U.S. 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: June 30, 2005
Or
[ ] Transition Report pursuant to Section 13 or 15(D) of the Securities
Exchange Act Of 1934
Commission File Nos: 814-00633 And 000-28027
---------------------------------------------
PACIFIC PEAK INVESTMENTS
-------------------------
(Exact name of Registrant as specified in its charter)
Nevada 90-0093439
------------------------ ----------------------
(State of Incorporation) (I.R.S. Employer I.D.)
4020 Birch Street, Suite 103, Newport Beach, CA 92660
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(Address of principal executive offices and principal Place of business)
(949) 756 - 2067
----------------
(Registrant's telephone number)
Pacific Crest Investments (formerly Bluetorch Inc.)
----------------------------------------------------
(Former names)
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 August 10, 2005, the registrant had a total of 29,075,969 shares of common
stock issued and outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1: Condensed Financial Statements 1-9
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3: Quantitative and Qualitative Disclosures About Market Risk 12
Item 4: Controls and Procedures 13
PART II OTHER INFORMATION
Item 1: Legal Proceedings 13
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 13
Item 3: Defaults Upon Senior Securities 13
Item 4: Submission of Matters to a Vote of Security Holders 13
Item 5: Other Information 14
Item 6: Exhibits 14
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
PACIFIC PEAK INVESTMENTS
CONDENSED BALANCE SHEETS
June 30, 2005 December 31, 2004
-------------- -----------------
(Unaudited)
ASSETS
Investments in portfolio companies $ 595,177 $ 377,478
Cash 2,147 43,466
Deferred financing costs - 28,125
Deposits & prepaid expenses 19,817 49,006
Property & equipment, net 17,356 25,720
-------------- -----------------
$ 634,497 $ 523,795
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable & accrued expenses $ 427,900 $ 118,970
Advances from related parties 25,000 -
Convertible debentures, net of discount - 8,824
-------------- -----------------
Total liabilities 452,900 127,794
-------------- -----------------
Stockholders' equity
Convertible preferred series A,
$0.001 par value; 400,000 shares - -
authorized; 0 shares issued and
outstanding
Convertible preferred series B,
$0.001 par value; 610,000 shares
authorized; 132,500 and 190,000
shares issued and outstanding 133 190
at June 30, 2005 & December 31, 2004,
respectively
Convertible preferred series C,
$0.001 par value; 10,000,000 shares
authorized; 0 and 10,000,000 shares issued
and outstanding at June 30, 2005 &
December 31, 2004, respectively - 10,000
Common stock, $0.001 par value;
950,000,000 shares authorized;
17,275,969 and 185,896 shares issued
and outstanding at June 30, 2005 and
December 31, 2004, respectively 17,276 186
Common stock held in escrow - (69,643)
Common stock subscriptions receivable (84,600) (9,600)
Additional paid in capital 9,074,505 8,416,412
Accumulated deficit (8,825,717) (7,951,544)
-------------- -----------------
Total stockholders' equity 181,597 396,001
-------------- -----------------
$ 634,497 $ 523,795
============== =================
<FN>
The accompanying notes form an integral part of these condensed financial statements.
1
PACIFIC PEAK INVESTMENTS
SCHEDULE OF INVESTMENTS IN PORTFOLIO COMPANIES
(Unaudited)
June 30, 2005
Description Percent Fair
Company of Business Ownership Cost Value
Unboxed Distribution, Inc. Extreme Sports Apparel 100% $ - $ - (1)
Total Sports Distribution, Inc. Extreme Sports Apparel 100% - - (1)
Island Tribe, Inc. Extreme Sports Apparel 51% 395,177 395,177 (1)
Titanium Design Studio, Inc. Jewelry 8% 200,000 200,000 (1)
-------- --------
Investments in portfolio companies $595,177 $595,177
======== ========
<FN>
(1) Fair value was determined by the Company's board of directors - refer to
Note 2 for further explanation of the Company's methods of determining fair
values.
The accompanying notes form an integral part of these condensed financial statements.
PACIFIC PEAK INVESTMENTS
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2005 JUNE 30,2004
------------- -------------- ------------- ------------
REVENUES $ - $ - $ - $ -
---------- ------------ ------------- ------------
EXPENSES
General and administrative (354,718) (230,630) (567,673) (502,094)
Interest expense, including
amortization of debt discounts - - (306,500) -
------------ ------------- ------------- ------------
Total expenses (354,718) (230,630) (874,173) (502,094)
------------ ------------- ------------- ------------
Net loss $ (354,718) $ (230,630) $ (874,173) $ (502,094)
============ ============= ============ ============
Basic and diluted - loss per share $ (0.05) $ (2.44) $ (0.24) $ (5.55)
============ ============= ============ ============
Weighted average common shares -
basic and diluted 7,174,618 94,522 3,702,633 90,438
============ ============= ============ ============
<FN>
The accompanying notes form an integral part of these condensed financial statements.
2
PACIFIC PEAK INVESTMENTS
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 and 2004
(Unaudited)
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (874,173) $ (502,094)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization expense 8,364 2,450
Amortization of deferred financing costs 28,125 -
Amortization of beneficial conversion feature on
convertible debentures 234,926 -
Penalties and interest related to conversion of
preferred series B - 50,000
Legal and other expenses associated with stock issuance - 5,345
Gain on forgiveness of notes payable - (14,000)
Changes in operating assets and liabilities:
Deposits & prepaid expenses 29,189 (5,557)
Accounts payable & accrued expenses 308,930 (19,973)
Loans payable - (12,000)
----------- ---------
Net cash used in operating activities (264,639) (495,829)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets - (36,534)
Acquisition of ownership interest in portfolio company (200,000) -
Payments advanced to portfolio companies (17,699) (601,649)
------------ ----------
Net cash used in investing activities (217,699) (638,183)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 275,000 1,198,849
Redemption of preferred series B - (30,000)
Proceeds from issuance of convertible debentures 50,000 -
Advance from related party 25,000 -
Additional proceeds from sale of common stock in prior year 91,019 -
------------ ----------
Net cash provided by financing activities 441,019 1,168,849
------------ ----------
Net increase / (decrease) in cash (41,319) 34,837
Cash, beginning of period 43,466 517
------------ ----------
Cash, end of period $ 2,147 $ 35,354
============ ==========
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Conversion of preferred series B to common stock $ 57 $ -
========== ========
Common stock issued upon conversion of convertible debentures $ 293,750 $ -
========== ========
<FN>
The accompanying notes form an integral part of these condensed financial statements.
3
NOTES TO THE FINANCIAL STATEMENTS
(unaudited)
(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.
("Aussie Apparel" or the "Company"), a Nevada corporation, was incorporated on
August 26, 2002. In October 2002, MedEx Corp. issued an aggregate of 2,600
shares (6,500,000 pre reverse stock split) 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 Corp. after the exchange, the Company was treated as the
acquirer for accounting purposes. Accordingly, the financial statements, as
presented herein, are the historical financial statements of the Company and
include the transactions of MedEx Corp. only from the date of acquisition, using
reverse merger accounting.
The Company's name was changed to Bluetorch Inc. (hereinafter "Bluetorch"
or the "Company"), 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").
On March 12, 2005, the Company and one of its wholly-owned portfolio
investment companies, Unboxed Distribution, Inc., signed a Mutual Settlement
and Release Agreement with Gotcha Brands Inc., the Bluetorch licensor, and
this agreement requires Unboxed Distribution, Inc. to cease the selling
and marketing of Bluetorch apparel. In keeping with this agreement, the
Company also agreed to change its corporate name by April 20, 2005.
Effective April 18, 2005, the Company implemented a 2500-to-1 reverse split of
its common stock. Immediately following this reverse stock split, there were
218,500 issued and outstanding common shares of the Company.
On April 19, 2005 and in accordance with the above Mutual Settlement and
Release Agreement, the Company amended its articles of incorporation to
implement a name change of the Company; effective April 25, 2005 the Company's
new name became "Pacific Crest Investments" (hereinafter the "Company") and its
common stock began trading under this new name with a new exchange symbol.
Following the public announcement of the Company's new name, the Company
received notice that another corporation had a name similar to Pacific Crest
Investments. In the interests of avoiding potentially prolonged and expensive
litigation, the Company agreed to change its name from Pacific Crest
Investments. Effective May 5, 2005, the Company's new name is Pacific Peak
Investments (hereinafter the "Company").
On March 22, 2005, the Company and one of its wholly-owned portfolio investment
companies, Total Sports Distribution, Inc., signed a Mutual Settlement and
Release Agreement with Collective Licensing International, LLC, the licensor of
the Airwalk apparel brand, and this agreement requires Total Sports
Distribution, Inc. to cease the selling and marketing of Airwalk apparel.
On June 6, 2005, the Company signed a Share Purchase Agreement with Titanium
Design Studio, Inc. ("TDS"), a Nevada corporation, whereby the Company invested
$200,000 in cash in exchange for 8% of the issued and outstanding common stock
of TDS.
On July 1, 2005, the Company and one of its wholly-owned portfolio investment
companies, Total Sports Distribution, Inc., signed a Mutual Settlement and
Release Agreement with Krash Distribution Inc., the licensor of TSABrand
apparel, and this agreement requires Total Sports Distribution, Inc. to
cease the selling and marketing of TSABrand apparel.
On July 8, 2005, the Company consummated the transactions contemplated by the
Share Purchase Agreement (dated June 28, 2005) with EON Beverage Group, Inc.
("EON") and, as a result, the Company has invested $400,000 in exchange for 9%
of the issued and outstanding common stock of EON.
Pursuant to Regulation S-X Rule 6, 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 in portfolio companies will be included in the Company's financial
statements.
Condensed Financial Statements
- --------------------------------
The accompanying condensed 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 June 30, 2005 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 States 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,
2004 audited financial statements on Form 10-K. The results of operations for
the interim periods presented are not necessarily indicative of the operating
results for the full years.
4
Reclassifications
- -----------------
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
Going Concern
- --------------
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the normal course of
business. As of June 30, 2005, the Company has an accumulated deficit of
$8,825,717 and had net losses totaling $874,173 for the six months ended June
30, 2005. Additionally, as of June 30, 2005, the Company had negative working
capital of $430,936. These factors, among others, raise substantial doubt about
the Company's ability to continue as a going concern. The Company intends to
fund operations through debt and equity financing arrangements which management
believes may be insufficient to fund its capital expenditures, working capital
and other cash requirements for the fiscal year ending December 31, 2005.
Therefore, the Company will be required to seek additional funds to finance its
long-term operations. The successful outcome of future activities cannot be
determined at this time and there is no assurance that, if achieved, the Company
will have sufficient funds to execute its intended business plan or generate
positive operating results.
Management plans to take the following steps in response to these issues:
Revenue
- -------
It has been determined that, as an investment company, the Company will only
invest in/acquire cash flow positive and profitable businesses or businesses
most likely to generate positive cash flow in the foreseeable future. It is
intended that these entities will have good growth potential as a result of
access to capital and/or additional management acumen.
As part of this strategic process, the Company will look beyond action sports
apparel for acquisition opportunities so as to include all consumer product
categories that have the potential for a positive return on investment. It is
believed that this new direction will both reduce the risk for the Company and
its shareholders as well as provide the best opportunity for long-term
shareholder value.
Regarding two of the Company's portfolio investment companies, Unboxed
Distribution, Inc. and Total Sports Distribution, Inc., it had become clear that
profitability in both entities was not possible in the near future. As noted
above, the Company has signed Mutual Settlement and Release Agreements to cease
the licensing agreements with the licensors for the Airwalk, Bluetorch and
TSABrand labels. There were significant future guaranteed royalty amounts
payable by these portfolio investment companies in accordance with the existing
licensing agreements and so it was in the best interests of the Company and the
portfolio investment companies to mitigate the substantial potential losses.
Accordingly, it has been determined that it is not in the best interests of the
Company's shareholders to continue the flow of capital to these two portfolio
investment companies.
The Company will, however, continue to fund and invest in Island Tribe,
Inc., Titanium Design Studio, Inc. and EON Beverage Group, Inc. (see Note
2).
Financing
- ---------
On June 19, 2003, an Offering Circular was filed authorizing the Company to
raise up to $3,000,000 via sale of its common stock. Through June 30, 2005, the
Company has raised $2,267,057 against this limit. This sum includes both cash
proceeds and conversion of debt.
On June 24, 2004, another Offering Circular was filed authorizing the Company to
raise up to $5,000,000 via sale of its common stock.
On May 18, 2005, the Company signed a non-binding Term Sheet ("TS") with Interim
Capital Corp., representing certain investors. This TS summarized the basic
terms and conditions for the sale of a total of 20,800,000 common shares of the
Company for a total of $1,040,000. As of June 30, 2005, the Company had sold
7,000,000 common shares of this total, resulting in cash received by the Company
of $275,000, with the balance of $75,000 included in common stock subscriptions
receivable in the accompanying balance sheet.
On June 25, 2005, the Company filed a new Offering Circular to raise an
additional $5,000,000 via sale of its common stock.
5
On July 8, 2005, the Company sold an additional 10,000,000 common shares related
to this TS, resulting in additional cash received by the Company of $500,000.
On July 27, 2005, the Company sold an additional 1,080,000 common shares related
to this TS, resulting in additional cash received by the Company of $54,000.
On August 8, 2005, the Company sold an additional 720,000 common shares related
to this TS, resulting in additional cash received by the Company of $36,000.
On July 5, 2005, in an additional transaction to the TS, the Company and Interim
Capital Corp., an agent for certain investors, signed a funding agreement for
the sale of a total of 14,200,000 common shares of the Company for a total of
$994,000. No shares have been sold by the Company as part of this funding
agreement.
Whereas the Company believes it will be successful with its plans, due to Market
factors and economic conditions, no assurance can be given that additional
financing will be available on favorable terms or at all.
The financial statements do not include any adjustments related to
recoverability and classification of the carrying amounts of assets or the
amounts and classification of liabilities that might result should the Company
be unable to continue as a going concern.
(2) INVESTMENTS
Island Tribe, Inc.
- --------------------
As noted above, the Company purchased a 51% interest in Island Tribe, Inc.
("Island Tribe"), a surf apparel company. The consideration for this investment
was $372,000, consisting of 12,000 restricted common shares (30,000,000 pre
reverse stock split) in the Company 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. The Company is obligated to pay
certain royalty commissions on future sales of Island Tribe product for the
duration of the agreement, which commenced in 2004 and concludes in 2016. These
royalty commissions range from 8% in 2004 to 2% in 2016 and only become due and
payable each year when annual sales of $372,000 are achieved.
Titanium Design Studio, Inc.
- -------------------------------
As noted above, on June 6, 2005 the Company invested $200,000 to acquire a 8%
ownership interest in Titanium Design Studio, Inc. ("TDS").
Valuation of Investments
- --------------------------
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.
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 that the owner
might reasonably expect to receive for them upon their current sale. Methods
that 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 that 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.
6
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 the absence of a recent appraisal, the value of the
investments 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.
Based on the previous methodology, the Company determined that its investments
in its portfolio companies should be valued at June 30, 2005 as follows:
- Unboxed Distribution, Inc. ("Unboxed")
-----------------------------------------
Unboxed has been valued at $0 due to the Company's decision to
discontinue the flow of capital to this entity. The sales for Unboxed
were progressing slowly and not fast enough to justify the minimum
royalties due in 2005 ($130,000) and 2006 ($300,000). As previously
noted, on March 12, 2005, Unboxed and Bluetorch signed a Mutual
Settlement and Release Agreement with the licensor of the Bluetorch
label. The write down in the investment in Unboxed for the year ended
December 31, 2004 totaled $927,154.
- Total Sports Distribution, Inc. ("Total Sports")
-----------------------------------------------------
Total Sports has been valued at $0, due to the Company's decision to
discontinue the flow of capital to this entity. It had become apparent
that the anticipated revenue flow for 2005 was not progressing at the
rate the board of directors and management anticipated and would fall
well short of expectations. As the board of directors and management
looked at the Company's contractual royalty minimums for the Airwalk
label for 2005 and beyond, it became clear that the Company was not
going to be able to meet the revenue objectives from which the royalty
minimums were based. These minimums were $920,000 in 2005 with an
additional $3,960,000 due between 2006 and 2008. In addition, this
situation was going to negatively impact Total Sports' ability to
market and sell the TSABrand label. As previously noted, on March 22,
2005, Total Sports and Bluetorch signed a Mutual Settlement and
Release Agreement with the licensor of the Airwalk label. The write
down in the investment in Total Sports for the year ended December 31,
2004 totaled $484,658.
- Island Tribe, Inc. ("Island Tribe")
---------------------------------------
Island Tribe has been valued at $395,177, being the purchase price of
$372,000, as per the Stock Purchase Agreement dated August 20, 2004,
plus additional cash investments by the Company during the fourth
quarter of 2004 and the first half of 2005. The Company is continuing
with Island Tribe since it is not subject to any guaranteed minimum
royalties, unlike Unboxed and Total Sports.
The fair value of $395,177 represents the Company's actual investment,
in accordance with the valuation methodology described above.
- Titanium Design Studio, Inc. ("TDS")
----------------------------------------
Titanium Design Studio, Inc. has been valued at $200,000, being the
price paid by the Company on June 6, 2005 for a 8% ownership of TDS.
7
The fair value of $200,000 represents the Company's actual investment,
in accordance with the valuation model described above.
(3) DEBT
As of December 31, 2004, the Company had convertible debentures of $8,824, net
of discount of $234,926. During the six months ended June 30, 2005, the
debenture holder converted these debentures into common stock.
The convertible feature of the above convertible debentures provides for a rate
of conversion that is below market value. Such feature is normally characterized
as a "beneficial conversion feature" ("BCF"). Pursuant to Emerging Issues Task
Force ("EITF") Issue No. 98-5, "Accounting For Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratio" and
EITF Issue No. 00-27, "Application of EITF Issue No. 98-5 To Certain Convertible
Instruments," the Company has estimated the fair value of such BCF to be
approximately $375,000 related to these debentures and recorded such amount as a
debt discount. Such discount is being amortized to interest expense over the
term of the notes. Amortization expense during the six months ended June 30,
2005 was $306,500.
(4) EQUITY
Common Stock:
- -------------
Effective April 18, 2005, the Company implemented a 2500-to-1 reverse split of
its common stock. Immediately following this reverse stock split, there were
218,500 issued and outstanding common shares of the Company.
During the three months ended June 30, 2005, the Company issued 7,000,000 shares
of common stock, all issued after the 2500-to-1 reverse stock split which became
effective on April 18, 2005, resulting in cash received by the Company of
$275,000, with the balance of $75,000 included in common stock subscriptions
receivable.
On March 17, 2005, the Company issued a convertible debenture in a principal
amount of $50,000, convertible into 20,000 common shares (50,000,000 pre reverse
split). During the three months ended March 31, 2005, the debenture holder
converted $30,000 of the debenture into 12,000 shares of common stock
(30,000,000 pre reverse split). During the three months ended June 30, 2005, the
debenture holder had converted the remaining $20,000 of the debenture into 8,000
common shares (20,000,000 pre reverse split), which were previously issued and
held in escrow.
On May 18, 2005, the board of directors of the Company adopted a resolution
instructing the management of the Company to discuss, with the holders of shares
of preferred series C stock ("Series CPS"), a recommendation of the Company's
board of directors that the holders of Series CPS agree to convert Series CPS to
restricted common shares, which would be issued with the restrictive legend
under Rule 144, and so could not be sold for at least twelve (12) months.
The purpose of the above resolution was to provide the Company the opportunity
to secure capital financing to allow the Company to survive and move forward for
the benefit of all shareholders.
Further to the subsequent discussions by Company management with the holders of
Series CPS, all 10,000,000 Series CPS were converted to 10,000,000 common
shares, the substantial majority of which were restricted common shares.
Preferred Stock:
- -----------------
The Company is authorized to issue up to 50,000,000 shares of preferred stock at
$0.001 par value.
Convertible preferred series A stock ("Series APS"), 400,000 shares originally
- --------------------------------------------------------------------------------
authorized; None outstanding at June 30, 2005.
- ----------------------------------------------------
The Series APS were issued in connection with an Asset Purchase Agreement and
were cancelled in connection with the rescission of the transactions
contemplated by the Asset Purchase Agreement in November 2003.
Convertible preferred series B stock ("Series BPS"), 610,000 shares
- ---------------------------------------------------------------------------
authorized; 132,500 issued and outstanding at June 30, 2005.
- --------------------------------------------------------------------
8
On June 14, 2005, holders of Series BPS converted 8,000 shares of Series BPS
into 57,469 common shares.
The holders of the Series BPS are entitled to receive dividends on the number of
shares of Series BPS, which are converted into shares of Company common stock,
at the dividend rate of 6% of the conversion price for the number of shares
converted, payable in cash or in common stock. The dividend rate is based upon
the ten (10) day average of the lowest closing bid price prior to the date of
conversion ("Market Price").
The Series BPS are convertible into common stock based upon a conversion price
equal to the number of shares being converted divided by 80% of the Market Price
described in the preceding paragraph. All shares of Series BPS outstanding three
(3) years from the date of issuance shall automatically be converted into common
stock based upon the foregoing formula.
Series BPS have preferred treatment upon liquidation of the Company. The holders
of Series BPS are entitled, upon liquidation, dissolution or winding up of the
Company, to receive 120% of the outstanding unconverted principal amount of the
Series BPS before the holders of common shares and any other class or series of
preferred stock.
Series BPS holders are entitled to one vote per share of Series BPS.
Series BPS, voting together as a class, have the right to elect one (1)
director.
Convertible preferred series C stock ("Series CPS"), 10,000,000 shares
- ------------------------------------------------------------------------------
authorized; None outstanding at June 30, 2005.
- ----------------------------------------------------
As noted above, during the three months ended June 30, 2005, all 10,000,000
Series CPS were converted to 10,000,000 common shares, the substantial majority
of which were restricted common shares.
The holders of the Series CPS are not entitled to receive dividends and are
convertible into common stock of the Company in an amount equal to the number of
Series CPS being converted. In connection with any reorganizations, merger,
consolidation or sale of assets involving the Company, the number of Series CPS
shares outstanding and the number of shares of common stock into which the
Series CPS are convertible will not be affected by any such capital
reorganization.
There is no liquidation preference for Series CPS holders.
Series CPS, voting together as a class, have the right to elect two (2)
directors but have no other voting rights.
(5) LOSS PER SHARE
Effective April 18, 2005, the Company implemented a 2500-to-1 reverse stock
split for the Company's common stock. In accordance with Statements of Financial
Accounting Standards No. 128 Earnings Per Share, as amended, the per-share
computations below reflect such changes in the number of shares. The following
is a reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations for the three and six months ended June 30, 2005
and 2004:
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2005 JUNE 30, 2004
------------- ------------
Numerator for basic and diluted loss per share:
Net loss $ (874,173) $ (502,094)
Denominator for basic and diluted loss per share:
Weighted average shares (assuming retroactive 2500-to-1 reverse stock split) 3,702,633 90,438
--------- ------
Basic and diluted loss per share $ (0.24) $ (5.55)
========== ==========
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2005 JUNE 30, 2004
------------- ------------
Numerator for basic and diluted loss per share:
Net loss $ (354,718) $ (230,630)
Denominator for basic and diluted loss per share:
Weighted average shares (assuming retroactive 2500-to-1 reverse stock split) 7,174,618 94,522
--------- ------
Basic and diluted loss per share $ (0.05) $ (2.44)
========== ==========
9
(6) COMMITMENTS AND CONTINGENCIES
General
- -------
The Company's commitments and contingencies include the usual obligations of a
BDC in the normal course of business. In the opinion of management, these
matters are not expected to have a material adverse effect on the Company's
financial position and results of operations. In addition, whereas the Company
may be indirectly impacted by claims and other obligations that arise at its
portfolio companies, management is not aware of any such claims.
Regulatory Compliance
- ----------------------
As a BDC, the Company operates in a highly regulated environment and must comply
with the requirements of the 1940 Act. The Company endeavors to be in compliance
with the requirements of the Act as part of its investment strategy and
oversight functions. Whereas compliance with such laws and regulations requires
interpretation, the Company believes it is in compliance with such requirements
at June 30, 2005. However, no assurances can be given that such requirements
will not change or that differing interpretations could result in non-compliance
or that such matters, if they arise, will be insignificant to the Company's
financial position or results of operations.
(7) SUBSEQUENT EVENTS
TSABrand Apparel (Total Sports Distribution, Inc.)
- -------------------------------------------------------
On July 1, 2005, the Company and one of its wholly-owned portfolio investment
companies, Total Sports Distribution, Inc., signed a Mutual Settlement and
Release Agreement with Krash Distribution Inc., the licensor of TSABrand
apparel, and this agreement requires Total Sports Distribution, Inc. to
cease the selling and marketing of TSABrand apparel.
Financing
- ---------
On July 5, 2005, in an additional transaction to the Term Sheet detailed above,
the Company and Interim Capital Corp., an agent for certain investors, signed a
funding agreement for the sale of a total of 14,200,000 common shares of the
Company for a total of $994,000. As of the date of this report, no shares have
been sold by the Company as part of this funding agreement.
On July 8, 2005, as part of the Term Sheet ("TS") detailed above, the Company
sold an additional 10,000,000 common shares related to this TS, resulting in
additional cash received by the Company of $500,000.
On July 27, 2005, as part of the TS detailed above, the Company sold an
additional 1,080,000 common shares related to this TS, resulting in additional
cash received by the Company of $54,000.
On August 9 , 2005, as part of the TS detailed above, the Company sold an
additional 720,000 common shares related to this TS, resulting in additional
cash received by the Company of $36,000.
EON Beverage Group, Inc. ("EON")
- ------------------------------------
On July 8, 2005, the Company consummated the transactions contemplated by the
Share Purchase Agreement (dated June 28, 2005) with EON and, as a result, the
Company has invested $400,000 in exchange for 9% of the issued and outstanding
common stock of EON.
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 the Company's future financial performance. In some cases,
you can identify forward-looking statements by terminology such as "may",
"will", "should", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential", "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 those indicated by such
forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels 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.
Management's discussion and analysis should be read in conjunction with the
Company's financial statements and the notes herein.
10
Critical Accounting Policies and Estimates
- ----------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses the Company's 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, valuation of investments in portfolio companies,
accrued expenses, financing operations, 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
results of which form the basis for making judgments about the carrying value of
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 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 Financial
Statements" included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2004.
Results of Operations
- -----------------------
For the six months ended June 30, 2005, the Company has incurred an operating
loss of $874,173. The loss consists primarily of interest related to financing
activities of $306,500, salaries and wages of $112,091 and consulting fees for
investment banking, investor relations, due diligence and legal of $253,935.
The loss for the six months ended June 30, 2004 was $502,094. The major
differences between the results of operations for the six months ended June
30, 2005 and 2004 are higher interest costs related to financing activities in
2005, write-off of advances to portfolio companies in 2004 and the increased due
diligence and legal costs associated with investments in portfolio companies in
2005.
For the three months ended June 30, 2005, the Company has incurred an operating
loss of $354,718. The loss consists primarily of salaries and wages of
$69,873 and consulting fees for investment banking, investor relations, due
diligence and legal of $180,494.
The loss for the three months ended June 30, 2004 was $230,630. The major
difference between the results of operations for the three months ended March
31, 2005 and 2004 is the due diligence and legal costs associated with
investments in portfolio companies in 2005.
Liquidity and Capital Resources
- ----------------------------------
We had cash totaling $2,147 as of June 30, 2005. Our other assets primarily
consist of investments in portfolio companies of $595,177. Total assets at June
30, 2005 were $634,497. At June 30, 2005 our total liabilities were $452,900,
which were represented primarily by $427,900 of accounts payable and accrued
expenses.
As of June 30, 2005, the Company had no revenues and incurred an accumulated
deficit totaling $8,825,717 for the period from August 26, 2002 (inception)
through June 30, 2005. Additionally, as of June 30, 2005, the Company had
negative working capital of $430,936. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
The Company intends to fund operations through debt and equity financing
arrangements which management believes may be insufficient to fund its capital
expenditures, working capital and other cash requirements for the fiscal year
ending December 31, 2005. Therefore, the Company will be required to seek
additional funds to finance its long-term operations. The successful outcome of
future activities cannot be determined at this time and there is no assurance
that, if achieved, the Company will have sufficient funds to execute its
intended business plan or generate positive operating results.
Our Plan of Operation for the Next Twelve Months
- --------------------------------------------------------
As stated above, it has been determined that, as an investment company, we will
only invest in/acquire cash flow positive and profitable businesses or
businesses most likely to generate positive cash flows in the foreseeable
future. These entities will have good growth potential as a result of access to
capital and/or additional management acumen.
As part of this strategic process, the Company will look beyond action sports
apparel for acquisition opportunities so as to include all consumer product
categories that have the potential for a positive return on investment. The
board of directors and management believe that this new direction will both
reduce the risk for the Company and its shareholders as well as provide the best
opportunity for long-term shareholder value.
11
Regarding two of the Company's portfolio investment companies, Unboxed
Distribution, Inc. and Total Sports Distribution, Inc., it is clear that
profitability in both entities is not possible in the near future. As noted
above, it has been determined that it is not in the best interests of the
Company's shareholders to continue the flow of capital to these two
portfolio investment companies and these investments were written-off as of
December 31, 2004.
The Company will, however, continue to fund and invest in Island Tribe, Inc.,
Titanium Design Studio, Inc. and EON Beverage Group, Inc.
Off Balance Sheet Arrangements
- ---------------------------------
None.
Contractual Obligations
- ------------------------
None.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business activities contain elements of risk. Company management
considers the principal types of risk to be valuations of investments in
portfolio companies 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 BDC, we plan to invest in liquid securities including debt and equity
securities of primarily private companies. Our investments are generally subject
to restrictions on resale and generally have no established trading market. Our
policy is to value our investments at fair value. There is no single standard
for determining fair value in good faith. As a result, determining fair
value requires that judgment be applied to the specific facts and circumstances
of each portfolio investment while employing a consistently applied valuation
process for each type of investment.
The board of directors 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. The
Company's valuation policy considers the fact that no ready market exists for
substantially all of the securities in which the Company invests. The Company's
valuation policy is intended to provide a consistent basis for determining the
fair value of the portfolio. The Company will record unrealized depreciation on
investments when the Company believes that an equity security is doubtful or
when the enterprise value of the company does not currently support the cost of
the Company's debt or equity investment. Conversely, the Company will record
unrealized appreciation if it determines that the underlying portfolio company
has appreciated in value and, therefore, the Company's equity security has also
appreciated in value. The values of any 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 the Company's investments in its
portfolio companies, 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 the Company's existing investments may adversely
affect its ability to dispose of debt and equity securities at times when it may
be otherwise advantageous for the Company to liquidate such investments. In
addition, if the Company was forced to immediately liquidate some or all of the
investments in the portfolio companies, the proceeds of such liquidation may be
significantly less than the current value of such investments.
Because the Company may borrow money to make investments, the Company's net
investment income before net realized and unrealized gains or losses, or net
investment income, is dependent upon the difference between the rates at which
the Company borrows funds and the rate at which the Company invests 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 the Company's net
investment income. In periods of rising interest rates, the Company's cost of
funds would increase, which would reduce the Company's net investment income.
The Company may use a combination of long-term and short-term borrowings and
equity capital to finance its investing activities.
12
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
- -----------------------------------------
The Company's board of directors and management, including the Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures,
as defined in Rule 13(a)-15(e) and 15(d)-15(e) of the Exchange Act. Based upon
that evaluation, the Company's board of directors and management, including the
CEO and CFO, concluded that, as of June 30, 2005, the Company's disclosure
controls and procedures were effective in alerting management on a timely basis
to material Company information that would be required to be included in our
periodic filings with the SEC.
Based on their most recent evaluation as of the Evaluation Date, the CEO and the
CFO have also concluded that the other controls and procedures, that are
designed to ensure that information required to be disclosed in our periodic
filings with the SEC, are adequate.
Changes in Internal Control
- ------------------------------
There were no significant changes made in the Company's internal controls over
financial reporting, during the three months ended June 30, 2005, that have
materially affected, or are reasonably likely to materially affect, these
internal controls. Thus, no corrective actions, with regard to significant
deficiencies or material weaknesses, were necessary.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the six months ended June 30, 2005, the Company issued an aggregate Of
7,047,857 shares of common stock, assuming the retroactive application of the
2500-to-1 reverse stock split that was effective on April 18, 2005.
During the quarter ended June 30, 2005, the Company issued an aggregate of
7,000,000 shares (post reverse split) of its common stock.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Vote of Shareholders - April 19, 2005:
- -----------------------------------------
A majority of shareholders, who collectively owned greater than 50% of the
outstanding common stock of the Company as of April 19, 2005, adopted
resolutions by written consent changing the name of the Company from Bluetorch
Inc. to Pacific Crest Investments and re-stating that the authorized capital of
the Company is one billion (1,000,000,000) shares, of which nine hundred and
fifty million (950,000,000) shares shall be designated common stock, with a par
value of $0.001 per share, and fifty million (50,000,000) shares shall be
designated preferred stock, with a par value of $0.001 per share.
The total number of issued and outstanding common shares of the Company as of
April 19, 2005 was 450,400 and the number of common shares held by the
shareholders executing this written consent was 246,904, which constituted 54.8%
of the total issued and outstanding common shares of the Company.
Vote of Shareholders - May 4, 2005:
- -----------------------------------
A majority of shareholders, who collectively owned greater than 50% of the
outstanding common stock of the Company as of May 4, 2005, adopted a resolution
by written consent changing the name of the Company from Pacific Crest
Investments to Pacific Peak Investments.
The total number of issued and outstanding common shares of the Company as of
May 4, 2005 was 472,900 and the number of common shares held by the shareholders
executing this written consent was 246,904, which constituted 52.2% of the total
issued and outstanding common shares of the Company.
Vote of Shareholders - May 16, 2005:
- ------------------------------------
A majority of shareholders, who collectively owned greater than 50% of the
outstanding common stock of the Company as of May 16, 2005, adopted a resolution
by written consent authorizing the Company to issue shares of its common stock
at a price that is below its net asset value.
The total number of issued and outstanding common shares of the Company as of
May 16, 2005 was 495,400 and the number of common shares held by the
shareholders executing this written consent was 262,254 which constituted 52.9 %
of the total issued and outstanding common shares of the Company.
13
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.
PACIFIC PEAK INVESTMENTS
August 10, 2005 By: /s/ Bruce MacGregor
-------------------------------
Bruce MacGregor, President
14