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 June 30, 2000
[ ] 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.
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(Exact name of small business issuer as specified in its charter)
NEW JERSEY 05-0460102
-------------------------------- -----------------------------------
State or Other Jurisdiction (I.R.S.Employer Identification No.)
of Incorporation or Organization)
46 OLD FLAT RIVER ROAD, COVENTRY, RHODE ISLAND 02816
----------------------------------------------------
(Address of Principal Executive Offices)
(401) 397-5987
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(Issuers Telephone Number, Including Area Code)
N/A
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(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, 12,449,845 shares outstanding at
July 31, 2000
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
<PAGE>
OPEN DOOR ONLINE, INC.
INDEX TO FORM 10-QSB
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 2000 and December 31, 1999 4
Statements of Operations for the three months ended
June 30, 2000 and June 30, 1999 5
Statements of Cash Flows for the three months ended
June 30, 2000 and June 30, 1999 6
Statements of Operations for the six months ended
June 30, 2000 and June 30, 1999 7
Statements of Cash Flows for the six months ended
June 30, 2000 and June 30, 1999 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 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 20
3
<PAGE>
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
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OPEN DOOR ONLINE, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 250 $ 34,567
Accounts receivable, net of allowance $28,403 717,997 204,489
Inventories 8,603
Recoupable Artist Advances 152,512
Loans Receivable 2,250 30,750
------------ ------------
Total current assets 881,612 269,806
Property and equipment, net 70,892 98,049
Web Site Development, net 51,555 43,556
Music Library 10, 255,005 10,255,005
------------ ------------
TOTAL ASSETS $ 11,259,064 $ 10,666,146
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current liabilities:
Current portion of long-term debt $ 75,000 $ 75,000
Accounts payable and accrued expenses 556,575 498,837
Reserve for discontinued operations 500,000 500,000
Short-term notes payable 168,580 442,200
Accrued royalties 195,583 --
Accrued interest on notes payable 15,362 9,000
------------ ------------
Total current liabilities 1,511,100 1,525,037
Long-term debt, net of current portion 150,000 150,000
------------ ------------
Total liabilities 1,661,100 1,675,037
Stockholders' equity
Common stock, $.0001 par value; authorized, 50,000,000 shares;
issued and outstanding, 12,449,845 shares and 10,133,185
shares at June 30, 2000 and December 31, 1999, respectively 1,129 1,013
Additional paid-in capital 10,085,151 9,610,372
Accumulated deficit (488,316) (620,006)
------------ ------------
Total Stockholders' equity: 9,597,964 8,991,379
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,259,064 $ 10,666,416
============ ============
</TABLE>
See accompanying notes to these financial statements
4
<PAGE>
OPEN DOOR ONLINE, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
June 30, June 30,
2000 1999
------------ ------------
Revenues
Net sales $ 405,450 $ 1,143
Cost of goods sold 122,240 645
------------ ------------
Gross profit 283,210 498
Operating Expenses:
Payroll and payroll taxes 113,550 --
Selling Expenses -- 8,221
Bad Debt 2,309 --
Consulting Expenses 7,227 24,900
Depreciation and amortization 9,578 --
Professional fees 44,273 8,250
Rent 1,950 500
Supplies 252 631
Telephone 1,044 1,211
Travel and Entertainment 6,812 9,000
Other 11,831 630
------------ ------------
Total operating expenses 198,826 53,343
Operating income (loss) 84,384 (52,845)
Interest income (expense) (4,602) --
------------ ------------
NET INCOME (LOSS) $ 79,782 $ (52,845)
============ ============
Net loss per common share $ 0.01 $ (0.01)
============ ============
Weighted average number of common
shares outstanding 12,449,845 7,000,000
============ ============
See accompanying notes to these financial statements
5
<PAGE>
OPEN DOOR ONLINE, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 79,782 $ (52,845)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization 9,578 --
--------- ---------
Changes in cash flows provided (used in)
operating activities 89,360 $ (52,845)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (272,919) 2,500
(Increase) decrease in loans receivable 39,132 (5,500)
(Increase) decrease in inventories 1,698 --
(Increase) decrease in other assets (5,158) (10,737)
Increase in accounts payable 42,656 (118)
Increase (decrease) in royalties payable (364) --
Increase (decrease) in accrued expenses 9,662 --
--------- ---------
Net cash (used in) operating activities (95,933) (66,700)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal advances on notes payable and long-term debt 96,183 44,323
Sale of common stock -- 26,357
--------- ---------
Net cash (used in) provided by financing activities 96,183 70,680
--------- ---------
NET INCREASE (DECREASE) IN CASH 250 3,980
Cash and cash equivalents - beginning of period 0 22,684
--------- ---------
Cash and cash equivalents - end of period $ 250 $ 26,664
========= =========
</TABLE>
See accompanying notes to these financial statements
6
<PAGE>
OPEN DOOR ONLINE, INC.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
June 30, June 30,
2000 1999
------------ ------------
Revenues
Net sales $ 831,191 $ 1,143
Cost of goods sold 318,187 5,376
------------ ------------
Gross profit 513,004 5,229
Operating Expenses:
Payroll and payroll taxes 187,550 --
Selling Expenses 3,112 8,221
Bad Debt Expense 26,403 --
Consulting Expenses 26,412 34,649
Depreciation and amortization 19,156 --
Professional fees 65,674 12,750
Rent 7,650 3,500
Supplies 1,991 858
Telephone 3,507 2,115
Travel and Entertainment 14,689 19,280
Other 15,393 6,821
------------ ------------
Total operating expenses 371,537 96,918
Operating income (loss) 141,467 (92,427)
Interest income (expense) (9,777) (8,724)
------------ ------------
NET INCOME (LOSS) $ 131,690 $ (101,151)
============ ============
Net loss per common share $ 0.01 $ (0.01)
============ ============
Weighted average number of common
shares outstanding 12,449,845 7,000,000
============ ============
See accompanying notes to these financial statements
7
<PAGE>
OPEN DOOR ONLINE, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 131,690 $(101,151)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization 19,156 --
--------- ---------
Changes in cash flows provided (used in)
operating activities 150,846 $(101,151)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (513,508) 30,000
(Increase) decrease in loans receivable (124,012) (5,500)
(Increase) in inventories (8,603) --
(Increase) decrease in other assets (5,158) (10,737)
Increase in accounts payable 48,728 (3,381)
Increase in royalties payable 195,583 --
Increase (decrease) in accrued expenses 20,522 8,100
--------- ---------
Net cash (used in) operating activities (235,602) (80,669)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Equipment -- (46,850)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal advances on notes payable and long-term debt 249,848 108,793
Principal repayment of short-term debt (48,653) --
Sale of common stock -- 45,357
--------- ---------
Net cash (used in) provided by financing activities 201,195 107,300
--------- ---------
NET INCREASE (DECREASE) IN CASH (34,407) 26,631
Cash and cash equivalents - beginning of period 34,657 33
--------- ---------
Cash and cash equivalents - end of period $ 250 $ 26,664
========= =========
</TABLE>
See accompanying notes to these financial statements
8
<PAGE>
OPEN DOOR ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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 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, 2000.
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 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 and 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
<PAGE>
OPEN DOOR ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
<PAGE>
OPEN DOOR ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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.
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 June 30, 2000 and 1999
were $9,578 and $0, respectively.
Property plant and equipment consist of the following:
June 30,
------------------------
2000 1999
--------- ---------
Production equipment $ 99,667 $ 99,667
Web site development 51,555 51,555
Office equipment, furniture and fixtures 24,638 24,638
Leasehold improvements 13,605 12,605
--------- ---------
189,465 188,465
Less accumulated depreciation and amortization (67,018) (11,321)
--------- ---------
$ 122,447 $ 177,144
========= =========
11
<PAGE>
OPEN DOOR ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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:
June 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.
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 the 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
12
<PAGE>
OPEN DOOR ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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 30 reverse split of
the Genesis shares as of June 30, 1999 retroactive to January 1, 1999 in
accordance with SFAS 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 11,317,138 shares and
7,000,000 shares at June 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 June 30, 2000, after giving effect to the
acquisition on June 30, 1999 by Genesis, the legal acquirer of Open Door
Records, Inc
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. Since the appraised value of the music library was in excess of $38
million, the fair market value of the merger was allocated music library and
results 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 - RESTATEMENT OF CHANGE IN ACCOUNTING
The Company has restated herein the application of APBO 16 to reflect the value
of the music library based on the fair market value of the stock issued for the
acquisition of Genesis rather than the fair market value of the music library.
This change had the effect of reducing the music library and paid in capital by
approximately $3,953,995.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 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 353% to $405,450 for the quarter ending June 30, 2000
from $1,143 in the comparative quarterly period ended June 30, 1999. The
majority of the sales increase was directly attributable to the operations of
the distribution contracts that increased $237,200 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 quarter 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 quarter ended June 30, 2000 increased $121,595, a 187% increase
over the comparative quarter ending June 30, 1999, all of these costs were for
artist royalties except for $1,699 sold from inventory of artists with only
distribution contracts. The remainder of the increase was from studio
operations, which resulted in $7,800 of cost. 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.
Expenses of $ 0 were incurred for the quarter ended June 30, 2000 a
decrease of 100% over the $8,221expended in the prior comparative quarter ended
June 30, 1999. This decrease is directly relational to the 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 $9,000 to the expenses for the quarter ended June 30,
2000 an increase of 73%. Site maintenance in the quarter ended June 30, 1999 was
$5,040.
BAD DEBT EXPENSE
Bad debt expense increased to $24,094 for the quarter ended June 30,
2000 a 100% increase over the corresponding quarter in 1999.
14
<PAGE>
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 $179,712 for the quarter ended
June 30, 2000 an increase of 298% over the $45,122 for the period ended June 30,
1999. The increase is directly attributable to costs incurred for legal and
accounting expenses for the filing of the Form-10SB, which increased these fees
by approximately $36,000 for the quarter with the remainder attributable to
wages for management most of which have been accrued.
DEPRECIATION EXPENSE
Depreciation and amortization expenses rose to $9,578 from $0 in the
quarters ended June 30, 2000 and June 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 June 30, 2000 was $4,602.
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 SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 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 100% to $831,191 for the six months ended at June 30,
2000 from $1,143 in the comparative six-month period ended June 30, 1999. The
majority of the sales increase was directly attributable to the operations of
the distribution contracts, which accounted for $635,000 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 six 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 six months ended June 30, 2000 increased $318,187, a 5,819%
increase over the comparative six months ended June 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.
Expenses of $ 3,112 were incurred for the six months ended June 30,
2000 a decrease of 62% over the $8,221 expended in the prior comparative six
months ended June 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.
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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 $29,524 to the expenses for the six months ended June
30, 2000 a decrease of 10%. Site maintenance in the six months ended June 30,
1999 was $14,774.
BAD DEBT EXPENSE
Bad debt expense increased to $26,403 for the quarter ended June 30,
2000 a 100% increase over the corresponding quarter 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 $288,804 for the
six months ended June 30, 2000 compared to $45,324 in the corresponding period
ended June 30, 1999. The increase is attributable to salaries for management
$187,500, the majority of which has been accrued, and increased professional
fees of approximately $53,000 which are directly related costs to the filing and
completion of the Form-10SB.
DEPRECIATION EXPENSE
Depreciation and amortization expenses rose to $19,156 from $0 in the
six months ended June 30, 2000 and June 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 six months ended June 30, 2000 was $9,777.
Comparable interest costs for the corresponding six 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 June 30, 2000 we had a cash $250. 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 $249,848. 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.
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 our totally
dependent on the success of artists and our forthcoming Internet sales site and
the affiliation agreements that are associated.
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ACCOUNTS RECEIVABLE
As of June 30, 2000 we had receivables that consisted of the sales from
March 2000 and all of the sales from the second quarter of 2000. The March 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. The receivables from the second quarter sales of recordings are not
due to be received the third quarter of 2000 per our agreement with Red Eye
Distribution. 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. 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 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.
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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.
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.
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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
We issued 1,158,280 restricted common shares to Mr. David DeBaene
for the conversion of certain debt and accrued interest in the amount of
$474,895. No other securities were issued during the period.
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)
Dated: August 14, 2000 /s/ David N. DeBaene
-------------------------------------
David N. DeBaene
President and Chief Executive Officer
Dated: August 14, 2000 /s/ Norman Birmingham
-------------------------------------
Norman Birmingham
Treasurer and Chief Financial Officer
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