SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Quarter Ended: September 30, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 000-3084133
BLUETORCH INC.
---------------
(Exact name of registrant as specified in its charter)
Nevada 90-0093439
- ---------------------------- ------------------------
(State of Incorporation) (I.R.S. Employer I.D.)
12607 Hidden Creek Way, Suite S
Cerritos, CA 90703
Telephone (562) 623-4040
(Address and telephone number of principal executive offices
and principal place of business)
1
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 a 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 [ ]
As of November 17, 2004, the registrant had a total of 358,397,254 shares of
common stock issued and outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1: Financial Statements 3
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 10
0Item 4: Controls and Procedures 11
PART II OTHER INFORMATION
Item 1: Legal Proceedings 11
Item 2: Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 11
Item 3: Defaults Upon Senior Securities 11
Item 4: Submission of Matters to a Vote of
Security Holders 12
Item 5: Other Information 12
Item 6: Exhibits 12
SIGNATURES 12
2
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BLUETORCH INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -------------------
(Unaudited)
ASSETS
Investments in portfolio companies $1,363,253 $559,405
Cash - 517
Property & equipment, net 29,902 -
Deposits 5,557 -
--------------- -------------------
$1,398,712 $559,922
=============== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft $15,702 $-
Accounts payable 127,102 106,156
Loans payable, related parties - 26,000
--------------- -------------------
Total current liabilities 142,804 132,156
--------------- -------------------
Stockholders' equity
Preferred series B, $.001 par value; 610,000 shares authorized;
190,000 shares issued and outstanding 190 480
Preferred series C, $.001 par value; 10,000,000 shares authorized;
9,560,000 shares issued and outstanding 9,560 10,000
Common stock, $.001 par value; 950,000,0000 shares authorized;
331,491,363 and 190,372,632 shares issued and
outstanding at June 30, 2004 and December 31, 2003, respectively 331,491 54,277
Common stock subscriptions receivable (162,600) (112,500)
Additional paid in capital 7,418,865 5,844,055
Accumulated deficit (6,341,598) (5,368,546)
--------------- -------------------
Total stockholders' equity 1,255,908 427,766
--------------- -------------------
$1,398,712 $559,922
=============== ===================
The accompanying notes form an integral part of these financial statements.
3
BLUETORCH INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003
--------------- --------------- --------------- ---------------
Income. $ - $ - $ - $ -
--------------- --------------- --------------- ---------------
Expenses -
General and administrative (170,958) (688,639) (673,052) (2,219,840)
Loss on investments in portfolio (300,000) - (300,000) -
companies
Cost associated with cancellation
of options - - - (2,784,600)
-------------- -------------- --------------- ---------------
Total expenses (470,958) (688,639) (973,052) (5,004,440)
--------------- --------------- --------------- ---------------
Net loss $ (470,958) $ (688,639) $ (973,052) $ (5,004,440)
=============== =============== =============== ===============
Basic and diluted - loss per share. $ (0.00) $ (0.00) $ (0.00) $ (0.03)
=============== =============== =============== ===============
Weighted average common shares -
basic and diluted 273,853,984 182,325,574 242,131,495 175,599,031
=============== =============== =============== ===============
The accompanying notes form an integral part of these financial statements.
BLUETORCH INC.
SCHEDULE OF INVESTMENTS IN PORTFOLIO COMPANIES
(Unaudited)
SEPTEMBER 30, 2004
Description Percent Fair
Company of Business Ownership Cost Value Affiliation
Unboxed Distribution, Inc Extreme Sports 100% $917,576 $800,711 (1) Yes
Apparel
Total Sports Distribution, Inc Extreme Sports 100% $373,677 $190,542 (1) Yes
Apparel
Island Tribe Inc. Extreme Sports 51% $372,000 $372,000 (1) Yes
Apparel ---------- ----------
Investments in Portfolio Companies $1,663,253 $1,363,253
========== ==========
<FN>
(1) Fair value was determined by the Company's Board of Directors based on the actual
cost of investment less an appropriate write down of inventory of the subsidiary companies.
See also Note 2 for further explanation on the Company's methods of determining fair values.
The accompanying notes form an integral part of these financial statements.
4
BLUETORCH INC.
STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
2004 2003
----------- ------------
Cash flows from operating activities:
Net loss $(973,052) $(5,004,440)
Adjustments to reconcile net loss to net cash used in
operating activities:
Costs associated with converting stock at a discount - 166,101
Depreciation and amortization expense 9,131 -
Forgiveness of notes payable (14,000) -
Stock Issued for employee compensation/services - 368,662
Stock Issued for debt conversion costs - 78,750
Series C Preferred shares issued in exchange for services - 367,500
Notes and loans payable issued for services - 220,048
Costs associated with cancellation of options - 2,784,600
Loss on investments in portfolio companies 300,000 530,000
Changes in operating assets and liabilities:
Prepaid royalties - (45,000)
Deposits (5,557) -
Bank overdraft 15,702 -
Accounts payable 20,946 99,463
Loans payable (12,000) -
Deposits payable - (10,000)
----------- ------------
Net cash used in operating activities (658,830) (444,316)
----------- ------------
Cash flows from investing activities:
Purchases of equipment (39,033) -
Payments advanced to portfolio investment companies (731,848) -
----------- ------------
Net cash used in investing activities (770,881) -
----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,403,849 437,332
Purchase of Series B preferred stock (30,000) -
Issuance of convertible debentures - 25,000
Legal and other expense associated with stock issuance 5,345 -
Stock issued for redemption on Series B 50,000 -
----------- ------------
Net cash provided by financing activities, 1,429,194 462,332
----------- ------------
Net increase in cash (517) 18,016
Cash - beginning of period 517 912
----------- ------------
Cash - end of period $ - $ 18,928
=========== ============
The accompanying notes form an integral part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
ORGANIZATION AND BUSINESS
Mercury Software, a Nevada corporation, was incorporated on January 29, 1997 and
its name was changed to MedEx Corp. on June 24, 2002. Aussie Apparel Group Ltd.
5
("Aussie Apparel" or "the Company"), a Nevada corporation, was incorporated on
August 26, 2002. In October 2002, MedEx Corp. issued an aggregate of 6,500,000
(pre-stock split) shares of its common stock to the shareholders of the Company
in connection with the merger of the Company with MedEx Corp., whose name was
then changed to "Aussie Apparel Group Ltd" on October 21, 2002. Since the
shareholders of the Company became the controlling shareholders of MedEx after
the exchange, the Company was treated as the acquirer for accounting purposes.
Accordingly, the financial statements as presented here are the historical
financial statements of the Company and include the transactions of MedEx only
from the date of acquisition, using reverse merger accounting.
The Company's name was changed to Bluetorch Inc. ("Bluetorch") effective
November 3, 2003.
On June 19, 2003, the Company became a "Business Development Company" ("BDC")
pursuant to applicable provisions of the Investment Company Act of 1940 (the
"Investment Company Act").
Until June 19, 2003 the Company was a development stage enterprise under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 7. Upon
commencing their operations as a BDC, the Company no longer qualified under the
guidelines of SFAS No. 7.
Based on the Company's integration and management strategies, the Company will
operate on a non-consolidated basis. Operations of the portfolio companies will
be reported at the subsidiary level and only the appreciation or impairment of
these investments will be included in the Company's financial statements.
CONDENSED FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position as of
September 30, 2004, and the results of operations and cash flows for all periods
presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United Sates of America have been condensed or omitted. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's December 31,
2003, audited financial statements on Form 10-K. The results of operations for
the periods ended September 30, 2004 and 2003 are not necessarily indicative of
the operating results for the full years
GOING CONCERN
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. As of September 30,
2004, the Company has generated no revenues and has incurred losses totaling
$6,341,598 for the period from August 26, 2002 (inception) through September 30,
2004. As of September 30, 2004, the Company has negative working capital of
$142,804. The negative working capital combined with the losses since inception
raises substantial doubt about the Company's ability to continue as a going
concern. These financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts, or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Management plans to take the following steps that it hopes will be sufficient to
provide Bluetorch Inc. with the ability to continue in existence:
REVENUE
On September 8, 2003, one of the Company's subsidiaries, Unboxed Distribution,
Inc. ("Unboxed"), signed an agreement to license (with an option to purchase in
2006) the Bluetorch trademark for apparel and certain other product categories.
Unboxed began limited shipments to retail of Bluetorch branded apparel in the
first quarter of 2004 with a limited product line of domestically produced young
men's embroidered and/or screened t-shirts.
Bluetorch Inc. has been working to acquire additional trade names. On October
21, 2003, the Company's other subsidiary, Total Sports Distribution, Inc.
("Total Sports") finalized an agreement to license (with an option to purchase)
the True Skate Apparel ("TSABrand") trademark.
Management anticipates that Total Sports will generate revenue from apparel
sales as a result of its licensing agreement for the Airwalk trademark.
The Company has recently entered into sales agency agreements for selling of the
Company's multiple brands.
In accordance with a Stock Purchase Agreement dated August 20, 2004, the Company
6
purchased, via the issuance of its restricted common stock, a 51% interest in
Island Tribe Inc. ("Island Tribe"), an innovative surf apparel company. The
value of this investment is $372,000, with 30,000,000 restricted common shares
in Bluetorch Inc. being issued at a per-share price of $0.0124. The effective
date of this transaction is August 1, 2004.
FINANCING
On June 19, 2003, Bluetorch Inc. filed an Offering Circular that authorized the
Company to raise up to $3,000,000 via sale of its common stock. Through
September 30, 2004, the Company has raised $2,267,057 against this limit. This
sum includes both cash proceeds and conversion of debt. On June 24, 2004, the
Company filed a new Offering Circular that authorizes the Company to raise up to
$5,000,000 via sale of its common stock.
On October 18, 2004 and on November 1, 2004 the Company filed amendments to the
June 24, 2004 Offering Circular, reducing the minimum offering share price to
$0.004 and $0.0035, respectively. In addition, these amendments included a
reduction in the authority to raise capital from $5,000,000 to $2,500,000.
Subsequent to June 30, 2004 and through November 17, 2004, the Company has
raised $487,600 against this limit. This leaves $2,012,400 available for
Bluetorch management to pursue from the equity markets.
Management will also endeavor to utilize debt financing (subsidiary receivables
and/or inventory financing) to generate additional working capital.
CONCLUSION
Management is projecting that revenues will be generated in the next 12 months
due to the quadrupling of the collective product lines as compared to the
collective first half product line. Management is anticipating that the cash
generated from the projected revenue, combined with cash raised from a
combination of equity and debt financing, will allow Bluetorch and its
subsidiaries, Unboxed, Total Sports and Island Tribe Inc., to continue as a
going concern through December 31, 2005. Whereas the Company believes it will be
successful with its plans, due to market factors and economic conditions, no
assurance can be given that financing will be available on favorable terms or at
all.
(2) INVESTMENTS
On August 21, 2003, the Company formed Unboxed for the purpose of owning and
operating the Bluetorch license agreement.
On October 21, 2003, the Company formed Total Sports for the purpose of owning
and operating the True Skate Apparel brand ("TSABrand)".
As noted above, the Company purchased a 51% interest in Island Tribe, a surf
apparel company. The consideration for this investment was $372,000, consisting
of 30,000,000 restricted common shares in Bluetorch Inc. being issued at a
per-share price of $0.0124. The effective date of this transaction was August 1,
2004. Over the next 4 years, this purchase agreement provides for the Company to
receive an additional 24% ownership of Island Tribe Inc. The Company is
obligated to pay certain royalties/commissions on future sales of Island Tribe
product.
Unboxed and Total Sports are wholly-owned subsidiaries while Island Tribe is a
51% owned subsidiary ("Investments") of the Company and these portfolio
companies are focused on providing apparel to the action sports markets,
including surfing, wakeboarding and skateboarding. The Investments plan to
develop high tech garments for athletes and participants in these sports as well
as designing more casual lifestyle clothing aimed at a wider range of consumers.
The portfolio companies plan to begin manufacturing and marketing under various
brand names and will market apparel to high end sporting goods stores, mid-tier
department stores, as well as specialty chains. The TSABrand name will be
marketed to specialty shops and to high end sporting goods and specialty chains.
As required by the SEC's Accounting Series Release ("ASR") 118, the investment
committee of the Company is required to assign a fair value to all investments.
To comply with Section 2(a)(41) of the Investment Company Act and Rule 2a-4
under the Investment Company Act, it is incumbent upon the board of directors to
satisfy themselves that all appropriate factors relevant to the value of
securities for which market quotations are not readily available have been
considered and to determine the method of arriving at the fair value of each
such security. To the extent considered necessary, the board may appoint persons
to assist them in the determination of such value, and to make the actual
calculations pursuant to the board's direction. The board must also, consistent
with this responsibility, continuously review the appropriateness of the method
used in valuing each issue of security in the Company's portfolio. The directors
must recognize their responsibilities in this matter and, whenever technical
assistance is requested from individuals who are not directors, the findings of
such individuals must be carefully reviewed by the directors in order to satisfy
themselves that the resulting valuations are fair.
7
No single standard for determining "fair value in good faith" can be laid down,
since fair value depends upon the circumstances of each individual case. As a
general principle, the current "fair value" of an issue of securities being
valued by the board of directors would appear to be the amount which the owner
might reasonably expect to receive for them upon their current sale. Methods,
which are in accord with this principle, may, for example, be based on a
multiple of earnings, or a discount from market of a similar freely traded
security, or yield to maturity with respect to debt issues, or a combination of
these and other methods. Some of the general factors which the directors should
consider in determining a valuation method for an individual issue of securities
include:
1) the fundamental analytical data relating to the investment; 2) the nature and
duration of restrictions on disposition of the securities; and 3) an evaluation
of the forces which influence the market in which these securities are purchased
and sold. Among the more specific factors which are to be considered are: type
of security, financial statements, cost at date of purchase, size of holding,
discount from market value of unrestricted securities of the same class at time
of purchase, special reports prepared by analysis, information as to any
transactions or offers with respect to the security, existence of merger
proposals or tender offers affecting the securities, price and extent of public
trading in similar securities of the issuer or comparable companies, and other
relevant matters.
The board has arrived at the following valuation method for its investments.
Where there is not a readily available source for determining the market value
of any investment, either because the investment is not publicly traded, or is
thinly traded, and in absence of a recent appraisal, the value of the investment
shall be based on the following criteria:
1. Total amount of the Company's actual investment ("AI"). This amount shall
include all loans, purchase price of securities and fair value of securities
given at the time of exchange.
2. Total revenues for the preceding twelve months ("R").
3. Earnings before interest, taxes and depreciation ("EBITD") .
4. Estimate of likely sale price of investment ("ESP").
5. Net assets of investment ("NA").
6. Likelihood of investment generating positive returns (going concern).
The estimated value of each investment shall be determined as follows:
- - Where no or limited revenues or earnings are present, then the value shall be
the greater of the investment's a) net assets, b) estimated sales price, or c)
total amount of actual investment.
- - Where revenues and/or earnings are present, then the value shall be the
greater of one time (1x) revenues or three times (3x) earnings, plus the greater
of the net assets of the investment or the total amount of the actual
investment.
- - Under both scenarios, the value of the investment shall be adjusted down if
there is a reasonable expectation that the Company will not be able to recoup
the investment or if there is reasonable doubt about the investment's ability to
continue as a going concern.
The Company's board of directors has determined the carrying value of its
Investment Portfolio, in accordance with the Company's valuation policy, at
September 30, 2004 to be the actual investment, less an appropriate write-down
of inventory of $300,000, held by Unboxed and Total Sports.
The investment in Unboxed is valued at $800,711 at September 30, 2004, comprised
of the following: Warrants issued and cash paid to acquire the licensing rights
of $418,326 and $45,000 respectively, inventory of $38,219, pre-paid expenses
$9,185 and advances from Bluetorch of $289,981. This value represents a decrease
of $42,862 from the value at June 30, 2004.
As of September 30, 2004, Total Sports is valued at $190,542 comprised of the
following: cash paid to acquire the licensing rights of $99,688, inventory of
$59,893, trade show booths of $15,000, pre-paid expenses of $9,184, deposits of
$4,498 and advances from Bluetorch of $2,279. This value represents a decrease
of $126,939 from the value at June 30, 2004.
(3) EQUITY
During the nine months ended September 30, 2004, the Company issued 97,286,111
shares of common stock for cash per its Offering Circulars.
The Company also issued 30,000,000 restricted common shares for the purchase of
a 51% interest in Island Tribe Inc., valued at $372,000. The number of shares
issued was based on a formula whereby Island Tribe was to receive $372,000 of
the Company's restricted common stock.
The common stock subscriptions receivable of $162,600 in the accompanying
condensed balance sheet at September 30, 2004 consists of amounts receivable
from investment banking companies related to the purchase of common shares.
8
A former employee returned 450,000 Series C preference shares and the Company
retired these shares.
During September 2004, 10,000 shares of Preferred Series C stock were issued in
connection with the issuance of 1,111,111 shares of common stock for total
proceeds of $10,000.
(4) SUBSEQUENT EVENTS
EQUITY TRANSACTIONS
Subsequent to September 30, 2004 and through November 17, 2004 the Company has
issued 31,875,000 common shares in exchange for $120,000 cash, while 4,969,109
common shares have been returned to the Company and retired.
In November the Company issued a Convertible Debenture in a principal amount of
$187,500, convertible into common shares of the Company in an amount up to
53,571,430 shares.
Subsequent to September 30, 2004 and through November 17, 2004, the Company
received cash totaling $142,600 relating to common stock subscriptions
receivable.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This information statement contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. These statements relate to
future events or to our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "predicts,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"potential," or "continue" or the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. There are a number of factors that could cause our actual
results to differ materially from these indicated by such forward-looking
statements. These factors include but are not limited to economic conditions
generally and in the industries in which Bluetorch Inc may participate,
competition within Bluetorch Inc.'s chosen industry, including competition from
much larger competitors, technological advances and failure by Bluetorch Inc. to
successfully develop business relationships.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, level of
activity, performance or achievements. Moreover, we do not assume responsibility
for the accuracy and completeness of such forward-looking statements. We are
under no duty to update any of the forward-looking statements after the date of
this information statement to conform such statements to actual results. The
foregoing management's discussion and analysis should be read in conjunction
with the Company's financial statements and the notes herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. On an on-going basis,
management will evaluate its estimates and judgments, including those related to
revenue recognition, accrued expenses, financial operations, and contingencies
and litigation. Management will base its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the result of which form the basis for making judgments about
the carrying value of the assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. The most significant accounting estimates
inherent in the preparation of our financial statements include estimates as to
the appropriate carrying value of certain assets and liabilities which are not
readily apparent from other sources, such as the investments in our portfolio
companies and deferred tax asset valuation. These accounting policies are
described at relevant sections in this discussion and analysis and in the notes
to the financial statements included in our quarterly report on Form 10-Q for
the quarter ended September 30, 2004.
RESULTS OF OPERATIONS
For the nine months ended September 30, 2004, the Company has incurred an
operating loss of $973,052. The loss primarily represents expenses including
payroll of $174,228, consulting fees for investment banking and investor
relations of $131,017, professional fees incurred for legal and accounting
services of $134,159 and a $300,000 reduction in the carrying value of the
investments in portfolio companies resulting from an inventory write-down in
Unboxed Distribution, Inc. and Total Sports Distribution, Inc. Also included in
9
the loss are interest and penalties of $50,000 related to the retirement of
260,000 shares of Preferred Series B stock.
The loss for the nine months to September 30, 2004 is substantially lower than
for the nine months ended September 30, 2003, primarily due to the costs
recognized in 2003 for the cancellation of options and a reduction in general
operating expenses.
The loss for the three months to September 30, 2004 is lower than for the three
months ended September 30, 2003, primarily due to a decrease in payroll.
LIQUIDITY AND CAPITAL RESOURCES
Our assets were security deposits of $5,557 for the Company's headquarters in
Cerritos, California and investments in portfolio companies of $1,363,253; total
assets at September 30, 2004 were $1,398,712, as compared to $559,922 at
December 31, 2003. At September 30, 2004, our total liabilities of $142,804 were
represented by a bank overdraft of $15,702 and $127,102 of accounts payable &
accruals; total liabilities at December 31, 2003 were $132,156.
The investments in our portfolio companies increased from $559,405 at December
31, 2003 to $1,363,253 at September 30, 2004. This increase was principally
attributed to the acquisition of 51% of Island Tribe Inc. and additional
advances by the Company.
The general and administrative expenses have reduced considerably from 2003 to
2004, due to the 2003 numbers including start-up costs, larger salary expenses
and significant financing expenses.
PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS
As we discussed in our recent 10-K/A filing, 2003 and part of 2004 was a period
of restructuring for Bluetorch Inc., including the formation and investment in
our subsidiary companies. Paramount in this process was the replacement of the
original portfolio of brands with three new brands. As a result, we created
Unboxed Distribution, Inc., which now wholesales and markets Bluetorch branded
apparel. Total Sports Distribution, Inc. was established to market and wholesale
both True Skate Apparel (TSABrand) and Airwalk branded apparel. In addition, the
Company acquired a 51% interest in Island Tribe Inc. in August 2004.
Unboxed shipped its first Bluetorch apparel product of young men's t-shirts to
retailers in the first quarter of 2004. As a result, the number of Bluetorch
styles available for shipment to retailers will more than triple in the third
and fourth quarters versus the first quarter of 2004. Unboxed anticipates that
this will generate a greater volume of buying per retail account.
The Company and its three investment portfolio companies are continually
reviewing their brands and evaluating the most positive strategies to deliver
these brands to the appropriate markets. As part of this on-going assessment,
management has decided to slightly amend its strategy in order to achieve a more
balanced mix of brands across the various market tiers. It is expected that this
approach may delay 2004 revenues but will provide improved sales opportunities
for 2005.
Bluetorch will continue to look for and possibly make additional investments in
new brands on behalf of its existing subsidiaries and/or any new potential
subsidiary in 2004 and beyond.
Failure to successfully develop our portfolio companies would hinder the
Company's ability to increase the size of our operations and realize asset
appreciation. If we are not able to generate additional revenues adequate to
cover increased operating costs, our business may ultimately fail.
We have a cash deficit of $15,702 as of September 30, 2004. Subsequent to
September 30, 2004, the Company received proceeds of $120,000 from the sale of
its securities. In the opinion of management, available cash is not sufficient
to fund current operations. However, management believes that it can obtain
adequate capital via issuance and sale of its securities.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our business activities contain elements of risk. We consider the principal
types of risk to be portfolio valuations and fluctuations in interest rates. We
consider the management of risk essential to conducting our business.
Accordingly, our risk management systems and procedures are designed to identify
and analyze our risks, to set appropriate policies and limits and to continually
monitor these risks and limits by means of reliable administrative and
information systems and other policies and programs.
As a Business Development Company, we invest in illiquid securities, including
debt and equity securities, of primarily private companies and non-investment
grade CMBS. Our investments are generally subject to restrictions on resale and
generally have no established trading market. We value substantially all of our
investments at fair value as policy. There is no single standard for determining
fair value in good faith. As a result, determining fair value requires that
10
judgments be applied to the specific facts and circumstances of each portfolio
investment while employing a consistently applied valuation process for the
types of investments.
We determine fair value to be the amount for which an investment could be
exchanged in an orderly disposition over a reasonable period of time between
willing parties other than in a forced or liquidation sale. Our valuation policy
considers the fact that no ready market exists for substantially all of the
securities in which we invest. Our valuation policy is intended to provide a
consistent basis for determining the fair value of the portfolio. We will record
unrealized depreciation on investments when we believe that an equity security
is doubtful, or when the enterprise value of the company does not currently
support the cost of our debt or equity investment. Conversely, we will record
unrealized appreciation if we believe that the underlying portfolio company has
appreciated in value and, therefore, our equity security has also appreciated in
value. The values of the investments in public securities are determined using
quoted market prices discounted for restrictions on resale. Without a readily
ascertainable market value and because of the inherent uncertainty of valuation,
the fair value of our investments determined in good faith by the board of
directors may differ significantly from the values that would have been used had
a ready market existed for the investments, and the differences could be
material.
In addition, the illiquidity of our investments may adversely affect our ability
to dispose of debt and equity securities at times when it may be otherwise
advantageous for us to liquidate such investments. In addition, if we were
forced to immediately liquidate some or all of the investments in the portfolio,
the proceeds of such liquidation would be significantly less than the current
value of such investments.
Because we may borrow money to make investments, our net investment income
before net realized and unrealized gains or losses, or net investment income, is
dependent upon the difference between the rate at which we borrow funds and the
rate at which we invest these funds. As a result, there can be no assurance that
a significant change in market interest rates will not have a material adverse
effect on our net investment income. In periods of rising interest rates, our
cost of funds would increase, which would reduce our net investment income. We
use a combination of long-term and short-term borrowings and equity capital to
finance our investing activities.
ITEM 4: CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's Chief
Executive Officer and the Chief Financial Officer carried out an evaluation of
the effectiveness of the design and operations of the Company's disclosure
controls and procedures. The Company's disclosure controls and procedures are
designed to ensure that information required to be disclosed by the Company in
its periodic SEC filings is recorded, processed and reported within the time
periods specified in the SEC's rules and forms. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in alerting them on a
timely basis to material information relating to the Company, as required to be
included in the Company's periodic SEC filings.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, except for the change in our chief financial officer.
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
During the quarter ended September 30, 2004, the Company
issued an aggregate of 87,986,111 shares of its common stock.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
11
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLUETORCH INC.
November 17, 2004 By:/s/ Bruce MacGregor
----------------------------
Bruce MacGregor, President