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 MARCH 31, 2002
[ ] 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 05-0507504
(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, 17,128,364 shares outstanding at
May 22, 2001
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
OPEN DOOR ONLINE, INC.
INDEX TO FORM 10-QSB
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 2002 and March 31, 2001 4
Statements of Operations for the three months ended
March 31, 2002 and March 31, 2001 5
Statements of Cash Flows for the three months ended
March 31, 2002 and March 31, 2001 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submissions of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
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.
2
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
MARCH 31, 2002 AND 2001
(UNAUDITED)
March 31, March 31,
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable, net of allowance $ 66,650 $ 107,603
Inventories 9,848 8,603
Recoupable Artist Advances 104,535 105,893
------------ ------------
Total current assets 181,033 222,099
Property and equipment, net 47,224 58,781
Web Site Development, net 0 53,781
Music Library 10,255,005 10,255,005
Goodwill, indefinite 10,000 0
Other assets 34,624 6,000
------------ ------------
TOTAL ASSETS $ 10,527,886 $ 10,595,666
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current liabilities:
Current portion of long-term debt $ 150,000 $ 150,000
Accounts payable and accrued expenses 750,601 537,051
Reserve for discontinued operations 413,514 500,000
Short-term notes payable 282,254 111,793
Accrued royalties 22,654 22,653
Accrued payroll 192,129 230,769
Accrued interest on notes payable 49,386 45,837
------------ ------------
Total current liabilities 1,860,537 1,598,103
Long-term debt, net of current portion 0 75,000
------------ ------------
Total liabilities 1,860,537 1,673,103
Stockholders' equity
Common stock, $.0001 par value; authorized, 50,000,000
shares; issued and outstanding, 21,842,943 shares and
17,128,364 shares at March 31, 2002 and 2001, respectively 2,184 1,713
Additional paid-in capital 11,061,883 10,501,621
Accumulated deficit (2,396,718) (1,580,771)
------------ ------------
Total Stockholders' equity: 8,667,349 8,922,563
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,527,886 $ 10,595,666
============ ============
See accompanying notes to these financial statements
4
OPEN DOOR ONLINE, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
March 31, March 31,
2002 2001
------------ ------------
Revenues
Net sales $ -- $ --
Cost of goods sold -- --
------------ ------------
Gross profit -- --
Operating Expenses:
Payroll and payroll taxes 23,750 --
Consulting Expenses 172,755 53,666
Depreciation and amortization 4,810 10,429
Professional fees 26,250 --
Supplies 533 239
Telephone 3,380 1,359
Travel and Entertainment 1,173 --
Other 3,784 --
------------ ------------
Total operating expenses (236,435) 65,693
Operating income (loss) (236,435) (65,693)
Interest income (expense) (10,204) (17,377)
------------ ------------
NET INCOME (LOSS) $ (246,639) $ (83,070)
============ ============
Net gain (loss) per common shareholder $ (0.01) $ (0.01)
============ ============
Weighted average number of shares outstanding 19,405,155 14,685,644
============ ============
See accompanying notes to these financial statements
5
OPEN DOOR ONLINE, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
March 31, March 31,
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $(246,639) $ (83,070)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Stock issued for services 151,505 50,000
Depreciation and amortization 4,810 10,429
--------- ---------
Changes in cash flows provided (used in) operating activities (90,324) (22,641)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable
(Increase) in loans receivable
(Increase) in inventories
(Increase) decrease in other assets
Increase (Decrease) in accounts payable
Increase in royalties payable 3,413 6,024
Increase (decrease) in accrued expenses (80,088) 14,617
--------- ---------
Net cash (used in) operating activities (166,999) (2,000)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Assets (31,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal advances on notes payable and long-term debt 19,995 2,000
Principal repayment of short-term debt (386) (180,000)
Common stock issued for repayment of debt 178,390 180,000
--------- ---------
Net cash (used in) provided by financing activities 179,999 2,000
--------- ---------
NET INCREASE (DECREASE) IN CASH
Cash and cash equivalents - beginning of period
Cash and cash equivalents - end of period $ 0 $ 0
========= =========
See accompanying notes to these financial statements
6
Open Door Online, Inc.
Notes to Financial Statements
for the three months ended March 31, 2002 and 2001
Note 1 - Organization
Open Door Records, Inc. ("Open Door") was incorporated in the state of Rhode
Island on November 20, 1997.
In June 2000, 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, 2000, 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, 2002
LINE OF BUSINESS
The business of the Company to date has derived revenue from the promotion,
production and studio recording services to music artists. The Company also had
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 evaluating its current business. The studio is
currently dismantled while awaiting a move to more commercially viable location.
No sales under the distribution contracts are currently being made. We are
actively seeking new markets and consultants or employee's to move the Company
forward and create value.
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.
7
Open Door Online, Inc.
Notes to Financial Statements
for the three months ended March 31, 2002 and 2000
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 FASB 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 customer's 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 distribution agreement has expired.
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
8
Open Door Online, Inc.
Notes to Financial Statements
for the three months ended March 31, 2002 and 2001
Note 2 - Summary of Significant Accounting Policies (continued)
IMPAIRMENT
The Company has adopted SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" which requires
that long-lived assets to be held and used be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
NEW TECHNICAL PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This statement establishes accounting and reporting standards for
goodwill and intangibles for years commencing after December 15, 2001. Whether
already acquired or subsequently acquired after the effective date, companies
are required to identify intangibles with finite lives and those with indefinite
lives. Those intangibles with finite lives are to be amortized over the
estimated useful lives of the assets while those with indefinite lives are not
to be amortized. Each intangible or goodwill asset should be analyzed at least
annually for impairment where the carrying value is in excess of the fair value
of the intangibles and in excess of the implied fair value in the case of
goodwill assets. The asset's carrying value is to be reduced by a charge to
income if the fair value is lower than the carrying value. The Company has not
determined the effect of this new standard.
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 SFAS 50 that 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 the
Statement of Financial Accounting Standards No. 130.
9
Open Door Online, Inc.
Notes to Financial Statements
for the three months ended March 31, 2002 and 2001
Note 3 - Property and Equipment
Depreciation and amortization for the three months ended March 31, 2002 and 2001
were $4,810, and $10,429 respectively.
Property plant and equipment consist of the following:
March 31,
-----------------------
2002 2001
--------- ---------
Production equipment $ 95,306 $ 95,306
Web site development 60,677
Office equipment, furniture and fixtures 39,374 33,985
--------- ---------
134,680 189,968
Less accumulated depreciation and amortization (87,456) (77,406)
--------- ---------
$ 47,224 $ 112,562
========= =========
Note 4 - Stock Transactions - Related Party
During 2001 and 2002, Mr. DeBaene has been a lender of funds to Open Door
Online, Inc. As of December 31, 2001 and March 31, 2002, the outstanding
balances due him are $107,757 and $133,125, including interest expense of $6,059
and $10,232 respectively. Interest rates range from 12% to 15% per annum.
Note 5 - Common Stock
The outstanding stock of the Company was 21,842,943 shares and 17,128,364 shares
at March 31, 2002 and 2001, respectively.
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 March 31, 2002 and 2001.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
SALES
No sales were recorded as all distribution contracts had expired and the
recording studio has not been re-opened at the quarter ending at March 31, 2002.
No sales were reported in the quarterly period ended March 31, 2001.
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. No cost of sales had been recorded for the quarters ended March 31, 2002
and 2001.
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 March 31, 2002 and
2001. The lack of expenses is directly relational to the lack of available cash
for promotional expenses.
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 expenses were $255,375 for the quarter ended March
31, 2002, an increase of $200,011 from $55,264 for the quarter ended March 31,
2001. The increase is attributable to consulting and legal fees of $199,005.
DEPRECIATION EXPENSE
Depreciation and amortization expenses rose to $4,810 from $10,429 in the
quarters ended March 31, 2002 and March 31, 2001, respectively. The decrease is
attributed to the expiration of the lease and the subsequent reduction of
depreciation on the leasehold improvements.
INTEREST EXPENSE
Net interest expense for the quarter ended March 31, 2002 was $10,204.
Comparable interest costs for the corresponding quarter ended 2001 was $17,377.
This decrease was caused by the decrease in outstanding short-term debt that
occurred in fiscal 2001.
11
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002 we had $0 cash. Sufficient cash to finance operations
for the short term is 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 quarter we issued net new debt for cash
of approximately $19,609. 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.
ACCOUNTS RECEIVABLE
As of March 31, 2002 we had receivables that consisted of the sales of
prerecorded music from fiscal 2000. 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 artist's 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. This account contains four artists at this time. 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 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 currently contemplating a total restructuring of
its operations and a change in its product and business mix. The Company has
previously been an entity supporting traditional sales and recording operations.
12
FUTURE PLAN OF OPERATION
Open Door Online, Inc. has discontinued the production and sales operations
of its recording studios and pre-recorded music business. A new direction and
additional businesses are be sought to create value for the shareholder's and
create profitability and positive cash flow for the Company.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are currently a party to suits that were either known to have been or
threatened to be filed against Genesis Media Group, Inc. prior to the time of
the acquisition and were not disclosed to the current management and some that
were defended but for which judgments were received. However a charge of
$500,000 was taken in fiscal 1999 to establish a reserve for known debts and
contingencies of prior management. These judgments, when paid, will be applied
to the reserve with no further charge to the Company until the reserve is
depleted. The Company believes that adequate reserves have been provided.
Various artists and individuals threaten additional lawsuits over accrued
royalties, failure of distribution agreements and other contractual obligations.
All known amounts for these have been accrued. The Company believes it has
adequately provided for all such costs, net of recoverable amounts from third
parties.
ITEM 2. CHANGES IN SECURITIES
In March 2002, Open Door Online, Inc. issued 100,000 restricted common
shares for the purchase of Anderson Associates, Inc. Additionally, 200,000
restricted common shares were issued to Steev Panneton for the continued rights
to certain board games that he had developed. Mission bay Consulting, Inc.
received 1,000,000 restricted common shares for services rendered. These shares
were issued with reliance on an exemption from registration requirements
provided in Section 4(2) of the Securities Act of 1933.
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
13
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: May 21, 2002 David N. DeBaene
President and Chief Executive Officer
/s/ Norman Birmingham
----------------------------------------
Dated: May 21, 2002 Norman Birmingham
Treasurer and Chief Financial Officer
14