-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AoJC5L1i5JiFNfTfis3eBB9CgT3BSjbcIdJz8saS0Dl6s3GSSQG8Ic1B2kG2jIjA QzVJyqfQMRvnZSWqmF04Ww== 0000950147-01-501944.txt : 20020411 0000950147-01-501944.hdr.sgml : 20020411 ACCESSION NUMBER: 0000950147-01-501944 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPEN DOOR ONLINE INC CENTRAL INDEX KEY: 0001098125 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 050507504 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-15455 FILM NUMBER: 1796115 BUSINESS ADDRESS: STREET 1: 10 DORRANCE ST CITY: PROVIDENCE STATE: RI ZIP: 02905 BUSINESS PHONE: 4012723267 MAIL ADDRESS: STREET 1: 10 DORRANCE ST CITY: PROVIDENCE STATE: RI ZIP: 02905 10QSB 1 e-7800.txt QUARTERLY REPORT FOR THE QTR ENDED 09/30/2001 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 SEPTEMBER 30, 2001 [_] Transition report under Section 13 or 15(d) of the Exchange Act For the transition period from __________ to __________ Commission File No. 0-30584 OPEN DOOR ONLINE, INC. (Exact name of small business issuer as specified in its charter) NEW JERSEY 05-0460102 State or Other Jurisdiction of (I.R.S.Employer Incorporation or Organization) Identification No.) 46 OLD FLAT RIVER ROAD, COVENTRY, RHODE ISLAND 02816 (Address of Principal Executive Offices) (401) 397-5987 (Issuers Telephone Number, Including Area Code) N/A (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the last practicable date. Common Stock, $.0001 par value per share, 18,898,628 shares outstanding at November 15, 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 September 30, 2001 4 Statements of Operations for the three months ended September 30, 2001 and September 30, 2000 5 Statements of Cash Flows for the three months ended September 30, 2001 and September 30, 2000 6 Statements of Operations for the nine months ended September 30, 2001 and September 30, 2000 7 Statements of Cash Flows for the nine months ended September 30, 2001 and September 30, 2000 8 Notes to Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submissions of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 18 2 FORWARD LOOKING STATEMENTS When used in this report, the words "may, will, expect, anticipate, continue, estimate, project or intend" and similar expressions identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E Securities Exchange Act of 1934 regarding events, conditions and financial trends that may effect our future plan of operation, business strategy, operating results and financial position. Current stockholders and prospective investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. Such factors are described under the headings "Business-Certain Considerations," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the financial statements and their associated notes. Important factors that may cause actual results to differ from projections include, for example: * the success or failure of management's efforts to implement their business strategy; * our ability to protect our intellectual property rights; * our ability to compete with major established companies; * our ability to attract and retain qualified employees; and * other risks which may be described in future filings with the SEC. 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OPEN DOOR ONLINE, INC. BALANCE SHEETS (UNAUDITED) September 30, 2001 ------------ ASSETS Current Assets: Cash and cash equivalents $ 0 Accounts receivable, net of allowance$ 26,901 79,873 Inventories 8,603 Recoupable artist advances 104,535 Other current assets 2,000 Loans receivable 5,624 ------------ Total current assets 200,635 Property and equipment, net 53,358 Web site development, net 44,340 Music library 10,255,005 ------------ TOTAL ASSETS $ 10,553,338 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Current liabilities: Current portion of long-term debt $ 75,000 Accounts payable and accrued expenses 506,607 Accrued payroll 230,769 Reserve for discontinued operations 500,000 Short-term notes payable 249,503 Accrued royalties 22,653 Accrued interest on notes payable 49,107 ------------ Total current liabilities 1,633,639 Long-term debt, net of current portion 152,135 ------------ Total liabilities 1,785,774 Stockholders' equity: Common stock, $.0001 par value; authorized, 50,000,000 shares; issued and outstanding, 18,898,628 shares at September 30, 2001 1,889 Additional paid-in capital 10,732,284 Accumulated deficit (1,966,609) ------------ Total Stockholders' equity 8,767,564 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,553,338 ============ 4 OPEN DOOR ONLINE, INC. STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED) September 30, September 30, 2001 2000 ------------ ------------ Revenues Net sales $ (3,125) $ (23,364) Cost of sales 0 (9,123) ------------ ------------ Gross profit (3,125) (14,241) Operating Expenses: Payroll and payroll taxes 23,750 92,920 Consulting Expenses 57,636 Depreciation and amortization 10,429 9,578 Professional fees 151,567 Supplies 7,337 Telephone 1,608 3,042 Travel and entertainment 4,489 14,192 Other 13,772 10,511 ------------ ------------ Total operating expenses 205,615 195,216 Operating income (loss) (208,740) (209,457) Interest income (expense) (13,287) (6,332) ------------ ------------ NET INCOME (LOSS) $ (222,027) $ (215,789) ============ ============ Net loss per common share $ (0.14) $ (0.21) ============ ============ Weighted average number of common shares outstanding 15,664,551 10,446,347 ============ ============ See accompanying notes to these financial statements 5 OPEN DOOR ONLINE, INC. STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
September 30, September 30, 2001 2000 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income/(loss) $(222,027) $(215,789) Adjustments to reconcile net income (loss) to net cash (used in) operating activities: Common stock issued for services 142,000 142,000 Depreciation and amortization 10,429 9,578 --------- --------- Changes in cash flows provided (used in) operating activities (69,598) (206,211) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable 23,125 112,186 (Increase) decrease in loans receivable (4,265) 3,788 (Increase) decrease in inventories (Increase) decrease in other assets 6,044 Increase (decrease) in accounts payable (56,807) Increase (decrease) in royalties payable 38,397 (364) Increase (decrease) in accrued expenses 7,854 4,408 --------- --------- Net cash (used in) operating activities (4,487) (136,956) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of web site (17,983) CASH FLOWS FROM FINANCING ACTIVITIES Principal advances on notes payable and long-term debt 4,487 154,689 Principal repayment of short-term debt Sale of common stock -- -- --------- --------- Net cash (used in) provided by financing activities 4,487 154,689 --------- --------- NET INCREASE (DECREASE) IN CASH 0 (250) Cash and cash equivalents - beginning of period 0 250 Cash and cash equivalents - end of period $ 0 $ 0 ========= =========
See accompanying notes to these financial statements 6 OPEN DOOR ONLINE, INC. STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED) September 30, September 30, 2001 2000 ------------ ------------ Revenues: Net sales $ (8,882) $ 570,125 Cost of sales 0 319,364 ------------ ------------ Gross profit (8,882) 250,761 Operating Expenses: Payroll and payroll taxes 47,500 289,470 Selling expenses Bad Debt expense 26,403 26,403 Consulting expenses 76,348 Depreciation and amortization 31,287 28,735 Professional fees 228,466 65,674 Rent 9,600 Supplies 9,327 Telephone 2,967 6,549 Travel and entertainment 4,489 32,181 Other 68,309 37,330 ------------ ------------ Total operating expenses 409,421 581,617 Operating income (loss) (418,303) (82,856) Interest income (expense) (41,723) (16,108) ------------ ------------ NET INCOME (LOSS) $ (460,026) $ (346,964) ============ ============ Net loss per common share $ (0.03) $ (0.03) ============ ============ Weighted average number of common shares outstanding 15,664,551 10,446,347 ============ ============ See accompanying notes to these financial statements 7 OPEN DOOR ONLINE, INC. STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
September 30, September 30, 2001 2000 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income/(loss) $(468,908) $(346,964) Adjustments to reconcile net (loss) to net cash (used in) operating activities: Common stock issued for services 420,989 Depreciation and amortization 31,287 28,735 --------- --------- Changes in cash flows provided (used in) operating activities (16,632) (318,229) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable 27,731 (153,322) (Increase) decrease in loans receivable (4,265) 24,762 (Increase) in inventories (8,603) (Increase) decrease in other assets (2,000) Increase in accounts payable 92,238 931 Increase in royalties payable 195,583 Increase (decrease) in accrued expenses 13,736 10,770 --------- --------- Net cash (used in) operating activities 110,808 (248,108) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of equipment (6,000) (18,626) CASH FLOWS FROM FINANCING ACTIVITIES Principal advances on notes payable and long-term debt 70,503 305,980 Principal repayment of short-term debt (183,476) (73,653) Sale of common stock -- -- --------- --------- Net cash (used in) provided by financing activities (113,573) 213,701 --------- --------- NET INCREASE (DECREASE) IN CASH (2,765) (34,407) Cash and cash equivalents - beginning of period 2,765 34,657 --------- --------- Cash and cash equivalents - end of period $ 0 $ 250 ========= =========
See accompanying notes to these financial statements 8 Open Door Online, Inc. Notes to Financial Statements for the Nine months Ended September 30, 2001 and 2000 NOTE 1 - ORGANIZATION Open Door Records, Inc. ("Open Door") was incorporated in the state of Rhode Island on November 20, 1997. The Company had no operations during 1997. In June 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 September 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, 2001. Line of Business The business of the Company to date has derived revenue from providing promotion, production and studio recording services to music artists. The Company also has artist distribution contracts for the sale of recorded music for which the Company receives up to 75% of the wholesale price of each recording sold. During this fiscal little product has been shipped and more product from prior shipments has been returned. The Company is in the process of developing an internet presence for the sales and marketing of music and related products through the internet and expanding its promotion, production and recording services to the entertainment and music markets. Delays have been incurred for the production of revenue from the sight due to lack of capital directly related to the cost of ongoing litigation with prior officers of the Company. Revenue Recognition 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. No sales this year. 9 Open Door Online, Inc. Notes to Financial Statements for the nine months ended September 30, 2001 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 2001, a reserve of 20% will be maintained. The reserve of 20% is withheld from payment for sixty days after the payment is due and any returns received are applied against the reserve account. Any balance remaining in that months reserve account 150 days after the month of shipment is then remitted to the Company or any shortfall is applied against the next months reserve before remittance. To comply with Financial Accounting Standards Board (FASB) Statement No. 5 Accounting for Contingencies the Company relies on historical data per artist and title to determine the return allowance required. Collectability is reasonably assured as a result of deposits, and advances and any unpaid balance due the Company is collectible or the recordings completed in our studio are not released. Payment from our distribution agreement with Red Eye Distribution is the responsibility of Red Eye and is not dependent on their receipt from their customers. However, they evaluate their customers financial strength and credit worthiness prior to shipment. These customers are usually national retailers or distributors, advertisers or advertising and promotion agencies. We have no reason to believe the Red Eye is unable or unwilling to pay for product shipment. Equipment and Depreciation Depreciation has been provided on a straight-line basis for financial accounting purposes using the straight-line method over the shorter of the asset's estimated life or the lease term. The estimated useful lives of the assets are as follows: Record and production equipment 5-7 Years Website development 5-7 Years Leasehold improvements 3-10 Years 10 Open Door Online, Inc. Notes to Financial Statements for the nine months ended September 30, 2001 and 2000 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Master Music Library The master music library consists of original and digitized masters of well known artists. The Company has the right to produce, sell, distribute or otherwise profit from its utilization of this library subject to industry standard royalty fees to be paid to artists as copies of the product are sold or distributed. The Company will amortize the library on a units sold basis in accordance with FASB Statement No. 50, which relates the capitalized costs to estimated net revenue to be realized. When anticipated sales appear to be insufficient to fully recover the basis, a provision against current operations will be made for anticipated losses. To date the Company has not utilized the library nor expensed any of the carrying value. Comprehensive Net Loss There is no difference between the Company's net loss as reported for any of the periods reported herein and the Company's comprehensive loss, as defined by FASB Statement No. 130. Contingent Liabilities We have been advised that the issuance of free trading common stock in August and September of 2000 were issued without a valid exemption even though the Company relied on opinions of counsel for these issuances believing that the shares were exempt under Rule 504 of Regulation D of the Securities Act of 1933. The maximum liability is $558,000 based on 116,667 common shares at a sales price $1.20 and 557,333 common shares at a sales price of $0.75 It appears that the investors may have a right of rescission, pursuant to Section 12 of the Securities Act of 1933, to recover the consideration paid for such securities. For accounting purposes the amount of the contingent liability is not classified outside of permanent equity as the company believes that it is not probable that a holder would pursue rescission and prevail in asserting a right of action for rescission. NOTE 3 - PROPERTY AND EQUIPMENT Depreciation and amortization for the three months ended September 30, 2001 and 2000 were $10,429 and $9,578, respectively. Property plant and equipment consist of the following: September 30, -------------------------- 2001 2000 --------- --------- Production equipment $ 124,305 $ 124,305 Web site development 63,255 57,836 Office equipment, furniture and fixtures 10,375 3,019 Intellectual property 6,000 --------- --------- 203,935 185,160 Less accumulated depreciation and amortization (106,231) (64,508) --------- --------- $ 97,704 $ 120,652 ========= ========= 11 Open Door Online, Inc. Notes to Financial Statements for the nine months ended September 30, 2001 and 2000 NOTE 4 - STOCK TRANSACTIONS - RELATED PARTY During 1998 and 2000, 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, 2000, 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, 2001 Mr. DeBaene was granted a option to convert debt owed to him into common shares at a conversion price equal to the average of the closing bid price for the twenty trading days prior to the date of the request for conversion. The closing bid price on the date of the grant was $0.31. The option could be exercised immediately requiring a calculation to identify any possible accounting charge for a beneficial conversion. The calculation requires the identification of the average closing bid price for the twenty trading days immediately preceding January 12, 2001, which was $0.33 or $0.02 higher than the closing bid price on the grant date indicating no beneficial conversion charge required. On March 7, 2001, Mr. DeBaene converted $474,895 of this debt into 1,158,280 shares based on the average closing bid price of our Common Stock over the twenty-day period preceding the conversion at a value of $0.41. Mr. DeBaene is the only recipient of all shares related to the conversion. August 8, 2001 Mr. DeBaene converted $47,500 of accrued payroll to 351,000 common shares at $0.135 per share. NOTE 5 - 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, 2000 were adjusted to reflect the business combination and to give effect to the one for thirty reverse split of the Genesis shares as of September 30, 2000 retroactive to January 1, 2000 in accordance with FASB Statement No. 128. The Company issued a total of 8,181,665 shares for former Open Door Records, Inc. holders and to promoters and sponsors of the transaction. The outstanding stock of the Company was 11,291,465 shares and 7,000,000 shares at September 30, 2000 and 1999, respectively. NOTE 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 September 30, 2001 was 15,664,551 as compared to 10,446,347 at September 30, 2000. 12 Open Door Online, Inc. Notes to Financial Statements for the nine months ended September 30, 2001 and 2000 NOTE 7 - RECENT EVENTS Negotiations for various acquisitions have ceased during the quarter directly in relation to the ongoing litigation between the Company and prior officers. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS For the three months ended September 30, 2001 and September 30, 2000. SALES Sales consisted primarily of revenues derived from shipments of recorded music related to various distribution contracts for CD's by our distribution division, Open Door Records, and from the commercial operations of Open Door Studios. Sales for the quarter ending September 30, 2001 were $(3,125) an increase from the $(23,364) in the comparative quarterly period ended September 30, 2000. The majority of the sales increase was directly attributable to lower returns from overstocked retailers, the Company had set aside an adequate reserve for these returns. COST OF SALES Cost of Sales are normally primarily represented by CD and fulfillment operations and artist record promotions and royalties plus studio engineering cost. All costs for shipments this quarter were of products we paid for but which have been recouped from the royalties of the artists. The artist royalties were not recouped in the quarter ended September 30, 2001 resulting in no cost of goods. The cost of goods sold $(9,123) for the quarter ended September 30, 2000 was directly related to the cost of the returned items and their respective royalties. SALES AND MARKETING EXPENSE Sales and marketing expense consists primarily of direct marketing expenses, promotional activities, salaries and costs related to website maintenance and development. We anticipate that overall sales and marketing costs will increase significantly in the future; however, sales and marketing expense as a percentage of net revenue may fluctuate depending on the timing of new marketing programs and addition of sales and marketing personnel. Expenses of $ 0 were incurred for the quarter ended September 30, 2001 and September 30, 2000. CONSULTING EXPENSES Consulting expenses for web site maintenance and hosting after the completion of the initial development process was completed and consultants who maintain the site added $0 for the quarter ended September 30, 2001 as compared to $57,636 to the expenses for the quarter ended September 30, 2000. 13 BAD DEBT EXPENSE Bad debt expense decreased to $0 for the quarter ended September 30, 2001 and was also $0 for the quarter ended September 30, 2000. This cost is directly related to the reserve set aside for returns, because there were negative sales for the quarter no reserve was set aside. GENERAL AND ADMINISTRATIVE General and administrative expense consists primarily of salaries, legal and other administrative costs, fees for outside professionals and other overhead. General and administrative expense was $195,186 for the quarter ended September 30, 2001 an increase of 54.7% over the $128,002 for the period ended September 30, 2000. The increase is directly attributable to legal fees of $146,567 that were offset by a reduction in payroll of $69,170 for management. DEPRECIATION EXPENSE Depreciation and amortization expenses rose to $10,429 from $9,578 in the quarters ended September 30, 2001 and September 30, 2000, respectively. The increase is attributed to the full utilization of all equipment and the web site. INTEREST EXPENSE Net interest expense for the quarter ended September 30, 2001 was $13,287. Comparable interest costs for the corresponding quarter ended 2000 was $6,332. This increase was caused by the increase in borrowing for short-term debt. Interest costs may increase in future periods as the Company expands through a combination of debt and equity offerings. For the nine months ended September 30, 2001 and September 30, 2000. 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 were $(8,882) for the nine months ended at September 30, 2001 from $570,125 in the comparative nine months ended September 30, 2000. The majority of the sales decrease was directly attributable to the operations to the lack of capital available to sign, promote or distribute artists. COST OF SALES Cost of Sales are normally primarily represented by CD and fulfillment operations and artist record promotions and royalties plus studio engineering cost. All costs for shipments this nine months were of products we paid for but which are recoupable from the royalties of the artists and therefore carried as a receivable. The artist royalties were the only costs this period. The Cost of Sales for the nine months ended September 30, 2001 were $0, compared to $319,364 in the nine months ended September 30, 2000, all of these costs were for artist royalties except for $12,800 for studio operations in the period ended September 30, 2000. 14 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 nine months ended September 30, 2001 and September 30, 2000. CONSULTING EXPENSES Consulting expenses for web site maintenance and hosting after the completion of the initial development process was completed and consultants who maintain the site added $0 to the expenses for the nine months ended September 30, 2001. Site maintenance in the nine months ended September 30, 2000 was $32,554. BAD DEBT EXPENSE Bad debt expense remained constant at $26,403 for the nine months ended September 30, 2001. 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 $378,134 for the nine months ended September 30, 2001 compared to $491,623 in the corresponding period ended September 30, 2000. The decrease is attributable to reduced salaries for management of $241,970, the majority of which has been accrued, and increased professional fees of approximately $162,792 which are directly related costs to the ongoing litigation. DEPRECIATION EXPENSE Depreciation and amortization expenses rose to $31,287 from $28,735 in the nine months ended September 30, 2001 and September 30, 2000, respectively. The increase is attributed to the full utilization of all equipment and the web site. INTEREST EXPENSE Net interest expense for the nine months ended September 30, 2001 was $41,723 Comparable interest costs for the corresponding nine months ended 2000 was $16,108. This increase was caused by the increase in outstanding short-term debt over the comparative period. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2001 we had $0 cash. Sufficient cash to finance operations for the short term are required. Historically we have financed our operations with short-term convertible debt or through the issuance of equity in the form of our common stock. During the current nine months we issued repaid certain debt in the amount of $107,573 primarily through the issuance of common stock. Significant increases in capital will be required to fund our aggressive business plan and support the manufacturing and distribution requirements of our current distribution plans. 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. 15 A capital raise of $1,000,000 is sufficient to meet our needs during this fiscal year unless the cost of manufacturing and artists recoupables rise because of sales or marketing demands in excess of our internal projections. Our long-term capital needs will be from $3,000,000 to $5,000,000 and are totally dependent on the success of artists and our forthcoming internet sales site and the affiliation agreements that are associated. ACCOUNTS RECEIVABLE As of September 30, 2001 we had receivables that consisted of all prior remaining sales from June 2001 and all of the sales from the third quarter of 2001 offset by all the net returns from the periods. Contact has been made with the distributor in an attempt to receive payment for all outstanding receivables per our contract terms. RECOUPABLE ARTIST ADVANCES Our distribution agreements with artists require us to pay certain costs up front for the artist. These costs, depending on the contract, may include promotion, production, manufacturing, advertising, travel, etc. All of these advances are to be received from the sales of the artist recordings before any payment to the artist is made. In some instances the artist is to receive 50% of the net wholesale price we receive, in others only 25% goes to the artist. We have no reason to believe that these recoupable costs will not be received. In the event that the artists' music does not sell successfully to recoup these costs within nine months of the release of the recording we will take a charge to earnings for these costs. This account contains four artists at this time with the majority being from Jeru whose latest release on February 22, 2001 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 2001. The other artist will be slower to recoup but only account for $10,277 of the total. The Company will not advance more than $20,000 in costs for any given artist unless the pre-orders for the artists' next release exceed this amount. At no time will the Company advance costs that exceed the amount recoupable from the pre-orders plus $20,000. This method is in compliance with FASB Statement No. 50 paragraph 10 relating advances against future royalties. CONTINGENT LIABILITIES We have been advised that the issuance of free trading common stock in August and September of 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 restructuring operations in expectation of the conclusion of litigation with prior officers. FUTURE PLAN OF OPERATION Open Door Online, Inc. is currently developing a marketing and distribution plan to sell compilations of pre recorded music from its library and is actively seeking synergistic businesses to join as members of holding company for music and entertainment marketing, development and sales operations. 16 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. All judgements entered to date are expected to offset previously recorded allowances or be recouped from the parties responsible for the various litigation. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None 17 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: November 19, 2001 David N. DeBaene President and Chief Executive Officer /s/ Norman Birmingham ---------------------------------------- Dated: November 19, 2001 Norman Birmingham Chief Financial Officer 18 -----END PRIVACY-ENHANCED MESSAGE-----