U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended JUNE 30, 2001
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
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
Incorporation or Organization) Identification No.)
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, 17,847,628 shares outstanding at
August 7, 2001
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
OPEN DOOR ONLINE, INC.
INDEX TO FORM 10-QSB
Page
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FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 2001 and December 31, 2000 4
Statements of Operations for the three months ended
June 30, 2001 and June 30, 2000 5
Statements of Cash Flows for the three months ended
June 30, 2001 and June 30, 2000 6
Statements of Operations for the six months ended
June 30, 2001 and June 30, 2000 7
Statements of Cash Flows for the six months ended
June 30, 2001 and June 30, 2000 8
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submissions of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
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)
June 30, June 30,
2001 2000
------------ ------------
ASSETS
Cash and cash equivalents $ 0 $ 250
Accounts receivable, net of allowance $26,901 and 28,403 102,998 480,295
Inventories 8,603 8,603
Recoupable artist advances 104,535 152,512
Loans receivable 1,359 2,250
------------ ------------
Total current assets 217,495 643,910
Property and equipment, net 38,878 70,892
Intellectual property, net 71,256 51,555
Music library 10,255,005 10,255,005
------------ ------------
TOTAL ASSETS $ 10,582,634 $ 11,021,362
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current portion of long-term debt $ 150,000 $ 75,000
Accounts payable and accrued expenses 606,675 407,575
Accrued wages 254,519 149,000
Reserve for discontinued operations 500,000 500,000
Short-term notes payable 84,943 168,580
Accrued royalties 22,653 195,583
Accrued interest on notes payable 41,253 15,362
------------ ------------
Total current liabilities 1,660,043 1,511,100
Long-term debt, net of current portion 75,000 150,000
------------ ------------
Total liabilities 1,735,043 1,661,100
Stockholders' equity:
Common stock, $.0001 par value; authorized, 50,000,000
shares; issued and outstanding, 17,847,628 shares and
11,291,465 shares at June 30, 2001 and June 30, 2000,
respectively 1,785 1,129
Additional paid-in capital 10,673,458 10,085,151
Accumulated deficit (1,827,652) (726,018)
------------ ------------
Total Stockholders' equity 8,847,591 9,360,262
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,582,634 $ 11,021,362
============ ============
See accompanying notes to these financial statements
4
OPEN DOOR ONLINE, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
June 30, June 30,
2001 2000
------------ ------------
Revenues
Net sales $ (5,757) $ 167,748
Cost of sales 0 122,240
------------ ------------
Gross profit (5,757) 45,508
Operating Expenses:
Payroll and payroll taxes 23,750 113,550
Bad Debt 0 2,309
Consulting Expenses 0 7,227
Depreciation and amortization 10,429 9,578
Professional fees 108,400 44,273
Rent 0 1,950
Supplies 0 252
Telephone 0 1,044
Travel and entertainment 0 6,812
Other 4,416 11,831
------------ ------------
Total operating expenses 146,995 198,826
Operating income (loss) (152,752) (153,318)
Interest income (expense) (11,059) (4,602)
------------ ------------
NET INCOME (LOSS) $ (163,811) $ (157,920)
============ ============
Net loss per common share $ (0.01) $ (0.01)
============ ============
Weighted average number of common shares outstanding 15,734,938 11,291,465
============ ============
See accompanying notes to these financial statements
5
OPEN DOOR ONLINE, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
June 30, June 30,
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $(163,811) $(157,920)
Adjustments to reconcile net income (loss) to net
cash (used in) operating activities:
Depreciation and amortization 10,429 9,578
--------- ---------
Changes in cash flows provided (used in) operating activities (153,382) (148,342)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 4,605 (35,217)
(Increase) decrease in loans receivable (1,359) 39,132
(Increase) decrease in inventories 1,698
(Increase) decrease in other assets (5,158)
Increase (decrease) in accounts payable (11,475) 42,656
Increase (decrease) in royalties payable 69,817 (364)
Increase (decrease) in accrued expenses 19,166 9,662
--------- ---------
Net cash (used in) operating activities (72,628) (95,933)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment
CASH FLOWS FROM FINANCING ACTIVITIES
Principal advances on notes payable and long-term debt 62,290 96,183
Issuance of stock for interest 10,338
Sale of common stock -- --
--------- ---------
Net cash (used in) provided by financing activities 72,628 96,183
--------- ---------
NET INCREASE (DECREASE) IN CASH 0 250
Cash and cash equivalents - beginning of period 0 0
--------- ---------
Cash and cash equivalents - end of period $ 0 $ 250
========= =========
See accompanying notes to these financial statements
6
OPEN DOOR ONLINE, INC.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
June 30, June 30,
2001 2000
------------ ------------
Revenues:
Net sales $ (5,757) $ 593,489
Cost of sales 0 318,187
------------ ------------
Gross profit (5,757) 275,302
Operating Expenses:
Payroll and payroll taxes 23,750 187,550
Selling expenses 0 3,112
Bad Debt expense 0 26,403
Consulting expenses 53,666 26,412
Depreciation and amortization 20,858 19,156
Professional fees 108,400 65,674
Rent 0 7,650
Supplies 239 1,991
Telephone 1,359 3,507
Travel and entertainment 0 14,689
Other 4,416 15,393
------------ ------------
Total operating expenses 212,688 371,537
Operating income (loss) (218,445) (96,235)
Interest income (expense) (28,436) (9,777)
------------ ------------
NET INCOME (LOSS) $ (246,881) $ (106,012)
============ ============
Net loss per common share $ (0.02) $ (0.01)
============ ============
Weighted average number of common shares outstanding 15,734,938 10,865,065
============ ============
See accompanying notes to these financial statements
7
OPEN DOOR ONLINE, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
June 30, June 30,
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $(246,881) $(106,012)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Stock issued for services 50,000
Depreciation and amortization 20,858 19,156
--------- ---------
Changes in cash flows provided (used in) operating activities (176,023) (86,856)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 4,605 (275,806)
(Increase) decrease in loans receivable (1,359) (124,012)
(Increase) in inventories (8,603)
(Increase) decrease in other assets (5,158)
Increase in accounts payable (11,475) 48,728
Increase in royalties payable 75,841 195,583
Increase (decrease) in accrued expenses 33,783 20,522
--------- ---------
Net cash (used in) operating activities (74,628) (235,602)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment
CASH FLOWS FROM FINANCING ACTIVITIES
Principal advances on notes payable and long-term debt 64,290 249,848
Issuance of stock for interest 10,338
Sale of common stock -- --
--------- ---------
Net cash (used in) provided by financing activities 74,628 201,195
--------- ---------
NET INCREASE (DECREASE) IN CASH 0 (34,407)
Cash and cash equivalents - beginning of period 0 34,657
--------- ---------
Cash and cash equivalents - end of period $ 0 $ 250
========= =========
See accompanying notes to these financial statements
8
Open Door Online, Inc.
Notes to Financial Statements
for the Six Months Ended June 30, 2001 and 2000
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 June 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, 2001.
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.
Sales have not been sufficient to cover returns from previously shipped product.
However the reserve has been sufficient to cover all returns to date with a
reasonable reserve still maintained.
9
Open Door Online, Inc.
Notes to Financial Statements
for the six months ended June 30, 2001 and 2000
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
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 2001, 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. The accounts receivable have been agreed to and payments
on the amounts due have been generally agreed to with payments on the
receivables having begun in July 2001.
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 six months ended June 30, 2001 and 2000
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. The Company intends to release a
compilation CD in August 2001.
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 2000 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 June 30, 2001 and 2000
were $10,429 and $9,578 respectively.
Property plant and equipment consist of the following:
June 30,
-----------------------
2001 2000
--------- ---------
Production equipment $ 124,305 $ 124,305
Web site development 51,555 51,555
Office equipment, furniture and fixtures 10,376 2,374
Leasehold improvements -- 13,605
Intellectual property 19,700 --
--------- ---------
205,936 191,839
Less accumulated depreciation and amortization (95,802) (69,392)
--------- ---------
$ 110,134 $ 122,447
========= =========
11
Open Door Online, Inc.
Notes to Financial Statements
for the six months ended June 30, 2001 and 2000
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:
June 30,
----------------------
2001 2000
--------- ---------
Tax effect of assets acquired in business combination $ 362,000 $ 362,000
Tax effects of reserve for discontinued operations 200,000 200,000
Tax effects of carryforward benefits:
Net operating loss carryforwards 712,000 242,000
--------- ---------
Tax effects of carryforwards
Tax effects of future taxable differences and carryforwards 1,274,000 804,000
Less deferred tax asset valuation allowance (1,274,000) (804,000)
---------- ---------
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 2021. 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 six months ended June 30, 2001 and 2000
NOTE 5 - STOCK TRANSACTIONS - RELATED PARTY
During 1998 through 2001, Mr. DeBaene has been a lender of funds to Open Door
Records and subsequently to Open Door Online, Inc. As of June 30, 2001 and June
30, 2000, the outstanding balances due him were $36,672 and $113,643, including
interest expense of $601 and $3,643, respectively. Interest rates are at 12% 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, 2001, 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.
In February 2001 Mr. DeBaene converted $100,000 of salary and short term debt to
3,333,333 shares of Common Stock at a conversion price of $0.03 The debt
converted consisted of short term loans of $18,984, and accrued payroll of
$81,016.
NOTE 6 - 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 June 30, 2001, 15,734,938 and 11,291,465 at
June 30, 2000.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For the three months ended June 30, 2001 and June 30, 2000.
SALES
Sales were minimal with returns outpacing shipments of pre-recorded media.
No sales were recorded from any other division of the Company. Sales were a
negative $(5,757) for the quarter ending June 30, 2001 compared to $167,748 in
sales for the quarterly period ended June 30, 2000. The sales decrease was
directly attributable to the limited operations on distribution contracts and no
sales from the other divisions.
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. The artist royalties would normally be the only cost relative to the net
returns of pre-recorded media. No costs were recognized, as the amount is
nominal this period. The cost of sales for the quarter ended June 30, 2001
decreased to $0 from $122,240 in the comparative quarter ending June 30, 2000.
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 June 30, 2001 a
decrease of 100% over the $8,221expended in the prior comparative quarter ended
June 30, 2000. 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 $0 to the expenses for the quarter ended June 30, 2001.
Site maintenance in the quarter ended June 30, 2000 was $9,000.
BAD DEBT EXPENSE
Bad debt expense was $0 for the quarter ended June 30, 2001 a 100% decrease
from $2,309 in the corresponding quarter in 2000.
14
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 $136,566 for the quarter ended June 30,
2001 a decrease of 24% over the $179,712 for the period ended June 30, 2000. The
decrease is directly attributable to the reduction in salaries of $75,000 that
were partially offset by additional legal fees of $58,000 and a reduction in
accounting fees of $20,000.
DEPRECIATION EXPENSE
Depreciation and amortization expenses rose to $10,429 from $9,578 in the
quarters ended June 30, 2001 and June 30, 2000, respectively. The increase is
attributed to the full utilization of all equipment and the web site and
additional intellectual property.
INTEREST EXPENSE
Net interest expense for the quarter ended June 30, 2001 was $11,059.
Comparable interest costs for the corresponding quarter ended 2000 was $4,602.
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 six months ended June 30, 2001 and June 30, 2000.
SALES
Sales consisted primarily of net returns of pre-recorded media. Sales
decreased to $(5,757) for the six months ended at June 30, 2001 from $593,489 in
the comparative six-month period ended June 30, 2000. The majority of the sales
decrease was directly attributable to the lack operations on distribution
contracts, and no sales from any other division.
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. Only nominal costs were incurred and are therefore not reflected. The Cost
of Sales for the six months ended June 30, 2001 was $0 decreasing 100% from
$318,187 in the comparative six months ended June 30, 2000.
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 six months ended June 30, 2001 a
decrease of 100% from $3,112 expended in the prior comparative six months ended
June 30, 2000. This decrease is directly relational to the reduction of
promotional expenses of signed artist that are not recoupable by Open Door
Records, Inc.
15
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 $9,000 to the expenses for the six months ended June 30,
2001 a decrease of 69.5%. Site maintenance in the six months ended June 30, 2000
was $29,524.
BAD DEBT EXPENSE
Bad debt expense was $0 for the six months ended June 30, 2001 a 100%
decrease from $26,403 in the corresponding six months of 2000.
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 $191,830 for the six months
ended June 30, 2001 compared to $288,804 in the corresponding period ended June
30, 2000. The decrease is attributable to salaries for management $150,000, and
a reduction of travel and entertainment expenses of $14,689 which were partially
offset by increased legal fees of $58,4000.
DEPRECIATION EXPENSE
Depreciation and amortization expenses rose to $20,858 from $19,156 in the
six months ended June 30, 2001 and June 30, 2000, respectively. The increase is
attributed to the full utilization of all equipment and intellectual property.
INTEREST EXPENSE
Net interest expense for the six months ended June 30, 2001 was $28,436.
Comparable interest costs for the corresponding six months ended 2000 was
$9,777. This increase was caused by the increase in outstanding short-term debt
over the comparative period.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001 we had cash of $0. 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 six months we issued net new
debt for cash of approximately $64,290. Significant increases in capital will be
required to fund our aggressive business plan and support acquisitions and new
lines of business. There is no assurance that we will be successful in raising
the required capital.
A capital raise of $750,000 to $1,000,000 will be sufficient to meet our
needs during this fiscal year. Our long-term capital needs will be from
$2,000,000 to $3,000,000 and are totally dependent on the success of our ability
to acquire other operations and expand our lines of business.
16
ACCOUNTS RECEIVABLE
As of June 30, 2001 we had receivables that consisted of the sales mainly
from fiscal year 2000. The receivables are being received and sufficient
allowances were set aside when the sales were recorded. We have no indication
that Red Eye Distribution is unable or unwilling to pay us for the product
shipped.
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 six months of the release of the recording we will take a charge to
earnings for these costs. 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 2000 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 an entity supporting traditional sales of
pre-recorded media and recording operations. Through strategic planning and
partnering, the components of each division are structured to grow with the
implementation of dynamic divisional plans. The Company is seeking to expand the
operations of its divisions.
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 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.
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FUTURE PLAN OF OPERATION
The Company is seeking acquisitions in the entertainment and recording
industry. 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.
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 2001 the Company was advised that a legal proceeding had been
brought by two former directors and an officer of the predecessor company as a
class and derivatively on behalf of Open Door Online, Inc. against Open Door
Online, Inc., its current officers and directors and various other parties. The
suit alleges mismanagement, corporate waste, fraud in the issuance of shares for
converted debt and racketeering among other charges. The suit has been brought
in the U.S. District Court for the District of New Jersey as a civil action no
01-3588(AET).
The Company has not had the opportunity to review the complaint with
counsel and has not developed an opinion as to the merits or potential cost to
the Company, but intends to vigorously defend against this action.
In July 2001 the Company brought an action against two former directors and
officers in Rhode Island alleging theft of corporate property, breach of
fiduciary duty and interference with the Company to transact its business.
In management's opinion there are no other 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 any such pending litigation will have no material adverse effect
on the Company's financial position or results of operation.
ITEM 2. CHANGES IN SECURITIES
We issued 888,381 restricted common shares to five note holders that did
not include any officers, directors or affiliated parties in settlement of
$88,838.10 of debt and accrued interest. No other securities were issued during
the period.
The Company returned for cancellation 3,900,000 shares of Common Stock
issued in anticipation of the exercise of warrants and for funding of a
consulting agreement.
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
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Dated: August 17, 2001 David N. DeBaene
President and Chief Executive Officer
/s/ Norman Birmingham
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Dated: August 17, 2001 Norman Birmingham
Treasurer and Chief Financial Officer
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