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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: March 31, 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)
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 May 6, 2004, the registrant had a total of 237,505,252 shares of common
stock issued and outstanding.
BLUETORCH, INC,
BALANCE SHEET
MARCH 31, 2004 DECEMBER 31, 2003
---------------- -------------------
ASSETS
Investment in Portfolio Companies . . . . . . . . . . . . . . . $ 853,959 $ 559,405
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,748 517
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,557 -
---------------- -------------------
$ 988,264 $ 559,922
================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . $ 47,961 $ 106,156
Deposits Payable. . . . . . . . . . . . . . . . . . . . . . . . - -
Loans payable, related parties. . . . . . . . . . . . . . . . . 14,000 26,000
---------------- -------------------
Total current liabilities . . . . . . . . . . . . . . . 61,961 132,156
---------------- -------------------
STOCKHOLDERS' EQUITY:
Preferred Series B, $.001 par value; 190,000 shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . . 190 480
Preferred Series C, $.001 par value; 10,000,000 shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . . 10,000 10,000
Common Stock, $.001 par value;950,000,0000 shares
authorized; 226,705,252 and 190,372,632 shares outstanding at
March 31, 2004 and December 31, 2003 respectively . . . . . . 90,610 54,277
Common stock subscriptions receivable . . . . . . . . . . . . . (112,500) (112,500)
Additional Paid in Capital. . . . . . . . . . . . . . . . . . . 6,702,262 5,844,055
Deficit accumulated during the development stage. . . . . . . . (5,764,259) (5,368,546)
---------------- -------------------
Total stockholders' equity. . . . . . . . . . . . . . . 926,303 427,766
---------------- -------------------
$ 988,264 $ 559,922
================ ===================
BLUETORCH, INC,
STATEMENT OF OPERATIONS
FOR THE FOR THE
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2004 MARCH 31, 2003
---------------- ----------------
INCOME . . . . . . . . . . . . . . $ - $ -
---------------- ----------------
EXPENSES -
general and administrative . . . (395,713) (419,151)
---------------- ----------------
Total expenses . . . . . (395,713) (419,151)
---------------- ----------------
NET LOSS . . . . . . . . . . . . . $ (395,713) $ (419,151)
================ ================
BASIC AND DILUTED - loss per share (0.00) (0.01)
================ ================
WEIGHTED AVERAGE COMMON SHARES -
basic and diluted. . . . . . . . 215,886,652 33,884,253
================ ================
BLUETORCH, INC,
SCHEDULE OF INVESTMENTS
DESCRIPTION PERCENT FAIR
COMPANY OF BUSINESS OWNERSHIP COST VALUE AFFILIATION
Unboxed Distribution, Inc.. . . Extreme Sports 100% $727,698 $727,698 (1) Yes
Apparel
Total Sports Distribution, Inc. Extreme Sports 100% $126,261 $126,261 (1) Yes
Apparel
(1) Fair value determined by the Company's Board of Directors based on the actual
cost of investment.
See also Note 2 for further explanation on the Company's methods of
determining fair values.
BLUETORCH, INC,
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION ON
AUGUST 26, 2002 THROUGH MARCH 31, 2004
Series A Series B Series C Common Stock
Preferred Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
At inception on August 26, 2002, as
restated for effect of reverse
merger with Aussie Apparel
(see Note 1 ). . . . . . . . . . . . - $ - - $ - - $ - 97,500,000 $ 1,000
Shares issued in connection with
merger with Aussie Apparel,
October 29, 2002 (see Note 1 ). . . . - - 610,000 610 39,590,430 2,639
Shares issued for acquisition
of tradenames . . . . . . . . . . . . 400,000 1,058,824 31,500,000 2,100
Net loss December, 31 2002. . . . . . . - - - - - -
--------- ------------ --------- ------ ------------ --------
Balance at December 31, 2002. . . . . . 400,000 1,058,824 610,000 610 - - 168,590,430 5,739
Shares issued for compensation,
compensation, services and
deferred offering costs 10,000,000 10,000 6,191,873 4,963
Shares issued to a foreign
entity for resale,
and recorded on balance sheet
as stock subscription receivable 750,000 50
Shares issued in connection
with conversion
of convertible debentures 525,000 35
Creation of stock option / deferred
Compensation plan
Shares issued in connection
with rescission
of employee stock options 682,147 682
Shares issued in connection
with stock subscription 18,545,818 18,321
Rescission of stock option/deferred
compensation plan
Issuance of convertible debenture,
with beneficial conversion feature
Shares issued in connection
with conversion
of series B preferred stock (130,000) (130) 5,087,364 5,087
Shares issued in settlement of
notes payable 18,200,000 18,200
Warrants issued in connection
with license/
option purchase agreement
Shares cancelled in
connection with rescission of
trademark acquisition. . . . . . . . (400,000) (1,058,824) (31,500,000) (2,100)
Shares issued as
settlement expense
in relation to rescission
trademark acquisition 3,300,000 3,300
Net loss December 31, 2003
Balance at December 31, 2003. . . . . . - $ - 480,000 $ 480 10,000,000 $10,000 190,372,632 $54,277
Shares issued in connection
with stock subscription 22,500,000 22,500
Shares issued in connection
with conversion
of series B preferred stock (260,000) (260) 12,165,953 12,166
Shares issued in connection
with interest and
penalties on conversion
of series B preferred stock 1,666,667 1,667
Series B preferred stock redeemed (30,000) (30)
Net loss March 31, 2004
Balance at March 31, 2004 . . . . . . . - - 190,000 $ 190 10,000,000 $10,000 226,705,252 $90,610
BLUETORCH, INC,
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION ON
AUGUST 26, 2002 THROUGH MARCH 31, 2004
(CONTINUED)
Deficit
accum-
Less stock Stock Add- ulated Total
sub- Less defer- options Treasury itional during the stock-
scription red offering /deferred stock paid-in development holders'
receivable cost comp'sation receivable capital stage equity
---------- ---- ----------- ---------- ------- ----- ------
At inception on August 26,
2002, as
restated for effect of reverse
merger with Aussie Apparel
(see Note 1 ). . . . . . . . . $ - $ - $ - $ - $ - $ - $ 1,000
Shares issued in connection with
merger with Aussie Apparel,
October 29, 2002 (see Note 1 ) 2,711 - 5,960
Shares issued for acquisition
of tradenames 4,722,900 5,783,824
Net loss December, 31 2002 - (136,061) (136,061)
-------- -------- ---------- -------- ------- -------- ---------
Balance at December 31, 2002. . . - - - - 4,725,611 (136,061) 5,654,723
Shares issued for
compensation services, and
deferred offering costs 1,164,900 1,179,863
Shares issued to a foreign -
entity for resale, and
recorded on balance sheet
as stock subscription
receivable . . . . . . . . . . (112,500) 112,450 -
Shares issued in connection -
with conversion
of convertible debentures 78,715 78,750
Creation of stock option/
deferred
compensation plan (2,784,600) 2,784,600 -
-
Shares issued in connection -
with rescission of
employee stock options 47,068 47,750
Shares issued in connection -
with stock subscription 641,492 659,813
Rescission of stock -
option/deferred
compensation plan 2,784,600 (380,250) 2,404,350
Issuance of convertible -
debenture with
beneficial conversion feature 8,000 8,000
Shares issued in connection
with conversion of
series B preferred stock (4,957) -
Shares issued in settlement
of notes payable 479,300 497,500
Warrants issued in connection
with license/
option purchase agreement 418,326 418,326
Shares cancelled in
connection with rescission of
trademark acquisition - (4,722,900) (5,783,824)
Shares issued as settlement
expense in relation to
rescission of trademark - 491,700 495,000
acquisition
Net loss December 31, 2003 (5,232,485) (5,232,485)
-------- -------- ---------- -------- ---------- -------- ---------
Balance at December 31, 2003. . . $(112,500) $ - $ - $ - $ 5,844,055 $(5,368,546) $ 427,766
Shares issued in connection
with stock subscription 841,750 864,250
Shares issued in connection
with conversion
of series B preferred stock (11,906) -
Shares issued in
connection with
interest and penalties
on conversion of
series B preferred stock 58,333 60,000
Series B preferred
stock redeemed (29,970) (30,000)
Net loss March 31, 2004 (395,713) (395,713)
-------- -------- ---------- -------- ------- -------- ---------
Balance at March 31, 2004 . . . . $(112,500) - $ - $ - $ 6,702,262 (5,764,259) 926,303
BLUETORCH, INC,
STATEMENT OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31
2004 2003
---------- ----------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $(395,713) $(419,151)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES -
Costs associated with issuing preferred and
Common stock at a discount . . . . . . . . . . . . . . . 124,250 -
Legal expense associated with Series B conversion . . . . 2,950 -
Shares issued for settlement of interest on Series B. . . 50,000 -
Stock Issued for employee compensation/services . . . . . - 124,750
Stock Issued for debt conversion costs. . . . . . . . . . - 78,750
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS -
Deposits . . . . . . . . . . . . . . . . . . . . . . . . (5,557) -
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . (58,195) 177,179
Loans Payable. . . . . . . . . . . . . . . . . . . . . . (12,000) -
Deposits payable . . . . . . . . . . . . . . . . . . . . - (10,000)
Preferred Series B shares to be issued . . . . . . . . . - 47,896
---------- ----------
Total adjustments. . . . . . . . . . . . . . . . . . 101,448 418,575
---------- ----------
Net cash used for operating activities . . . . . . . (294,265) (576)
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES -
Payments advanced to investments in portfolio investments (294,554) -
---------- ----------
Net cash provided (used) for investing activities. . (294,554) -
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES -
Proceeds from issuance of common stock . . . . . . . . . . 747,050 -
Purchase of Series B . . . . . . . . . . . . . . . . . . . (30,000) -
---------- ----------
Net cash provided (used) for investing activities. . 717,050 -
NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . 128,231 (576)
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . 517 912
---------- ----------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . $ 128,748 $ 336
========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND
INVESTING ACTIVITIES -
Shares issued for settlement of interest on Series B $50,000
=========
Conversion of 260,000 shares of Preferred Series B into
12,165,953 of Common Stock
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.
("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. 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.
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 consolidated financial
position as of March 31,2004, 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. The results of operations for the periods
ended March 31, 2004 and 2003 are note 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 March 31,
2004, the Company has generated no revenues and has incurred losses totaling
$5,764,259 for the period from August 26, 2002 (inception) through March 31,
2004. As March 31, 2004 the Company has working capital of $72,344 but the loss
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 with the ability to continue in existence:
REVENUE
On September 8, 2003 the Company's subsidiary, 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 shipment 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
and sweatshirts. In the second quarter of 2004, Unboxed will begin shipment to
retail of similar apparel product in the junior's side. In the second half of
2004, Unboxed will ship a dramatically broader Bluetorch apparel line (as
compared to first half of 2004) as the Company will include foreign sourced
product in young men's and junior's including wovens, knits and denim.
Bluetorch Inc. has been working to acquire additional trade names. On October
21,2003 the Company's other subsidiary, Total Sports finalized an agreement to
license (with an option to purchase) the True Skate Apparel ("TSABrand")
trademark. Total Sports will begin began shipping TSABrand apparel to retailers
in April 2004. This product line being shipped in the second quarter of 2004 is
limited as Total Sports inherited this product line upon licensing the brand.
Management feels that the TSABrand being shown to retailers for delivery
starting July 2004 is a broader, more fashion correct product line. Total Sports
will also look to broaden the distribution of where TSABrand has been
historically sold. In addition to the core shops that have carried TSABrand
since 1991, Total Sports is planning to expand the brand's presence into better
department stores and upper-end sporting goods retailers.
Total Sports will also start generating revenue as a result of its licensing
agreement for the Airwalk trademark in apparel. This agreement allows Total
Sports to begin shipping to retailers starting in July of 2004. Management is
projecting the Airwalk label to generate the largest percentage of revenue in
2004 from its portfolio of brands despite being limited to six months of
shipments in 2004.
On March 6th, 2004 Unboxed signed a letter of intent with Dome Exchange Pty. for
the licensing rights of Aztec Rose for the North American territory. Unboxed in
now working on completing a definitive agreement in order to ship initial
product for the spring 2005 season rather than the Holiday 2004 season as
originally projected.
FINANCING
On June 19, 2003, Bluetorch Inc. filed an Offering Circular that authorizes the
Company to raise up to $3,000,000 via sale of its common stock. Through March
31,2004 the Company has raised $1,812,185 against this limit, and an additional
$270,000 through May 6, 2004. These sums include both cash proceeds and
conversion of debt. This leaves $917,815 that Bluetorch management will continue
to pursue from the equity markets. Part of this will be pursued through an
agreement that Bluetorch entered into in October 2003 with an Investment
Agreement pursuant to which the investment advisor agreed to purchase $1,800,000
of the Company's common stock over a one year period ending October 2004.
Management will also endeavor to utilize debt financing (receivables and /or
inventory financing) to create additional working capital.
CONCLUSION
Management is projecting the majority of 2004's revenue to be created in the
second half of 2004 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 and Total Sports to continue to grow their operations and
revenues.
(2) Investments:
On August 21, 2003, the Company formed Unboxed for the purpose of owning and
operating the Bluetorch license agreement.
In October 2003, the Company formed Total Sports for the purpose of owning and
operating the True Skate Apparel brand ("TSABrand),".
Unboxed and Total Sports are wholly-owned subsidiaries ("Investments")of the
Company and are focused on providing apparel to the action sports area,
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.
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 investments ability to
continue as a going concern.
The Company's Board of Directors has determined the carrying value of it's
Investment Portfolio, in accordance with the Company's valuation policy, at
March 31,2004 to be the actual investment. The investment Unboxed should be
valued at $727,698 as of March 31,2004 comprised of the following: Warrants
issued and cash paid to acquire the licensing rights of $418,326 and $45,000
respectively, inventory of $26,635, sales commission draws paid of $1,500 and
advances from Bluetorch of $236,237.
As of March 31,2004, Total Sports has been valued at $126,261 comprised of the
following: cash paid to acquire the licensing rights of $54,000, inventory of
$25,000, sales commission draws paid of $1,500 and advances from Bluetorch of
$45,761.
(3) Equity
During the three months ended March 31, 2004, the Company issued 17,166,667
shares of common stock for cash per its Offering Circular. The shares were sold
at below market value and accordingly a stock discount expense of $124,250 has
been recognized on the accompanying financial statements.
(4) Subsequent Events
EQUITY TRANSACTIONS
Subsequent to March 31, 2004 and through May 6, 2004 the Company has issued
10,800,000 common shares in exchange for $270,000.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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 POLICY AND ESTIMATES
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses our consolidated 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 period. 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
deferred tax asset valuation. These accounting policies are described at
relevant sections in this discussion and analysis and in the notes to the
consolidated financial statements included in our Quarterly Report on Form 10-Q
for the quarter ended March 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
We had cash totaling $128,748 as of March 31, 2004. Our other assets were
security deposits of $5,557 for the Company's headquarters in Cerritos
California and investment in portfolio companies of $853,959; total assets at
March 31, 2004 were $988,264. At March 31, 2004 our total liabilities of $61,961
represented $47,961 of accounts payable and $14,000 of loans payable to related
parties.
OUR PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS
As we discussed in our recent 10K filing, 2003 was a year 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 ones. 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.
Unboxed shipped its first Bluetorch apparel product of young men's t-shirts to
retailers in the first quarter of 2004. As previously announced, Unboxed plans
to ship their first junior's t-shirts in the second quarter of 2004. Young men's
and junior's denim, tops and bottoms (knits & wovens) are scheduled for shipment
starting July 2004. As a result, the number of Bluetorch styles available for
shipment to retailers will more than triple in the third and forth quarters
versus the first quarter of 2004. Unboxed anticipates that this will generate a
greater volume of buying per retail account.
Unboxed had net sales of $43,524 in the first quarter with only young men's
t-shirts available for shipment. Unboxed opened and shipped 68 retail accounts
in the first quarter. The management of Unboxed is forecasting that the majority
of its net sales in 2004 will occur in the third and forth quarters. This
assumption is based on the significantly expanded product line and the ongoing
expansion of new retailers carrying Bluetorch apparel.
The third and forth quarter revenues for Unboxed will also reflect a higher per
unit wholesale price as the first quarter revenues were reliant on the lowest
wholesale cost product (t-shirts).
Total Sports shipped its first product (TSABrand) in April 2004. The licensing
agreement for Airwalk apparel allows Total Sports to begin shipping product in
July 2004. We have forecasted Airwalk to provide the majority of the revenue for
2004 out of the three brands presently within our subsidiary companies.
Given that the collective product lines of our two subsidiaries will more than
quadruple (1st quarter 2004 versus 2nd & 3rd quarters 2004), we are projecting a
dramatic spike in the collective net sales of our subsidiaries in the second
half of 2004 as compared to the first half. This assumption is also supported by
the additional retail accounts projected to be opened by both subsidiaries.
As previously announced, Unboxed did sign a letter-of-intent to license the
Aztec Rose junior's label for North America. Unboxed in now working on
completing a definitive agreement in order to ship initial product for the
spring 2005 season rather than the Holiday 2004 season as originally projected.
Bluetorch will continue to look and possibly make additional investments (in new
brands) on behalf of its existing subsidiaries and/or any new potential
subsidiary in 2004 and/or beyond.
As of March 31, 2004, the Company has not recognized any revenues from its
portfolio investments and for the three months ended March 31, 2004 has incurred
an operating loss of $395,713. The loss represents expenses including payroll of
$63,310, consulting fees for investment banking and investor relations of
$56,505 and professional fees incurred for legal and accounting services of
$26,961. Also included in the loss are expenses of $124,250 related to issuing
stock at a discount and interest and penalties of $50,000 related to the
retirement of 260,000 shares of Preferred Series B stock.
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 cash equivalents of $128,748 as of March 31, 2004. Subsequent to March
31, 2004, the Company received proceeds of $230,500 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. QUANTATATIVE AND QUALATATIVE 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 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 make.
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 b
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 timely alerting
him to material information relating to the Company 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.
PART II: OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
During the quarter ended March 31, 2004, the Company issued an aggregate of
36,332,620 shares of its common stock, of which 22,500,000 shares were issued
for cash pursuant to an Investment Agreement entered into on October 2003. The
remaining 13,832,620 shares were issued upon conversion of shares of the
Company's Series B Preferred Stock, of which 1,666,667 shares related to
interest and penalties.
In February and March 2004, the Company purchased for cash 30,000 shares of
its Series B Preferred Stock at a price of $1.00 per share, from the holder
thereof in a private transaction.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
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.
May 17, 2004 By:/s/ Bruce MacGregor
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Bruce MacGregor, President