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 MARCH 31, 2000
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
46 Old Flat River Road Coventry, Rhode Island 02816
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(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, 11,291,565 shares outstanding at
April 20, 2000
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
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OPEN DOOR ONLINE, INC.
INDEX TO FORM 10-QSB
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report 3
Balance Sheets as of March 31, 2000 and March 31, 1999 4
Statements of Operations for the three months ended
March 31, 2000 and March 31, 1999 5
Statements of Cash Flows for the three months ended
March 31, 2000 and March 31, 1999 6
Notes to Financial Statements 7
Item 2. Management s Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submissions of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
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
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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
INDEPENDENT AUDITOR'S REVIEW REPORT
To the Board of Directors
OPEN DOOR ONLINE, INC.
We have reviewed the accompanying balance sheets of Open Door Online, Inc. and
the related statements of operations, and cash flows as of March 31, 2000 and
1999, and for the three months then ended. These financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Open Door Online, Inc. as of December 31, 1999
and 1998, and the related statements of operations, stockholders' equity, and
cash flows for the years then ended; and in our report dated April 13, 2000, we
expressed an unqualified opinion on those financial statements.
/s/ James C. Marshall, CPA, PC
Scottsdale, Arizona
June 21, 2000
4
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OPEN DOOR ONLINE, INC.
BALANCE SHEETS
MARCH 31, 2000 AND 1999
(UNAUDITED)
March 31, March 31,
2000 1999
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ASSETS
Current Assets:
Cash and cash equivalents $ 22,684
Accounts receivable, net of allowance $24,094 $ 445,078 9,685
Inventories 10,301
Recoupable Artist Advances 193,894
Prepaid Expenses -- 1,477
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Total current assets 649,273 33,846
Property and equipment, net 83,050 125,589
Web Site Development, net 48,977 43,556
Music Library 10,255,005
Other assets -- 2,737
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TOTAL ASSETS $ 11,028,835 $ 205,728
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current liabilities:
Current portion of long-term debt $ 75,000 $ 3,457
Accounts payable and accrued expenses 513,919
Reserve for discontinued operations 500,000
Short-term notes payable 72,397 191,507
Accrued royalties 195,947
Accrued interest on notes payable 10,860 8,100
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Total current liabilities 1,368,123 203,064
Long-term debt, net of current portion 150,000 --
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Total liabilities 1,518,123 203,064
Stockholders' equity
Common stock, $.0001 par value; authorized,
50,000,000 shares; issued and outstanding,
11,291,565 shares and 10,133,185 shares at
March 31, 2000 and December 31, 1999,
respectively 1,129 1,000
Additional paid-in capital 10,085,151 63,918
Accumulated deficit (568,098) (62,254)
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Total Stockholders' equity 9,518,182 2,664
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,028,835 $ 205,728
============ =========
See accompanying notes to these financial statements
5
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OPEN DOOR ONLINE, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
March 31, March 31,
2000 1999
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Revenues
Net sales $ 425,741 $
Cost of goods sold 195,947 4,731
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Gross profit 229,794 4,731
Operating Expenses
Payroll and payroll taxes 74,000
Selling Expenses 3,112
Bad Debt Expense 24,094
Consulting Expenses 19,185 9,749
Depreciation and amortization 9,578
Professional fees 21,401 4,500
Rent 5,700 3,000
Supplies 1,739 227
Telephone 2,463 904
Travel and Entertainment 7,877 10,280
Other 3,562 6,191
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Total operating expenses 172,711 43,575
Operating income (loss) 57,083 (39,582)
Interest income (expense) (5,175) (8,724)
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NET INCOME (LOSS) $ 51,908 $ (48,306)
============ ===========
Net loss per common share $ 0.01 $ (0.01)
============ ===========
Weighted average number of common shares
outstanding 10,445,510 7,000,000
============ ===========
See accompanying notes to these financial statements
6
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OPEN DOOR ONLINE, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 51,908 $ (48,306)
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 61,486 $ (48,306)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (240,589)
(Increase) in loans receivable (163,144) 27,500
(Increase) in inventories (10,301)
(Increase) decrease in other assets
Increase in accounts payable 6,072
Increase in royalties payable 195,947 (3,263)
Increase (decrease) in accrued expenses 10,860 8,100
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Net cash (used in) operating activities (139,669) (15,969)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Equipment (46,850)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal advances on notes payable and long-term debt 153,665 81,507
Principal repayment of short-term debt (48,653)
Sale of common stock -- 19,000
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Net cash (used in) provided by financing activities 105,012 85,470
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NET INCREASE (DECREASE) IN CASH (34,657) 22,651
Cash and cash equivalents - beginning of period 34,657 33
--------- ---------
Cash and cash equivalents - end of period $ 0.00 $ 22,684
========= =========
</TABLE>
See accompanying notes to these financial statements
7
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Open Door Online, Inc.
Notes to Financial Statements
for the three months ended March 31, 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 in the early part of 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.
8
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Open Door Online, Inc.
Notes to Financial Statements
for the three months ended March 31, 2000 and 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The engineering of the recording is the most time consuming function of
producing recorded music. We recognize engineering revenue upon the release of
the recording for mastering or upon acceptance of the demo by the client if no
mastering is to occur. The contracts typically provide that they are cancelable
by either party, with notice, and work to date would be paid upon the
cancellation.
ARTIST DISTRIBUTION AGREEMENTS
The distribution of music recorded on CD's, cassettes, and single or
extended play vinyl at wholesale is recognized upon shipment. The Company
contract with Red Eye Distribution specifies payment will be received monthly,
at 80% of the product shipped three months prior. Returns of product shipped
must be approved within 90 days of shipment but may not be physically received
during the 90-day period. Starting with the first shipments in the first quarter
of 2000, a reserve of 20% will be maintained. The reserve of 20% is withheld
from payment for sixty days after the payment is due and any returns received
are applied against the reserve account. Any balance remaining in that months
reserve account 150 days after the month of shipment is then remitted to the
Company or any shortfall is applied against the next months reserve before
remittance. To comply with 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.
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
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Open Door Online, Inc.
Notes to Financial Statements
for the three months ended March 31, 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 March 31, 2000 and
1999 were $9,578, and $0, respectively.
Property plant and equipment consist of the following:
March 31,
-----------------------
2000 1999
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Production equipment $ 95,306 $ 95,306
Web site development 48,977 43,556
Office equipment, furniture and fixtures 33,985 24,638
Leasehold improvements 13,573 5,645
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191,841 169,145
Less accumulated depreciation and amortization (59,814) --
--------- --------
$ 132,027 $133,615
========= ========
10
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Open Door Online, Inc.
Notes to Financial Statements
for the three months ended March 31, 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:
March 31,
----------------------
2000 1999
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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.
11
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Open Door Online, Inc.
Notes to Financial Statements
for the three months ended March 31, 2000 and 1999
NOTE 5 - STOCK TRANSACTIONS - RELATED PARTY
During 1998 and 1999, Mr. DeBaene has been a lender of funds to Open Door
Records and subsequently to Open Door Online, Inc. As of December 31, 1998 and
September 30, 1999, the outstanding balances due him are $113,643 and $498,622,
including interest expense of $3,643 and $8,224, respectively. Interest rates
range from 12% to 20% per annum. On January 12, 2000 Mr. DeBaene was granted a
option to convert debt owed to him into common shares at 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 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 March 31, 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 March 31, 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
12
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Open Door Online, Inc.
Notes to Financial Statements
for the three months ended March 31, 2000 and 1999
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 by approximately $3,953,995.
13
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
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 $425,741 for the quarter ending at March 31, 2000 from
$0 in the comparative quarterly period ended March 31, 1999. The majority of the
sales increase was directly attributable to the operations of the distribution
contracts.
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 March 31, 2000 increased $195,947, a 4,042% increase
over the comparative quarter ending March 31, 1999, all of these costs were for
artist royalties. 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 quarter ended March 31, 2000 an
increase of 100% over the $0 expended in the prior comparative quarter ended
March 31, 1999. This increase 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 $19,185 to the expenses for the quarter ended March 31,
2000 an increase of 97%. Site maintenance in the quarter ended March 31, 1999
was $9,749.
BAD DEBT EXPENSE
Bad debt expense increased to $24,094 for the quarter ended March 31, 2000
a 100% increase over the corresponding quarter in 1999.
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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 1,048% of Revenue for the
year ended December 31, 1999. The year ended December 31, 1998 saw these
expenses at 477% of Revenue. It is anticipated that overall general and
administrative expense will decrease as a percentage of revenue as revenue
increases.
DEPRECIATION EXPENSE
Depreciation and amortization expenses rose to $9,578 from $0 in the
quarters ended March 31, 2000 and March 31, 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 March 31, 2000 was $5,175.
Comparable interest costs for the corresponding quarter ended 1999 was $8,724.
This decrease was caused by the reduction in outstanding short-term debt by
conversion to equity on March 7, 2000. Interest costs may increase in future
periods as the Company expands through a combination of debt and equity
offerings.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000 we had a cash deficit of $7,470. 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 quarter we issued
net new debt for cash of approximately $49,000. 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. The Company is negotiating
with Earnhardt and Co. to raise up to $3 million dollars in debt financing over
the next twelve months. Their indications suggest we will receive up to $1
million by the end of June 2000. The required documents have been prepared and
await their facilitation.
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.
ACCOUNTS RECEIVABLE
As of March 31, 2000 we had receivables that consisted of the sales from
December 1999 and all of the sales from the first quarter of 2000. The 1999
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 first quarter sales of recordings are not
due to be received the second 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.
15
<PAGE>
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 second 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.
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 250,000 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.
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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.
The sales from this period are not expected to be representative of the
fiscal year sales as our artist marketing efforts did not begin in earnest until
the last week of February. Other significant events will help us meet our sales
projections for artists under distribution agreements and the unit sales from
our music catalogue via our web site beginning in May.
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,
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and credibility, which could have a material adverse effect on our business and
our financial condition. Such problems could occur with Sound Delivery, our
supplier of music CDs, cassettes and other related products. With all expected
dates for problems now past and the fact that no interruptions or improper
recording of transactions have occurred that the period for concern has passed.
We do not have, nor do we intend to create, a contingency plan to handle such an
event.
We have concluded, based on our review of our operations and computer
systems and those of our major suppliers and distributors have not had any
problems associated with the Year 2000 issue. However, we cannot guarantee that
such problems will not arise in the future.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In management's opinion there are no material pending legal proceedings,
other than ordinary routine litigation incidental to its business or that of its
predecessor, to which the Company is a party.
It is the opinion of management, after discussions with legal counsel, that
the ultimate dispositions of pending litigation will have no material adverse
effect on the Company's financial position or results of operation.
ITEM 2. CHANGES IN SECURITIES
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)
/s/ David N. DeBaene
-------------------------------------
Dated: June 21, 2000 David N. DeBaene
President and Chief Executive Officer
/s/ Norman Birmingham
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Dated: June 21, 2000 Norman Birmingham
Treasurer and Chief Financial Officer
