10-Q 1 doc1.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended: September 30, 2004 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 000-3084133 BLUETORCH INC. --------------- (Exact name of registrant as specified in its charter) Nevada 90-0093439 ---------------------------- ------------------------ (State of Incorporation) (I.R.S. Employer I.D.) 12607 Hidden Creek Way, Suite S Cerritos, CA 90703 Telephone (562) 623-4040 (Address and telephone number of principal executive offices and principal place of business) 1 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such a period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 17, 2004, the registrant had a total of 358,397,254 shares of common stock issued and outstanding. TABLE OF CONTENTS PART I FINANCIAL INFORMATION PAGE Item 1: Financial Statements 3 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3: Quantitative and Qualitative Disclosures About Market Risk 10 0Item 4: Controls and Procedures 11 PART II OTHER INFORMATION Item 1: Legal Proceedings 11 Item 2: Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 11 Item 3: Defaults Upon Senior Securities 11 Item 4: Submission of Matters to a Vote of Security Holders 12 Item 5: Other Information 12 Item 6: Exhibits 12 SIGNATURES 12 2 PART I FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS
BLUETORCH INC. CONDENSED BALANCE SHEETS SEPTEMBER 30, 2004 DECEMBER 31, 2003 ------------------ ------------------- (Unaudited) ASSETS Investments in portfolio companies $1,363,253 $559,405 Cash - 517 Property & equipment, net 29,902 - Deposits 5,557 - --------------- ------------------- $1,398,712 $559,922 =============== =================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Bank overdraft $15,702 $- Accounts payable 127,102 106,156 Loans payable, related parties - 26,000 --------------- ------------------- Total current liabilities 142,804 132,156 --------------- ------------------- Stockholders' equity Preferred series B, $.001 par value; 610,000 shares authorized; 190,000 shares issued and outstanding 190 480 Preferred series C, $.001 par value; 10,000,000 shares authorized; 9,560,000 shares issued and outstanding 9,560 10,000 Common stock, $.001 par value; 950,000,0000 shares authorized; 331,491,363 and 190,372,632 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively 331,491 54,277 Common stock subscriptions receivable (162,600) (112,500) Additional paid in capital 7,418,865 5,844,055 Accumulated deficit (6,341,598) (5,368,546) --------------- ------------------- Total stockholders' equity 1,255,908 427,766 --------------- ------------------- $1,398,712 $559,922 =============== =================== The accompanying notes form an integral part of these financial statements.
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BLUETORCH INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003 --------------- --------------- --------------- --------------- Income. $ - $ - $ - $ - --------------- --------------- --------------- --------------- Expenses - General and administrative (170,958) (688,639) (673,052) (2,219,840) Loss on investments in portfolio (300,000) - (300,000) - companies Cost associated with cancellation of options - - - (2,784,600) -------------- -------------- --------------- --------------- Total expenses (470,958) (688,639) (973,052) (5,004,440) --------------- --------------- --------------- --------------- Net loss $ (470,958) $ (688,639) $ (973,052) $ (5,004,440) =============== =============== =============== =============== Basic and diluted - loss per share. $ (0.00) $ (0.00) $ (0.00) $ (0.03) =============== =============== =============== =============== Weighted average common shares - basic and diluted 273,853,984 182,325,574 242,131,495 175,599,031 =============== =============== =============== =============== The accompanying notes form an integral part of these financial statements.
BLUETORCH INC. SCHEDULE OF INVESTMENTS IN PORTFOLIO COMPANIES (Unaudited) SEPTEMBER 30, 2004 Description Percent Fair Company of Business Ownership Cost Value Affiliation Unboxed Distribution, Inc Extreme Sports 100% $917,576 $800,711 (1) Yes Apparel Total Sports Distribution, Inc Extreme Sports 100% $373,677 $190,542 (1) Yes Apparel Island Tribe Inc. Extreme Sports 51% $372,000 $372,000 (1) Yes Apparel ---------- ---------- Investments in Portfolio Companies $1,663,253 $1,363,253 ========== ========== (1) Fair value was determined by the Company's Board of Directors based on the actual cost of investment less an appropriate write down of inventory of the subsidiary companies. See also Note 2 for further explanation on the Company's methods of determining fair values. The accompanying notes form an integral part of these financial statements.
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BLUETORCH INC. STATEMENTS OF CASH FLOWS FOR NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (Unaudited) 2004 2003 ----------- ------------ Cash flows from operating activities: Net loss $(973,052) $(5,004,440) Adjustments to reconcile net loss to net cash used in operating activities: Costs associated with converting stock at a discount - 166,101 Depreciation and amortization expense 9,131 - Forgiveness of notes payable (14,000) - Stock Issued for employee compensation/services - 368,662 Stock Issued for debt conversion costs - 78,750 Series C Preferred shares issued in exchange for services - 367,500 Notes and loans payable issued for services - 220,048 Costs associated with cancellation of options - 2,784,600 Loss on investments in portfolio companies 300,000 530,000 Changes in operating assets and liabilities: Prepaid royalties - (45,000) Deposits (5,557) - Bank overdraft 15,702 - Accounts payable 20,946 99,463 Loans payable (12,000) - Deposits payable - (10,000) ----------- ------------ Net cash used in operating activities (658,830) (444,316) ----------- ------------ Cash flows from investing activities: Purchases of equipment (39,033) - Payments advanced to portfolio investment companies (731,848) - ----------- ------------ Net cash used in investing activities (770,881) - ----------- ------------ Cash flows from financing activities: Proceeds from issuance of common stock 1,403,849 437,332 Purchase of Series B preferred stock (30,000) - Issuance of convertible debentures - 25,000 Legal and other expense associated with stock issuance 5,345 - Stock issued for redemption on Series B 50,000 - ----------- ------------ Net cash provided by financing activities, 1,429,194 462,332 ----------- ------------ Net increase in cash (517) 18,016 Cash - beginning of period 517 912 ----------- ------------ Cash - end of period $ - $ 18,928 =========== ============ The accompanying notes form an integral part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS ORGANIZATION AND BUSINESS Mercury Software, a Nevada corporation, was incorporated on January 29, 1997 and its name was changed to MedEx Corp. on June 24, 2002. Aussie Apparel Group Ltd. 5 ("Aussie Apparel" or "the Company"), a Nevada corporation, was incorporated on August 26, 2002. In October 2002, MedEx Corp. issued an aggregate of 6,500,000 (pre-stock split) shares of its common stock to the shareholders of the Company in connection with the merger of the Company with MedEx Corp., whose name was then changed to "Aussie Apparel Group Ltd" on October 21, 2002. Since the shareholders of the Company became the controlling shareholders of MedEx after the exchange, the Company was treated as the acquirer for accounting purposes. Accordingly, the financial statements as presented here are the historical financial statements of the Company and include the transactions of MedEx only from the date of acquisition, using reverse merger accounting. The Company's name was changed to Bluetorch Inc. ("Bluetorch") effective November 3, 2003. On June 19, 2003, the Company became a "Business Development Company" ("BDC") pursuant to applicable provisions of the Investment Company Act of 1940 (the "Investment Company Act"). Until June 19, 2003 the Company was a development stage enterprise under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 7. Upon commencing their operations as a BDC, the Company no longer qualified under the guidelines of SFAS No. 7. Based on the Company's integration and management strategies, the Company will operate on a non-consolidated basis. Operations of the portfolio companies will be reported at the subsidiary level and only the appreciation or impairment of these investments will be included in the Company's financial statements. CONDENSED FINANCIAL STATEMENTS The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2004, and the results of operations and cash flows for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United Sates of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2003, audited financial statements on Form 10-K. The results of operations for the periods ended September 30, 2004 and 2003 are not necessarily indicative of the operating results for the full years GOING CONCERN The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. As of September 30, 2004, the Company has generated no revenues and has incurred losses totaling $6,341,598 for the period from August 26, 2002 (inception) through September 30, 2004. As of September 30, 2004, the Company has negative working capital of $142,804. The negative working capital combined with the losses since inception raises substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management plans to take the following steps that it hopes will be sufficient to provide Bluetorch Inc. with the ability to continue in existence: REVENUE On September 8, 2003, one of the Company's subsidiaries, Unboxed Distribution, Inc. ("Unboxed"), signed an agreement to license (with an option to purchase in 2006) the Bluetorch trademark for apparel and certain other product categories. Unboxed began limited shipments to retail of Bluetorch branded apparel in the first quarter of 2004 with a limited product line of domestically produced young men's embroidered and/or screened t-shirts. Bluetorch Inc. has been working to acquire additional trade names. On October 21, 2003, the Company's other subsidiary, Total Sports Distribution, Inc. ("Total Sports") finalized an agreement to license (with an option to purchase) the True Skate Apparel ("TSABrand") trademark. Management anticipates that Total Sports will generate revenue from apparel sales as a result of its licensing agreement for the Airwalk trademark. The Company has recently entered into sales agency agreements for selling of the Company's multiple brands. In accordance with a Stock Purchase Agreement dated August 20, 2004, the Company 6 purchased, via the issuance of its restricted common stock, a 51% interest in Island Tribe Inc. ("Island Tribe"), an innovative surf apparel company. The value of this investment is $372,000, with 30,000,000 restricted common shares in Bluetorch Inc. being issued at a per-share price of $0.0124. The effective date of this transaction is August 1, 2004. FINANCING On June 19, 2003, Bluetorch Inc. filed an Offering Circular that authorized the Company to raise up to $3,000,000 via sale of its common stock. Through September 30, 2004, the Company has raised $2,267,057 against this limit. This sum includes both cash proceeds and conversion of debt. On June 24, 2004, the Company filed a new Offering Circular that authorizes the Company to raise up to $5,000,000 via sale of its common stock. On October 18, 2004 and on November 1, 2004 the Company filed amendments to the June 24, 2004 Offering Circular, reducing the minimum offering share price to $0.004 and $0.0035, respectively. In addition, these amendments included a reduction in the authority to raise capital from $5,000,000 to $2,500,000. Subsequent to June 30, 2004 and through November 17, 2004, the Company has raised $487,600 against this limit. This leaves $2,012,400 available for Bluetorch management to pursue from the equity markets. Management will also endeavor to utilize debt financing (subsidiary receivables and/or inventory financing) to generate additional working capital. CONCLUSION Management is projecting that revenues will be generated in the next 12 months due to the quadrupling of the collective product lines as compared to the collective first half product line. Management is anticipating that the cash generated from the projected revenue, combined with cash raised from a combination of equity and debt financing, will allow Bluetorch and its subsidiaries, Unboxed, Total Sports and Island Tribe Inc., to continue as a going concern through December 31, 2005. Whereas the Company believes it will be successful with its plans, due to market factors and economic conditions, no assurance can be given that financing will be available on favorable terms or at all. (2) INVESTMENTS On August 21, 2003, the Company formed Unboxed for the purpose of owning and operating the Bluetorch license agreement. On October 21, 2003, the Company formed Total Sports for the purpose of owning and operating the True Skate Apparel brand ("TSABrand)". As noted above, the Company purchased a 51% interest in Island Tribe, a surf apparel company. The consideration for this investment was $372,000, consisting of 30,000,000 restricted common shares in Bluetorch Inc. being issued at a per-share price of $0.0124. The effective date of this transaction was August 1, 2004. Over the next 4 years, this purchase agreement provides for the Company to receive an additional 24% ownership of Island Tribe Inc. The Company is obligated to pay certain royalties/commissions on future sales of Island Tribe product. Unboxed and Total Sports are wholly-owned subsidiaries while Island Tribe is a 51% owned subsidiary ("Investments") of the Company and these portfolio companies are focused on providing apparel to the action sports markets, including surfing, wakeboarding and skateboarding. The Investments plan to develop high tech garments for athletes and participants in these sports as well as designing more casual lifestyle clothing aimed at a wider range of consumers. The portfolio companies plan to begin manufacturing and marketing under various brand names and will market apparel to high end sporting goods stores, mid-tier department stores, as well as specialty chains. The TSABrand name will be marketed to specialty shops and to high end sporting goods and specialty chains. As required by the SEC's Accounting Series Release ("ASR") 118, the investment committee of the Company is required to assign a fair value to all investments. To comply with Section 2(a)(41) of the Investment Company Act and Rule 2a-4 under the Investment Company Act, it is incumbent upon the board of directors to satisfy themselves that all appropriate factors relevant to the value of securities for which market quotations are not readily available have been considered and to determine the method of arriving at the fair value of each such security. To the extent considered necessary, the board may appoint persons to assist them in the determination of such value, and to make the actual calculations pursuant to the board's direction. The board must also, consistent with this responsibility, continuously review the appropriateness of the method used in valuing each issue of security in the Company's portfolio. The directors must recognize their responsibilities in this matter and, whenever technical assistance is requested from individuals who are not directors, the findings of such individuals must be carefully reviewed by the directors in order to satisfy themselves that the resulting valuations are fair. 7 No single standard for determining "fair value in good faith" can be laid down, since fair value depends upon the circumstances of each individual case. As a general principle, the current "fair value" of an issue of securities being valued by the board of directors would appear to be the amount which the owner might reasonably expect to receive for them upon their current sale. Methods, which are in accord with this principle, may, for example, be based on a multiple of earnings, or a discount from market of a similar freely traded security, or yield to maturity with respect to debt issues, or a combination of these and other methods. Some of the general factors which the directors should consider in determining a valuation method for an individual issue of securities include: 1) the fundamental analytical data relating to the investment; 2) the nature and duration of restrictions on disposition of the securities; and 3) an evaluation of the forces which influence the market in which these securities are purchased and sold. Among the more specific factors which are to be considered are: type of security, financial statements, cost at date of purchase, size of holding, discount from market value of unrestricted securities of the same class at time of purchase, special reports prepared by analysis, information as to any transactions or offers with respect to the security, existence of merger proposals or tender offers affecting the securities, price and extent of public trading in similar securities of the issuer or comparable companies, and other relevant matters. The board has arrived at the following valuation method for its investments. Where there is not a readily available source for determining the market value of any investment, either because the investment is not publicly traded, or is thinly traded, and in absence of a recent appraisal, the value of the investment shall be based on the following criteria: 1. Total amount of the Company's actual investment ("AI"). This amount shall include all loans, purchase price of securities and fair value of securities given at the time of exchange. 2. Total revenues for the preceding twelve months ("R"). 3. Earnings before interest, taxes and depreciation ("EBITD") . 4. Estimate of likely sale price of investment ("ESP"). 5. Net assets of investment ("NA"). 6. Likelihood of investment generating positive returns (going concern). The estimated value of each investment shall be determined as follows: - Where no or limited revenues or earnings are present, then the value shall be the greater of the investment's a) net assets, b) estimated sales price, or c) total amount of actual investment. - Where revenues and/or earnings are present, then the value shall be the greater of one time (1x) revenues or three times (3x) earnings, plus the greater of the net assets of the investment or the total amount of the actual investment. - Under both scenarios, the value of the investment shall be adjusted down if there is a reasonable expectation that the Company will not be able to recoup the investment or if there is reasonable doubt about the investment's ability to continue as a going concern. The Company's board of directors has determined the carrying value of its Investment Portfolio, in accordance with the Company's valuation policy, at September 30, 2004 to be the actual investment, less an appropriate write-down of inventory of $300,000, held by Unboxed and Total Sports. The investment in Unboxed is valued at $800,711 at September 30, 2004, comprised of the following: Warrants issued and cash paid to acquire the licensing rights of $418,326 and $45,000 respectively, inventory of $38,219, pre-paid expenses $9,185 and advances from Bluetorch of $289,981. This value represents a decrease of $42,862 from the value at June 30, 2004. As of September 30, 2004, Total Sports is valued at $190,542 comprised of the following: cash paid to acquire the licensing rights of $99,688, inventory of $59,893, trade show booths of $15,000, pre-paid expenses of $9,184, deposits of $4,498 and advances from Bluetorch of $2,279. This value represents a decrease of $126,939 from the value at June 30, 2004. (3) EQUITY During the nine months ended September 30, 2004, the Company issued 97,286,111 shares of common stock for cash per its Offering Circulars. The Company also issued 30,000,000 restricted common shares for the purchase of a 51% interest in Island Tribe Inc., valued at $372,000. The number of shares issued was based on a formula whereby Island Tribe was to receive $372,000 of the Company's restricted common stock. The common stock subscriptions receivable of $162,600 in the accompanying condensed balance sheet at September 30, 2004 consists of amounts receivable from investment banking companies related to the purchase of common shares. 8 A former employee returned 450,000 Series C preference shares and the Company retired these shares. During September 2004, 10,000 shares of Preferred Series C stock were issued in connection with the issuance of 1,111,111 shares of common stock for total proceeds of $10,000. (4) SUBSEQUENT EVENTS EQUITY TRANSACTIONS Subsequent to September 30, 2004 and through November 17, 2004 the Company has issued 31,875,000 common shares in exchange for $120,000 cash, while 4,969,109 common shares have been returned to the Company and retired. In November the Company issued a Convertible Debenture in a principal amount of $187,500, convertible into common shares of the Company in an amount up to 53,571,430 shares. Subsequent to September 30, 2004 and through November 17, 2004, the Company received cash totaling $142,600 relating to common stock subscriptions receivable. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information statement contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements relate to future events or to our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "predicts," "should," "expects," "plans," "anticipates," "believes," "estimates," "potential," or "continue" or the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. There are a number of factors that could cause our actual results to differ materially from these indicated by such forward-looking statements. These factors include but are not limited to economic conditions generally and in the industries in which Bluetorch Inc may participate, competition within Bluetorch Inc.'s chosen industry, including competition from much larger competitors, technological advances and failure by Bluetorch Inc. to successfully develop business relationships. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, we do not assume responsibility for the accuracy and completeness of such forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this information statement to conform such statements to actual results. The foregoing management's discussion and analysis should be read in conjunction with the Company's financial statements and the notes herein. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, management will evaluate its estimates and judgments, including those related to revenue recognition, accrued expenses, financial operations, and contingencies and litigation. Management will base its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying value of the assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, such as the investments in our portfolio companies and deferred tax asset valuation. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the financial statements included in our quarterly report on Form 10-Q for the quarter ended September 30, 2004. RESULTS OF OPERATIONS For the nine months ended September 30, 2004, the Company has incurred an operating loss of $973,052. The loss primarily represents expenses including payroll of $174,228, consulting fees for investment banking and investor relations of $131,017, professional fees incurred for legal and accounting services of $134,159 and a $300,000 reduction in the carrying value of the investments in portfolio companies resulting from an inventory write-down in Unboxed Distribution, Inc. and Total Sports Distribution, Inc. Also included in 9 the loss are interest and penalties of $50,000 related to the retirement of 260,000 shares of Preferred Series B stock. The loss for the nine months to September 30, 2004 is substantially lower than for the nine months ended September 30, 2003, primarily due to the costs recognized in 2003 for the cancellation of options and a reduction in general operating expenses. The loss for the three months to September 30, 2004 is lower than for the three months ended September 30, 2003, primarily due to a decrease in payroll. LIQUIDITY AND CAPITAL RESOURCES Our assets were security deposits of $5,557 for the Company's headquarters in Cerritos, California and investments in portfolio companies of $1,363,253; total assets at September 30, 2004 were $1,398,712, as compared to $559,922 at December 31, 2003. At September 30, 2004, our total liabilities of $142,804 were represented by a bank overdraft of $15,702 and $127,102 of accounts payable & accruals; total liabilities at December 31, 2003 were $132,156. The investments in our portfolio companies increased from $559,405 at December 31, 2003 to $1,363,253 at September 30, 2004. This increase was principally attributed to the acquisition of 51% of Island Tribe Inc. and additional advances by the Company. The general and administrative expenses have reduced considerably from 2003 to 2004, due to the 2003 numbers including start-up costs, larger salary expenses and significant financing expenses. PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS As we discussed in our recent 10-K/A filing, 2003 and part of 2004 was a period of restructuring for Bluetorch Inc., including the formation and investment in our subsidiary companies. Paramount in this process was the replacement of the original portfolio of brands with three new brands. As a result, we created Unboxed Distribution, Inc., which now wholesales and markets Bluetorch branded apparel. Total Sports Distribution, Inc. was established to market and wholesale both True Skate Apparel (TSABrand) and Airwalk branded apparel. In addition, the Company acquired a 51% interest in Island Tribe Inc. in August 2004. Unboxed shipped its first Bluetorch apparel product of young men's t-shirts to retailers in the first quarter of 2004. As a result, the number of Bluetorch styles available for shipment to retailers will more than triple in the third and fourth quarters versus the first quarter of 2004. Unboxed anticipates that this will generate a greater volume of buying per retail account. The Company and its three investment portfolio companies are continually reviewing their brands and evaluating the most positive strategies to deliver these brands to the appropriate markets. As part of this on-going assessment, management has decided to slightly amend its strategy in order to achieve a more balanced mix of brands across the various market tiers. It is expected that this approach may delay 2004 revenues but will provide improved sales opportunities for 2005. Bluetorch will continue to look for and possibly make additional investments in new brands on behalf of its existing subsidiaries and/or any new potential subsidiary in 2004 and beyond. Failure to successfully develop our portfolio companies would hinder the Company's ability to increase the size of our operations and realize asset appreciation. If we are not able to generate additional revenues adequate to cover increased operating costs, our business may ultimately fail. We have a cash deficit of $15,702 as of September 30, 2004. Subsequent to September 30, 2004, the Company received proceeds of $120,000 from the sale of its securities. In the opinion of management, available cash is not sufficient to fund current operations. However, management believes that it can obtain adequate capital via issuance and sale of its securities. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our business activities contain elements of risk. We consider the principal types of risk to be portfolio valuations and fluctuations in interest rates. We consider the management of risk essential to conducting our business. Accordingly, our risk management systems and procedures are designed to identify and analyze our risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. As a Business Development Company, we invest in illiquid securities, including debt and equity securities, of primarily private companies and non-investment grade CMBS. Our investments are generally subject to restrictions on resale and generally have no established trading market. We value substantially all of our investments at fair value as policy. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that 10 judgments be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments. We determine fair value to be the amount for which an investment could be exchanged in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. Our valuation policy considers the fact that no ready market exists for substantially all of the securities in which we invest. Our valuation policy is intended to provide a consistent basis for determining the fair value of the portfolio. We will record unrealized depreciation on investments when we believe that an equity security is doubtful, or when the enterprise value of the company does not currently support the cost of our debt or equity investment. Conversely, we will record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and, therefore, our equity security has also appreciated in value. The values of the investments in public securities are determined using quoted market prices discounted for restrictions on resale. Without a readily ascertainable market value and because of the inherent uncertainty of valuation, the fair value of our investments determined in good faith by the board of directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material. In addition, the illiquidity of our investments may adversely affect our ability to dispose of debt and equity securities at times when it may be otherwise advantageous for us to liquidate such investments. In addition, if we were forced to immediately liquidate some or all of the investments in the portfolio, the proceeds of such liquidation would be significantly less than the current value of such investments. Because we may borrow money to make investments, our net investment income before net realized and unrealized gains or losses, or net investment income, is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which would reduce our net investment income. We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. ITEM 4: CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company's Chief Executive Officer and the Chief Financial Officer carried out an evaluation of the effectiveness of the design and operations of the Company's disclosure controls and procedures. The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in its periodic SEC filings is recorded, processed and reported within the time periods specified in the SEC's rules and forms. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company, as required to be included in the Company's periodic SEC filings. CHANGES IN INTERNAL CONTROLS There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, except for the change in our chief financial officer. PART II OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS None ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES During the quarter ended September 30, 2004, the Company issued an aggregate of 87,986,111 shares of its common stock. ITEM 3: DEFAULTS UPON SENIOR SECURITIES None 11 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5: OTHER INFORMATION None ITEM 6: EXHIBITS None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BLUETORCH INC. November 17, 2004 By:/s/ Bruce MacGregor ---------------------------- Bruce MacGregor, President