 570,125 $ 1,601
Cost of sales 319,364 9,326
------------ ------------
Gross profit 250,761 (7,725)
Operating Expenses:
Payroll and payroll taxes 289,470 27,500
Selling expenses 17,360
Bad Debt expense 26,403
Consulting expenses 76,348 45,389
Depreciation and amortization 28,735
Professional fees 65,674 19,512
Rent 9,600 11,788
Supplies 9,327 726
Telephone 6,549 5,378
Travel and entertainment 32,181 28,674
Other 37,330 27,605
------------ ------------
Total operating expenses 581,617 183,932
Operating income (loss) (82,856) (191,657)
Interest income (expense) (16,108) (8,724)
------------ ------------
NET INCOME (LOSS) $ (346,964) $ (200,381)
============ ============
Net loss per common share $ (0.03) $ (0.03)
============ ============
Weighted average number of common shares outstanding 10,446,347 7,000,000
============ ============
See accompanying notes to these financial statements
7
OPEN DOOR ONLINE, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
September 30, September 30,
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $(346,964) $(200,381)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization 28,735 --
--------- ---------
Changes in cash flows provided (used in) operating activities (318,229) $(200,381)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (153,322)
(Increase) decrease in loans receivable 24,762 (78,531)
(Increase) in inventories (8,603) (10,695)
(Increase) decrease in other assets
Increase in accounts payable 931
Increase in royalties payable 195,583 (3,381)
Increase (decrease) in accrued expenses 10,770 8,100
--------- ---------
Net cash (used in) operating activities (248,108) (284,888)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment (18,626) (26,960)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal advances on notes payable and long-term debt 305,980 311,815
Principal repayment of short-term debt (73,653)
Sale of common stock -- --
--------- ---------
Net cash (used in) provided by financing activities 213,701 311,815
--------- ---------
NET INCREASE (DECREASE) IN CASH (34,407) (33)
Cash and cash equivalents - beginning of period 34,657 33
--------- ---------
Cash and cash equivalents - end of period $ 250 $ 0
========= =========
See accompanying notes to these financial statements
8
Open Door Online, Inc.
Notes to Financial Statements
for the Nine months Ended September 30, 2000 and 1999
NOTE 1 - ORGANIZATION
Open Door Records, Inc. ("Open Door") was incorporated in the state of Rhode
Island on November 20, 1997. The Company had no operations during 1997.
In June 1999, Open Door entered into a stock exchange agreement with Genesis
Media Group, Inc. ("Genesis") accounted for as a reverse acquisition whereby all
of Open Door's outstanding stock would be acquired in exchange for stock of
Genesis. On an aggregate basis, Genesis shareholders received 0.0333 shares of
the Company for each share of Genesis common stock. In addition, the agreement
provides for the resignation of management and directors of Genesis and the
appointment of directors and executives selected by Open Door. This agreement
was completed as of September 30, 1999, whereupon the resulting entity changed
its name to Open Door Online, Inc. (the "Company") and state of incorporation to
New Jersey. The combination of Open Door with Genesis was accounted for as a
tax-free exchange under the Internal Revenue Code.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies of Open Door Records, Inc. is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's management.
Management is responsible for their integrity. The accounting policies conform
to generally accepted accounting principles and have been consistently applied
in the preparation of the financial statements. The results of operations for
the interim periods shown in this report are not necessarily indicative of
results to be expected for the fiscal year ending December 31, 2000.
LINE OF BUSINESS
The business of the Company to date has derived revenue from providing
promotion, production and studio recording services to music artists. The
Company also has artist distribution contracts for the sale of recorded music
for which the Company receives up to 75% of the wholesale price of each
recording sold.
The Company is in the process of developing an internet presence for the sales
and marketing of music and related products through the internet and expanding
its promotion, production and recording services to the entertainment and music
markets. No sales have been concluded from the internet site to date. We expect
sales to start during the third quarter 2000.
REVENUE RECOGNITION
RECORDING STUDIO REVENUE
Our recording studio revenue is derived mainly from studio rental for which we
supply the facility, recording equipment, and the studio engineer. Recording
studio time is billed at $350 per day and recognized upon the completion of the
recording days contracted.
9
Open Door Online, Inc.
Notes to Financial Statements
for the nine months ended September 30, 2000 and 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The engineering of the recording is the most time consuming function of
producing recorded music. We recognize engineering revenue upon the release of
the recording for mastering or upon acceptance of the demo by the client if no
mastering is to occur. The contracts typically provide that they are cancelable
by either party, with notice, and work to date would be paid upon the
cancellation.
ARTIST DISTRIBUTION AGREEMENTS
The distribution of music recorded on CD's, cassettes, and single or extended
play vinyl at wholesale is recognized upon shipment. The Company contract with
Red Eye Distribution specifies payment will be received monthly, at 80% of the
product shipped three months prior. Returns of product shipped must be approved
within 90 days of shipment but may not be physically received during the 90-day
period. Starting with the first shipments in the first quarter of 2000, a
reserve of 20% will be maintained. The reserve of 20% is withheld from payment
for sixty days after the payment is due and any returns received are applied
against the reserve account. Any balance remaining in that months reserve
account 150 days after the month of shipment is then remitted to the Company or
any shortfall is applied against the next months reserve before remittance. To
comply with Financial Accounting Standards Board (FASB) Statement No. 5
Accounting for Contingencies the Company relies on historical data per artist
and title to determine the return allowance required.
Collectability is reasonably assured as a result of deposits, and advances and
any unpaid balance due the Company is collectible or the recordings completed in
our studio are not released. Payment from our distribution agreement with Red
Eye Distribution is the responsibility of Red Eye and is not dependent on their
receipt from their customers. However, they evaluate their customers financial
strength and credit worthiness prior to shipment. These customers are usually
national retailers or distributors, advertisers or advertising and promotion
agencies. We have no reason to believe the Red Eye is unable or unwilling to pay
for product shipment.
EQUIPMENT AND DEPRECIATION
Depreciation has been provided on a straight-line basis for financial accounting
purposes using the straight-line method over the shorter of the asset's
estimated life or the lease term. The estimated useful lives of the assets are
as follows:
Record and production equipment 5-7 Years
Website development 5-7 Years
Leasehold improvements 3-10 Years
10
Open Door Online, Inc.
Notes to Financial Statements
for the nine months ended September 30, 2000 and 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MASTER MUSIC LIBRARY
The master music library consists of original and digitized masters of well
known artists. The Company has the right to produce, sell, distribute or
otherwise profit from its utilization of this library subject to industry
standard royalty fees to be paid to artists as copies of the product are sold or
distributed. The Company will amortize the library on a units sold basis in
accordance with FASB Statement No. 50, which relates the capitalized costs to
estimated net revenue to be realized. When anticipated sales appear to be
insufficient to fully recover the basis, a provision against current operations
will be made for anticipated losses. To date the Company has not utilized the
library nor expensed any of the carrying value.
COMPREHENSIVE NET LOSS
There is no difference between the Company's net loss as reported for any of the
periods reported herein and the Company's comprehensive loss, as defined by FASB
Statement No. 130.
CONTINGENT LIABILITIES
We have been advised that the issuance of free trading common stock in August
and September of 1999 were issued without a valid exemption even though the
Company relied on opinions of counsel for these issuances believing that the
shares were exempt under Rule 504 of Regulation D of the Securities Act of 1933.
The maximum liability is $558,000 based on 116,667 common shares at a sales
price $1.20 and 557,333 common shares at a sales price of $0.75 It appears that
the investors may have a right of rescission, pursuant to Section 12 of the
Securities Act of 1933, to recover the consideration paid for such securities.
For accounting purposes the amount of the contingent liability is not classified
outside of permanent equity as the company believes that it is not probable that
a holder would pursue rescission and prevail in asserting a right of action for
rescission.
NOTE 3 - PROPERTY AND EQUIPMENT
Depreciation and amortization for the three months ended September 30, 2000 and
1999 were $9,578 and $0, respectively.
Property plant and equipment consist of the following:
September 30,
------------------------
2000 1999
--------- ---------
Production equipment $ 124,305 $ 124,305
Web site development 57,836 51,555
Office equipment, furniture and fixtures 3,019 1,900
Leasehold improvements 13,605 13,605
--------- ---------
198,765 191,365
Less accumulated depreciation and amortization (78,971) (11,321)
--------- ---------
$ 119,794 $ 180,044
========= =========
11
Open Door Online, Inc.
Notes to Financial Statements
for the nine months ended September 30, 2000 and 1999
NOTE 4 - INCOME TAXES
The tax-free exchange with Genesis creates a difference in the basis of the
assets between tax basis and accounting basis. At July 1, 1999, the tax basis of
the assets is approximately $906,000 greater than the accounting basis. In the
future, as assets are disposed of, depreciated, or amortized or liabilities
paid, the deduction for tax purposes will be greater than the book basis,
resulting in reduced tax expense or greater net operating loss carryover for tax
purposes than would otherwise be expected. There is no certainty as to the
timing of such recognition nor that the Company will be able to fully utilize
these differences.
The components of deferred tax assets and liabilities are as follows:
September 30,
------------------------
2000 1999
--------- ---------
Tax effect of assets acquired in business combination $ 362,000 $ --
Tax effects of reserve for discontinued operations 200,000 --
Tax effects of carryforward benefits:
Net operating loss carryforwards 242,000 24,400
--------- ---------
Tax effects of carryforwards
Tax effects of future taxable differences and
carryforwards 804,000 24,400
Less deferred tax asset valuation allowance (804,000) (24,400)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
Realization of the net deferred tax assets is dependent on generating sufficient
taxable income prior to their expiration. Tax effects are based on a 9.0% state
and 34.0% federal income tax rates for a net combined rate of 40%. The tax
effects of the acquired business combination have not been recognized in the
current or prior periods but will be recognized in future periods, at which time
if the current period taxable income is insufficient to offset such charges for
tax purposes, the effect will be available to the Company over the succeeding 20
years. The realized net operating losses expire over the next 20 years, the
majority of which expire in 2019. A valuation allowance has been provided for
the full deferred tax asset amount due to the lack of operating history and
operating losses in recent periods. When realization of the deferred tax asset
is more likely than not to occur, the benefit related to the differences will be
recognized as a reduction of income tax expense.
12
Open Door Online, Inc.
Notes to Financial Statements
for the nine months ended September 30, 2000 and 1999
NOTE 5 - STOCK TRANSACTIONS - RELATED PARTY
During 1998 and 1999, Mr. DeBaene has been a lender of funds to Open Door
Records and subsequently to Open Door Online, Inc. As of December 31, 1998 and
September 30, 1999, the outstanding balances due him are $113,643 and $498,622,
including interest expense of $3,643 and $8,224, respectively. Interest rates
range from 12% to 20% per annum. On January 12, 2000 Mr. DeBaene was granted a
option to convert debt owed to him into common shares at a conversion price
equal to the average of the closing bid price for the twenty trading days prior
to the date of the request for conversion. The closing bid price on the date of
the grant was $0.31. The option could be exercised immediately requiring a
calculation to identify any possible accounting charge for a beneficial
conversion. The calculation requires the identification of the average closing
bid price for the twenty trading days immediately preceding January 12, 2000,
which was $0.33 or $0.02 higher than the closing bid price on the grant date
indicating no beneficial conversion charge required. On March 7, 2000, Mr.
DeBaene converted $474,895 of this debt into 1,158,280 shares based on the
average closing bid price of our Common Stock over the twenty-day period
preceding the conversion at a value of $0.41. He has elected not to convert any
of the remaining debt outstanding incurred prior to the initial filing of this
registration statement. Mr. DeBaene is the only recipient of all shares related
to the conversion.
NOTE 6 - COMMON STOCK
Genesis was the nominal acquirer in the Open Door Records, Inc. transaction in
which Open Door was the nominal acquiree in the reverse acquisition. As the
legal acquirer, the Genesis balances at January 1, 1999 were adjusted to reflect
the business combination and to give effect to the one for thirty reverse split
of the Genesis shares as of September 30, 1999 retroactive to January 1, 1999 in
accordance with FASB Statement No. 128. The Company issued a total of 8,181,665
shares for former Open Door Records, Inc. holders and to promoters and sponsors
of the transaction. The outstanding stock of the Company was 11,291,465 shares
and 7,000,000 shares at September 30, 2000 and 1999, respectively.
NOTE 7 - EARNINGS PER COMMON SHARE
Earnings per share of common stock have been computed based on the weighted
average number of shares outstanding. The weighted average number of shares used
to compute the earnings per share at September 30, 2000, after giving effect to
the acquisition on September 30, 1999 by Genesis, the legal acquirer of Open
Door Records, Inc. was 10,446,347 ending September 30, 2000 and 7,000,000 at
September 30, 1999.
NOTE 8 - 1999 PURCHASE ACCOUNTING
The purchase method of accounting was performed on Genesis based on the average
closing bid price including June 17, 1999, the date of the transaction and the
two trading days immediately before and after the transaction date of $3.78 on a
post reverse basis. The shareholders of Genesis Media Group retained 1,277,626
common shares and 1,181,665 common shares were issued as expenses of the
transaction.
13
Open Door Online, Inc.
Notes to Financial Statements
for the nine months ended September 30, 2000 and 1999
NOTE 8 - 1999 PURCHASE ACCOUNTING (CONTINUED)
Since the appraised value of the music library was in excess of $38 million, the
fair market value of the merger was allocated to the music library and resulted
in no goodwill being recorded. A summary of assets and liabilities acquired, at
established fair market value was as follows:
Purchase Price $10,255,005
Transaction Fees Incurred (120,000)
Current liabilities assumed (688,885)
Long-term liabilities assumed (150,000)
-----------
Fair market value of Genesis $ 9,296,120
===========
The accompanying financial statements include the results of Open Door for all
periods and the results of Genesis beginning on July 1, 1999.
NOTE 9 - RECENT EVENTS
On November 13, 2000 the Company purchased 100% of the outstanding stock of
Hollywood On Air, Inc. for a up to 85% of the outstanding shares after the
Company issues the shares for the transaction. The Company will release
approximately 12,500,000 restricted common shares to the current shareholders of
Hollywood On Air, Inc. upon acceptance by the shareholders at a meeting to be
held in December 2000. The remaining shares will be held in escrow to be
released following the completion of the audit for the period ended December 31,
2001 at the rate of one share for each $0.65 of net pre tax earnings. Hollywood
On Air, Inc. adds approximately $12 million in assets offset by approximately $4
million in liabilities and sales in excess of $15 million annually.
The Company has begun the search for $5 million in equity capital to provide
working capital, reduce current debt and provide for acquisition capital.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the three months ended September 30, 2000 and September 30, 1999.
SALES
Sales consisted primarily of revenues derived from shipments of recorded
music related to various distribution contracts for CD's by our distribution
division, Open Door Records, and from the commercial operations of Open Door
Studios. Sales increased $(23,264) for the quarter ending September 30, 2000
from $458 in the comparative quarterly period ended September 30, 1999. The
majority of the sales decrease was directly attributable to the returns from
overstocked retailers, the Company had set aside an adequate reserve for these
returns.
COST OF SALES
Cost of Sales are normally primarily represented by CD and fulfillment
operations and artist record promotions and royalties plus studio engineering
cost. All costs for shipments this quarter were of products we paid for but
which have been recouped from the royalties of the artists. The artist royalties
were the only costs this period. The cost of goods sold $(9,123) for the quarter
ended September 30, 2000. This negative cost was directly related to the cost of
the returned items and their respective royalties. Total cost of goods sold were
$700 for the quarter ending September 30, 1999.
SALES AND MARKETING EXPENSE
Sales and marketing expense consists primarily of direct marketing
expenses, promotional activities, salaries and costs related to website
maintenance and development. We anticipate that overall sales and marketing
costs will increase significantly in the future; however, sales and marketing
expense as a percentage of net revenue may fluctuate depending on the timing of
new marketing programs and addition of sales and marketing personnel.
Expenses of $ 0 were incurred for the quarter ended September 30, 2000 a
decrease of 100% over the $1,500 expended in the prior comparative quarter ended
September 30, 1999. This decrease is directly relational to the promotional
expenses of signed artists that are not recoupable by Open Door Records, Inc.
CONSULTING EXPENSES
Consulting expenses for web site maintenance and hosting after the
completion of the initial development process was completed and consultants who
maintain the site added $57,636 to the expenses for the quarter ended September
30, 2000 an increase of 291%. Site maintenance in the quarter ended September
30, 1999 was $14,740.
BAD DEBT EXPENSE
Bad debt expense decreased to $0 for the quarter ended September 30, 2000
and was also $0 for the quarter ended September 30, 1999. This cost is directly
related to the reserve set aside for returns, because there were negative sales
for the quarter no reserve was set aside.
15
GENERAL AND ADMINISTRATIVE
General and administrative expense consists primarily of salaries, legal
and other administrative costs, fees for outside professionals and other
overhead. General and administrative expense was $128,002 for the quarter ended
September 30, 2000 an increase of 54.7% over the $82,747 for the period ended
September 30, 1999. The increase is directly attributable to wages for
management.
DEPRECIATION EXPENSE
Depreciation and amortization expenses rose to $9,578 from $0 in the
quarters ended September 30, 2000 and September 30, 1999, respectively. The
increase is attributed to the full utilization of all equipment and the web
site.
INTEREST EXPENSE
Net interest expense for the quarter ended September 30, 2000 was $6,332.
Comparable interest costs for the corresponding quarter ended 1999 was $0. This
increase was caused by the increase in borrowing for short-term debt. Interest
costs may increase in future periods as the Company expands through a
combination of debt and equity offerings.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999.
SALES
Sales consisted primarily of revenues derived from shipments recorded music
related to various distribution contracts for CD's by our distribution division,
Open Door Records, and from the commercial operations of Open Door Studios.
Sales increased 3,551% to $570,125 for the nine months ended at September 30,
2000 from $1,601 in the comparative nine months ended September 30, 1999. The
majority of the sales increase was directly attributable to the operations of
the distribution contracts, which accounted for $543,000 of the increase, with
the remainder from studio operations.
COST OF SALES
Cost of Sales are normally primarily represented by CD and fulfillment
operations and artist record promotions and royalties plus studio engineering
cost. All costs for shipments this nine months were of products we paid for but
which are recoupable from the royalties of the artists and therefore carried as
a receivable. The artist royalties were the only costs this period. The Cost of
Sales for the nine months ended September 30, 2000 increased to $319,364, a 332%
increase over $9,326 in the comparative nine months ended September 30, 1999,
all of these costs were for artist royalties except for $12,800 for studio
operations. This cost of sales ratio to sales should be representative over the
coming quarter.
SALES AND MARKETING EXPENSE
Sales and marketing expense consists primarily of direct marketing
expenses, promotional activities, salaries and costs related to website
maintenance and development. We anticipate that overall sales and marketing
costs will increase significantly in the future; however, sales and marketing
expense as a percentage of net revenue may fluctuate depending on the timing of
new marketing programs and addition of sales and marketing personnel.
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Expenses of $0 were incurred for the nine months ended September 30, 2000 a
decrease of 100% from the $17,360 expended in the prior comparative nine months
ended September 30, 1999. This decrease is directly relational to the reduction
of promotional expenses of signed artist that are not recoupable by Open Door
Records, Inc.
CONSULTING EXPENSES
Consulting expenses for web site maintenance and hosting after the
completion of the initial development process was completed and consultants who
maintain the site added $32,524 to the expenses for the nine months ended
September 30, 2000 an increase of 120%. Site maintenance in the nine months
ended September 30, 1999 was $14,774.
BAD DEBT EXPENSE
Bad debt expense increased to $26,403 for the nine months ended September
30, 2000 a 100% increase over the corresponding nine months in 1999.
GENERAL AND ADMINISTRATIVE
General and administrative expense consists primarily of salaries, legal
and other administrative costs, fees for outside consultants and other overhead.
General and administrative expense was approximately $491,623or the nine months
ended September 30, 2000 compared to $64,901 in the corresponding period ended
September 30, 1999. The increase is attributable to salaries for management
$289,470, the majority of which has been accrued, and increased professional
fees of approximately $46,000 which are directly related costs to the filing and
completion of the Form-10SB.
DEPRECIATION EXPENSE
Depreciation and amortization expenses rose to $28,735 from $0 in the nine
months ended September 30, 2000 and September 30, 1999, respectively. The
increase is attributed to the full utilization of all equipment and the web
site.
INTEREST EXPENSE
Net interest expense for the nine months ended September 30, 2000 was
$16,108 Comparable interest costs for the corresponding nine months ended 1999
was $8,724. This increase was caused by the increase in outstanding short-term
debt over the comparative period.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000 we had $0 cash. Sufficient cash to finance
operations for the short term are required. Historically we have financed our
operations with short-term convertible debt or through the issuance of equity in
the form of our common stock. During the current nine months we issued net new
debt for cash of approximately $254,327. Significant increases in capital will
be required to fund our aggressive business plan and support the manufacturing
and distribution requirements of our current artist distribution contracts.
While there is no assurance that we will be successful in raising the required
capital, all indications through our current financing negotiations suggest that
we will receive substantial capital.
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A capital raise of $1,000,000 is sufficient to meet our needs during this
fiscal year unless the cost of manufacturing and artists recoupables rise
because of sales or marketing demands in excess of our internal projections. Our
long-term capital needs will be from $3,000,000 to $5,000,000 and are totally
dependent on the success of artists and our forthcoming internet sales site and
the affiliation agreements that are associated.
ACCOUNTS RECEIVABLE
As of September 30, 2000 we had receivables that consisted of the sales
from June 2000 and all of the sales from the third quarter of 2000. The June
2000 receivables are being received and no allowance is required within 90 days.
These receivables are from artists who continue to use the music production
facilities.
RECOUPABLE ARTIST ADVANCES
Our distribution agreements with artists require us to pay certain costs up
front for the artist. These costs, depending on the contract, may include
promotion, production, manufacturing, advertising, travel, etc. All of these
advances are to be received from the sales of the artist recordings before any
payment to the artist is made. In some instances the artist is to receive 50% of
the net wholesale price we receive, in others only 25% goes to the artist. We
have no reason to believe that these recoupable costs will not be received. In
the event that the artists' music does not sell successfully to recoup these
costs within nine months of the release of the recording we will take a charge
to earnings for these costs. This account contains four artists at this time
with the majority being from Jeru whose latest release on February 22, 2000 has
already sold enough for us to recover the majority of our costs when payment for
these shipments is received during the third quarter of 2000. The other artist
will be slower to recoup but only account for $10,277 of the total. The Company
will not advance more than $20,000 in costs for any given artist unless the
pre-orders for the artists' next release exceed this amount. At no time will the
Company advance costs that exceed the amount recoupable from the pre-orders plus
$20,000. This method is in compliance with FASB Statement No. 50 paragraph 10
relating advances against future royalties.
CONTINGENT LIABILITIES
We have been advised that the issuance of free trading common stock in
August and September of 1999 were issued without a valid exemption even though
the Company relied on opinions of counsel for these issuances believing that the
shares were exempt under Rule 504 of Regulation D of the Securities Act of 1933.
The maximum liability is $558,000 based on 116,667 common shares at a sales
price $1.20 and 557,333 common shares at a sales price of $0.75. It appears that
the investors may have a right of rescission, pursuant to Section 12 of the
Securities Act of 1933, to recover the consideration paid for such securities.
For accounting purposes the amount of the contingent liability is not classified
outside of permanent equity as the Company believes that it is not probable that
a holder would pursue rescission and prevail in asserting a right of action for
rescission.
OPERATIONS
Open Door Online, Inc. is a bona fide "brick and click" entity supporting
traditional sales and recording operations with a broad internet backbone.
Through strategic planning and partnering, the components of each division are
structured to grow with the implementation of dynamic divisional plans. The
management of each division is aggressive in its approach to marketing,
adherence to its well defined goals, and flexibility to lead or respond to the
ever changing malleability of the Internet, related technologies, and consumer
product demand.
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Open Door Music. In February of 1999, Open Door Records, Inc. created Open
Door Music, an online music CD store. Our online CD store, located on the
Internet at www.opendoormusic.com, offers over 350,000 music titles for sale. To
assist customers in making music selections, the web site contains product
notes, reviews, related articles and sound samples and is open 24 hours a day,
seven days a week. It offers its customers convenient and timely product
fulfillment, including standard and overnight delivery options. Our web site
provides an entertaining and informative resource enabling users to search and
sample music and artist information interactively through sound and graphics,
including online "sound stations" for each artist. Music posted on our web site
in digital form is available for downloading using Real Audio(TM) "plug-ins."
Visitors to the web site who are interested in the music they sample may
purchase it immediately online.
Open Door Records. On November 21, 1997, Open Door Records, Inc.
established its own record label, "Open Door Records." Subsequent to the
acquisition of Open Door Records, Inc., we now use our web site, as well as
traditional distribution channels to promote, distribute and sell original and
licensed artists recordings. We intend to license master recordings from other
record labels and conventional adverting and promotional companies, acquire
master recordings and publishing catalogs and sign artists to the record label.
Through our web site, we intend to feature and promote individual artists and
independent record labels.
FUTURE PLAN OF OPERATION
The post acquisition company, Open Door Online, has discontinued the
production operations of the predecessor and focused on branding itself as a
virtual "open door" bridging together artists and consumers from around the
world and ultimately maintaining a loyal and appreciative entertainment
community. Our objective is to build a global entertainment company offering a
broad range of entertainment commerce related products and to deliver a wealth
of original content in a highly personalized interactive context.
We recognize that the nature and scope of our intended business will
require substantial additional financing. To meet this requirement, we plan to
finance our cash requirements through a combination of equity offerings and debt
financing. This process will allow us to complete the initial phases of our
internet marketing plan. Once in place, we believe this should provide
sufficient operating revenue to expand the other intended areas of our business.
The internet marketing arena is highly competitive. We believe that we are
well placed to take advantage of this growing market and look to become more
competitive in the entertainment and distribution sectors of that market.
We will expand our workforce to meet our business plan and growth
objectives while providing quality services and products. The overall plan of
operation and objectives was detailed earlier on Form 10-KSB.
YEAR 2000 DISCLOSURE
We do not anticipate any problem in dealing with computer entries in the
year 2000 or thereafter, with any computers currently used at any of its
facilities. All of our computer systems are new and have been Year 2000
compliant since their acquisition. We keep current with all updates and
revisions with all software we currently use. It is anticipated that the
software updates reflect required revisions to accommodate transactions in the
Year 2000 and thereafter.
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In addition, most of the purchases on our web site are expected to be made
with credit cards, and our operations may be adversely affected to the extent
its customers are unable to use their credit cards due to any Year 2000 issues
that are not rectified by their credit card vendors. In a worst case scenario,
if our customers' computer systems or that of suppliers and vendors do not
contain the necessary software updates to be Year 2000 compliant, a multitude of
problems could occur which may include, among others, lost orders, merchandise
not shipped or shipped to incorrect addresses and credit card purchases
incorrectly credited or debited. As a result, we could lose customers, clients,
and credibility, which could have a material adverse effect on our business and
our financial condition. Such problems could occur with Sound Delivery, our
supplier of music CDs, cassettes and other related products. With all expected
dates for problems now past and the fact that no interruptions or improper
recording of transactions have occurred that the period for concern has passed.
We do not have, nor do we intend to create, a contingency plan to handle such an
event.
We have concluded, based on our review of our operations and computer
systems and those of our major suppliers and distributors have not had any
problems associated with the Year 2000 issue. However, we cannot guarantee that
such problems will not arise in the future.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In management's opinion there are no material pending legal proceedings,
other than ordinary routine litigation incidental to its business or that of its
predecessor, to which the Company is a party.
It is the opinion of management, after discussions with legal counsel, that
the ultimate dispositions of pending litigation will have no material adverse
effect on the Company's financial position or results of operation.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPEN DOOR ONLINE, INC.
(Registrant)
/s/ David N. DeBaene
-------------------------------------
Dated: April 9, 2001 David N. DeBaene
President and Chief Executive Officer
/s/ Norman Birmingham
-------------------------------------
Dated: April 9, 2001 Norman Birmingham
Treasurer and Chief Financial Officer
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