10QSB 1 doc1.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 BLUEGATE CORPORATION (Exact name of registrant as specified in its charter) Commission file number: 0-22711 Nevada 76-0640970 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 701 North Post Oak, Road, Suite 630, Houston, Texas 77024 (Address of Principal Executive Office) (Zip Code) (713) 682-7400 (Registrant's Telephone Number, Including Area Code) CRESCENT COMMUNICATIONS, INC. (Former Name) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings requirements for the past 90 days. Yes [X] No [_] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [_] No [_] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each the issuer's classes of common equity, as of the latest practicable date: 48,655,665 common shares outstanding as of October 31, 2004. Transitional Small Business Disclosure Format (Check One): Yes [_] No [X] --------------------------------------------------------------------------------
BLUEGATE CORPORATION (FORMERLY CRESCENT COMMUNICATIONS, INC.) TABLE OF CONTENTS __________ PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Unaudited Condensed Consolidated Financial Statements. . . . . . . . . . . . F-1 Condensed Consolidated Balance Sheet as of September 30, 2004 (Unaudited) and December 31, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Unaudited Condensed Consolidated Statement of Operations for three months and nine months ended September 30, 2004 and 2003. . . . . . . . F-3 Unaudited Condensed Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2004 . . . . . . . . . . . . . . . . F-4 Unaudited Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2004 and 2003 . . . . . . . . . . . . . . . . F-5 Notes to Unaudited Condensed Consolidated Financial Statements . . . . . . F-6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. . . . . . . . . . I-1 ITEM 3. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . . . . I-4 PART II. OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. . . . . . . . . II-1 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . II-1 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-2 CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-3
2 ITEM 1. FINANCIAL STATEMENTS BLUEGATE CORPORATION (FORMERLY CRESCENT COMMUNICATIONS, INC.) __________ UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 F-1
BLUEGATE CORPORATION (FORMERLY CRESCENT COMMUNICATIONS, INC.) CONDENSED CONSOLIDATED BALANCE SHEET __________ SEPTEMBER 30, DECEMBER 31, 2004 2003 ASSETS (UNAUDITED) (NOTE) ------ --------------- -------------- Current assets: Cash and cash equivalents $ 14,566 $ 9,485 Accounts receivable, net 255,777 155,425 Note receivable 201,608 - Prepaid expenses and other 10,223 2,100 --------------- -------------- Total current assets 482,174 167,010 Property and equipment, net 49,395 61,191 Net non-current assets of discontinued operations - 542,372 --------------- -------------- Total assets $ 531,569 $ 770,573 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Book overdraft $ - $ 63,705 Notes payable 29,275 124,658 Notes payable to related parties 287,709 514,670 Accounts payable 670,996 717,188 Accrued liabilities 384,394 297,693 Deferred revenue 189,783 193,038 --------------- -------------- Total current liabilities 1,562,157 1,910,952 --------------- -------------- Commitments and contingencies Stockholders' deficit: Series A Convertible Non-Redeemable Preferred stock, $.001 par value, 20,000,000 shares authorized; 110.242 issued and outstanding, $5,000 pre share liquidation preference($578,630 aggregate liquidation preference) - - Series B Convertible Non-Redeemable Preferred stock, $.001 par value, 10,000,000 shares authorized; no shares issued and outstanding - - Common stock, $.001 par value, 85,000,000 shares authorized, 47,796,432 and 34,540,174 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively 47,796 34,540 Additional paid-in capital 6,058,884 5,540,467 Deferred compensation - (12,008) Accumulated deficit (7,137,268) (6,703,378) --------------- -------------- Total stockholders' deficit (1,030,588) (1,140,379) --------------- -------------- Total liabilities and stockholders' equity $ 531,569 $ 770,573 =============== ==============
Note: The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. See accompanying notes. F-2
BLUEGATE CORPORATION (FORMERLY CRESCENT COMMUNICATIONS, INC.) UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 __________ THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Service revenue $ 362,235 $ 101,180 $ 734,412 $ 553,786 Cost of services 154,527 26,540 379,158 339,702 ------------ ------------ ------------ ------------ Gross margin 207,708 74,640 355,254 214,084 Selling, general and adminis- trative expenses 303,616 227,148 899,151 1,147,436 ------------ ------------ ------------ ------------ Loss from operations (95,908) (152,508) (543,897) (933,352) Interest Income 2,611 - 2,611 - Interest expense (8,425) (3,362) (25,231) (9,472) ------------ ------------ ------------ ------------ Loss from continuing operations (101,722) (155,870) (566,517) (942,824) ------------ ------------ ------------ ------------ Discontinued operations: Gain from sale of discontinued - - 643,627 - broadband internet segment Loss from operation of discontinued broadband internet segment - (303,709) (511,000) (831,709) ------------ ------------ ------------ ------------ Income (loss) from discontinued operations - (303,709) 132,627 (810,279) ------------ ------------ ------------ ------------ Net income (loss) $ (101,722) $ (459,579) $ (433,890) $(1,774,533) ============ ============ ============ ============ Basic and diluted net income (loss) per common share Continuing operations $ (0.00) $ (0.01) $ (0.01) $ (0.04) Discontinued operations - (0.01) 0.00 (0.04) ------------ ------------ ------------ ------------ $ (0.00) $ (0.02) $ (0.01) $ (0.08) ============ ============ ============ ============ Weighted average shares out- standing 45,183,755 26,772,026 40,625,894 21,759,311 ============ ============ ============ ============
See accompanying notes. F-3
BLUEGATE CORPORATION (FORMERLY CRESCENT COMMUNICATIONS, INC.) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 __________ SERIES A SERIES B ----------------- ---------------- COMMON STOCK PREFERRED STOCK PREFERRED STOCK ADDITIONAL DEFERRED ------------------- ----------------- ---------------- PAID-IN COMPEN- ACCUMULATED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL SATION DEFICIT TOTAL ---------- ------- --------- ------ -------- ------ ----------- --------- ------------ ------------ Balance at December 31, 2003 34,540,174 $34,540 116 $ - - $ - $5,540,467 $(12,008) $(6,703,378) $(1,140,379) Issuance of common stock for compensa- tion 50,000 50 - - - - 11,950 - - 12,000 Conversion of Series A preferred stock to common stock 1,283,188 1,283 (5) - - - (1,283) - - - Issuance of common stock for cash 11,923,070 11,923 - - - - 507,750 - - 519,673 Amortization of deferred compen- sation - - - - - - - 12,008 - 12,008 Net loss - - - - - - - - (433,890) (433,890) ---------- ------- --------- ------ -------- ------ ----------- --------- ------------ ------------ Balance at September 30, 2004 47,796,432 $47,796 111 $ - - $ - $6,058,884 $ - $(7,137,268) $(1,030,588) ========== ======= ========= ====== ======== ====== =========== ========= ============ ============
See accompanying notes. F-4
BLUEGATE CORPORATION (FORMERLY CRESCENT COMMUNICATIONS, INC.) UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 __________ SEPTEMBER 30, SEPTEMBER 30, 2004 2003 --------------- --------------- Cash flows from operating activities: Net loss $ (433,890) $ (1,774,533) Adjustments to reconcile net loss to net cash used by operating activities: (647,771) 742,551 --------------- --------------- Net cash used in continuing operations (527,844) (289,058) Net cash used in discontinued operations (522,863) (742,924) --------------- --------------- Net cash used by operating activities (1,081,661) (1,031,982) --------------- --------------- Cash flows from investing activities: Proceeds from sale of connectivity services business 900,000 - Proceeds from note receivable 48,392 - Proceeds from sale of property and equipment 4,366 - Capital expenditures - (16,138) --------------- --------------- Net cash provided by continuing operations 4,366 - Net cash provided (used) by discontinued operations 948,392 (16,138) --------------- --------------- Net cash provided (used) by investing activities 952,758 (16,138) --------------- --------------- Cash flows from financing activities: Decrease in book overdraft (63,705) (6,457) Proceeds from notes payable 40,000 78,116 Payments on notes payable (362,344) (61,300) Issuance of common stock for cash 519,673 1,041,110 --------------- --------------- Net cash provided by continuing operations 133,624 1,051,469 Net cash provided by discontinued operations - - --------------- --------------- Net cash provided by financing activities 133,624 1,051,469 --------------- --------------- Net increase in cash and cash equivalents 4,721 3,349 Cash and cash equivalents at beginning of period 9,845 - --------------- --------------- Cash and cash equivalents at end of period $ 14,566 $ 3,349 =============== ===============
See accompanying notes. F-5 BLUEGATE CORPORATION (FORMERLY CRESCENT COMMUNICATIONS, INC.) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS __________ 1. BASIS OF PRESENTATION ----------------------- The unaudited consolidated condensed financial statements included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. 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, pursuant to such rules and regulations. These unaudited consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of Bluegate Corporation (the "Company") included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003. In the opinion of management, the unaudited consolidated condensed financial information included herein reflect all adjustments, consisting only of normal, recurring adjustments, which are necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for a full year or any other interim period. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the periods. Actual results could differ from estimates making it reasonably possible that a change in the estimates could occur in the near term. 2. GOING CONCERN CONSIDERATIONS ------------------------------ During the nine months ended September 30, 2004 and the years ended December 31, 2003 and 2002, the Company has been unable to generate cash flows sufficient to support its operations and has been dependent on debt and equity raised from qualified individual investors. During the years ended December 31, 2003 and 2002, the Company experienced negative financial results as follows:
2003 2002 ------------ ------------ Net loss $(2,543,629) $(2,946,382) Negative cash flow from operations (1,423,363) (1,774,837) Negative working capital (1,743,942) (1,276,547) Stockholders' deficit (1,140,379) (442,332)
These negative factors have continued during the nine months ended September 30, 2004 and raise substantial doubt about the Company's ability to continue as a going concern. The Company has supported current operations by: 1) selling off its traditional connectivity services business, 2) raising additional operating cash through private placements of its common stock, 3) issuing debt convertible to common stock to certain key stockholders and 4) issuing stock and options as compensation to certain employees and vendors in lieu of cash payments. These steps have provided the Company with the cash flows to continue its business plan, but have not resulted in significant improvement in the Company's financial position. Management is considering alternatives to address its critical cash flow situation that include: F-6 BLUEGATE CORPORATION (FORMERLY CRESCENT COMMUNICATIONS, INC.) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS __________ 2. GOING CONCERN CONSIDERATIONS, CONTINUED ------------------------------------------ - Raising capital through additional sale of its common and preferred stock and/or debt securities. - Merging the Company with another business that compliments current activities. - Reducing cash operating expenses to levels that are in line with current revenues. Reductions can be achieved through the issuance of additional common shares of the Company's stock in lieu of cash payments to employees or vendors. These alternatives could result in substantial dilution of existing stockholders. There can be no assurances that the Company's current financial position can be improved, that it can raise additional working capital or that it can achieve positive cash flows from operations. The Company's long-term viability as a going concern is dependent upon the following: - The Company's ability to locate sources of debt or equity funding to meet current commitments and near term future requirements. - The ability of the Company to achieve profitability and ultimately generate sufficient cash flow from operations to sustain its continuing operations. 3. SALE OF CONNECTIVITY BUSINESS -------------------------------- Effective June 21, 2004, the Company entered into an Asset Sale Agreement (the "Agreement") with DFW Internet Services, Inc. ("DFW"), a Texas corporation and a wholly-owned subsidiary of MobilePro Corporation for the sale of certain assets related to connectivity services including wireless, digital subscriber line and traditional communication technologies to business and residential customers. Under the terms of this Agreement, the Company will receive a total of $1,150,000 of which $900,000 was cash and $250,000 was a one-year promissory note. Additionally, DFW acquired 85% of accounts receivable associated with services provided to the Company's customers through June 17, 2004. Further, DFW entered into a one-year sublease for the Company's leased space at 701 N. Post Oak Road, Suite 630, Houston, Texas, for rental rate of $3,000 per month. The terms and conditions of the transactions were the result of arms-length negotiations by the parties. As a result of the Agreement the Company's operations are now solely based on Bluegate (TM) , our branded HIPAA compliant broadband digital connectivity offering for health care providers nationally. Following is analysis of assets sold under the agreement:
Assets sold: Property and equipment $ 306,027 Goodwill associated with connectivity business 200,346 ---------- 443,281 ---------- Consideration received Cash 900,000 Note receivable 250,000 ---------- 1,150,000 ---------- Gain recognized $ 643,627 ----------
F-7 BLUEGATE CORPORATION (FORMERLY CRESCENT COMMUNICATIONS, INC.) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS __________ 3. SALE OF CONNECTIVITY BUSINESS, CONTINUED -------------------------------------------- In addition to the above assets, the Company sold 85% of the accounts receivable associated with it's traditional connectivity business. Following is an analysis of discontinued operations:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ----------------------- 2004 2003 2004 2003 ----------- ----------- ---------- ----------- Service revenue $ - $ 420,605 $ 847,551 $1,152,052 Cost of services - 291,019 680,830 797,113 ----------- ----------- ---------- ----------- Gross margin - 129,586 166,721 354,939 Selling, general and administrative expenses - 424,931 657,395 1,163,093 ----------- ----------- ---------- ----------- Loss from operations - (295,345) (490,674) (808,154) Interest expense - 8,364 20,326 23,555 ----------- ----------- ---------- ----------- Loss from operations $ - $( 303,709) $(511,000) $ (831,709) =========== =========== ========== ===========
4. INCOME TAX ----------- The difference between the Federal statutory income tax rate of 34% and the Company's effective rate is primarily attributable to increases in the valuation allowance offset against deferred tax assets associated with the Company's net operating losses. 5. NOTES PAYABLE TO RELATED PARTIES ------------------------------------ Certain notes payable to related parties totaling $300,185 are convertible into shares of the Company's common stock at $.05 per share, at the election of the payee, any time prior to repayment of the note. At September 30, 2004 the notes are convertible into 6,003,700 common shares. During the nine months ended September 30, 2004 certain members of the executive management team advanced $80,000 under short term borrowing agreements. All amounts were subsequently repaid. F-8 BLUEGATE CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS __________ 6. STOCKHOLDERS' EQUITY --------------------- During the nine months ended September 30, 2004, the Company engaged in various transactions affecting stockholders' equity, as follows: - The Company sold common stock under Regulation S to various foreign investors under investment agreements entered into during 2003. The investment agreements generally provide for the sale of restricted common stock at 35% of the current trading price in the United States. During the nine month period ended September 30, 2004, 11,923,070 shares were issued for $519,673. - The Company issued common stock for legal and consulting services totaling $12,000. - The Company issued options to acquire shares of the Company's common stock to employees and consultants. The options are exercisable after a vesting period at $.20 per share. F-9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS This Management's Discussion and Analysis as of September 30, 2004 and for the three and nine months ended September 30, 2004, should be read in conjunction with the unaudited condensed financial statements and notes thereto set forth in Item 1 of this report and in conjunction with our Annual Report on Form 10-KSB for the year ended December 31, 2003. The results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for a full year or any other interim period. The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, words such as, "may," "will," "should," "estimates," "predicts," "potential," continue," "strategy," "believes," "anticipates," "plans," "expects," "intends," and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to the risks discussed in our other SEC filings. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These estimates and assumptions provide a basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and these differences may be material. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. REVENUE RECOGNITION ------------------- Revenue from Bluegate (TM) , HIPAA compliant broadband digital connectivity is recognized based upon contractually determined monthly service charges to individual customers. Services are billed in advance and, accordingly, revenues are deferred until the period in which the services are provided. At September 30, 2004, deferred service revenue was $189,783. I-1 STOCK-BASED COMPENSATION ------------------------- Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") established financial accounting and reporting standards for stock-based employee compensation plans. It defined a fair value based method of accounting for an employee stock option or similar equity instrument and encouraged all entities to adopt that method of accounting for all of their employee stock compensation plans and include the cost in the income statement as compensation expense. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". The Company accounts for compensation cost for stock option plans in accordance with APB Opinion No. 25. GENERAL Crescent Communications is a Nevada corporation that began operations on July 23, 2001, providing co-location hosting and connectivity systems to small to mid-size businesses in Texas. The Company, headquartered in Houston, Texas is a Value Added Network provider that develops and deploys specific technological internet related solutions for businesses. The Company was formed through a Stock Exchange Agreement ("Agreement") whereby the shareholders of Solis Communications, Inc ("Solis") exchanged all the issued and outstanding shares of Solis for 600 shares of newly issued Series A Convertible Non-Redeemable Preferred Stock of Berens Industries, Inc. ("Berens"). Solis, the ultimate acquirer of Berens in this reverse merger, agreed to contribute $600,000 cash and cash equivalents. Berens was a development stage enterprise involved in the development of an online auction site for exclusive paintings and other art works. At the date of the Agreement, Berens had ceased all activity due to their inability to generate sufficient revenue or obtain additional capital funding. This transaction was exempt from Section 4(2) of the Securities Act of 1933, as amended. On September 17, 2001 Berens filed a name change to Crescent Communications, Inc. d.b.a. Crescent Broadband and approved a 5-for-1 reverse stock split to be effective on September 24, 2001. On a fully convertible post-split basis, the former shareholders of Solis beneficially owned an aggregate of approximately 28,000,000 shares of common stockAs a result, the former shareholders control approximately 52% of the common stock. The Series A Preferred Stock does not receive dividends. Effective June 17, 2004, the Company entered into an Asset Sale Agreement (the "Agreement") with DFW Internet Services, Inc. ("DFW"), a Texas corporation and a wholly-owned subsidiary of MobilePro Corporation for the sale of certain assets related to connectivity services including wireless, digital subscriber line and traditional communication technologies to business and residential customers. Under the terms of this Agreement, the Company will receive a total of $1,150,000 of which $900,000 was cash and $250,000 was a one-year promissory note. Additionally, DFW acquired 85% of accounts receivable associated with services provided to the Company's customers through June 17, 2004. Further, DFW entered into a one-year sublease for the Company's leased space at 701 N. Post Oak Road, Suite 630, Houston, Texas, for rental rate of $3,000 per month. The terms and conditions of the transactions were the result of arms-length negotiations by the parties. We received a fairness opinion from an independent third party that the asset sale was fair and equitable to us. As a result of the Agreement our operations are now solely based on Bluegate (TM) , our branded HIPAA compliant broadband digital connectivity offering for health care providers nationally. The Company has incurred a significant loss from operations since inception, and is in a negative working capital and stockholders' deficit position at September 30, 2004. The Company remains dependent on outside sources of funding for continuation of its operations. Based on these factors, our auditors issued a qualified opinion at December 31, 2003 that reflects the significant doubt about the company's ability to continue as a going concern. I-2 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2004 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003 During the three months ended September 30, 2004, the Company's revenue from Bluegate (TM) , HIPAA compliant broadband digital connectivity connectivity was $362,235 versus $101,180 for the three month period ended September 30, 2003. This represents an increase of $261,055 and is primarily attributable to our efforts to market Bluegate (TM) as it has become the center of our business. Cost of sales for the three months ended September 30, 2004 was $154,527 versus $26,540 for the comparable 2003 period. The increase is due to higher interconnect fees and costs associated with Bluegate (TM). The gross margin for the three-month period just ended improved substantially over the three-month period ended September 30, 2003. The improvement in gross margin is attributable to the fact that our margins improve as revenues increase due to fixed costs. Selling, general and administrative expenses of $303,616 for the three months ended September 30, 2004, represents an increase of $76,468 as compared to three months ended September 30, 2003. The increase is attributable to fixed costs that remained after sale of our broadband internet business. No significant capital expenditures were made during the period. NINE MONTHS ENDED SEPTEMBER 30, 2004 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003 During the nine months ended September 30, 2004, the Company's revenue from Bluegate (TM) , HIPAA compliant broadband digital connectivity was $734,412 versus $553,786 for the nine month period ended September 30, 2003. This increase of $180,626 is primarily attributable to our efforts to market Bluegate (TM) as it has become the center of our business. Cost of sales for the nine months ended September 30, 2004 were $379,158 versus $339,702 for the comparable 2003 period. The increase is due to higher interconnect fees and costs associated with Bluegate (TM). The gross margin for the nine month period just ended improved over the nine month period ended September 30, 2003. The improvement is attributable to the fact that our margins improve as revenues increase due to fixed costs. Selling, general and administrative expenses of $889,151 for the nine months ended September 30, 2004, represents a decrease of $258,295 as compared to nine months ended September 30, 2003. The decrease is attributable to lower costs arising from stock based compensation. Interest expense is higher in 2004 by due to assignment of all debt costs to Bluegate (TM) after sale of our broadband Internet business. Certain of the debt was repaid upon sale of our traditional connectivity services business. No significant capital expenditures were made during the period. I-3 PLAN OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES Operations for the nine-month period ended September 30, 2004 have been funded by the issuance of common stock for cash of $519,673, and proceeds from sale of the Company's traditional connectivity business of $900,000. The Company has continued to take steps to reduce its monthly operating expenses relating to its core business and has expanded its efforts in creating a market for the health care industry. Because of the uncertainty associated with this new market, breakeven cash flow is not expected until late 2004, at the earliest. The Company is seeking additional capital to fund expected operating costs and has engaged in negotiations to merge or sell part or all of the Company. No commitments for mergers or acquisitions have been obtained at this time and the Company continues to negotiate with certain parties to address the operating cash flow shortfalls. We believe future funding may be obtained from public or private offerings of equity securities, debt or convertible debt securities or other sources. Stockholders should assume that any additional funding will likely be dilutive. If we are unable to raise additional funding, we may have to limit our operations to an extent that we cannot presently determine. The effect on our business may include the sale of certain assets, the reduction or curtailment of new customer acquisition, reduction in the scope of current operations or the cessation of business operations. Our ability to achieve profitability will depend upon our ability to raise additional operating capital, continued growth in demand for connectivity services and our ability to execute and deliver high quality, reliable connectivity services. ITEM 3. CONTROLS AND PROCEDURES Manfred Sternberg, our Chief Executive Officer and Mike McDonald, our Chief Financial Officer, have concluded that our disclosure controls and procedures are appropriate and effective. They have evaluated these controls and procedures as of the end of the period covered by this report on Form 10-QSB. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of his evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II. OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During the calendar quarter ending September 30, 2004 the Company completed placements of 4,397,214 shares of common stock with investors located outside of the United States. The shares were offered pursuant to an exemption from registration afforded by Regulation S to the Securities Act of 1933. Share sold pursuant to Regulation S are deemed restricted and may not be sold to any U.S. Person (as that term is defined in the Regulation) for a period of one (1) year from date of sale. Thereafter, the shares will be subject to the restrictions of Rule 144. The Company received a total of $164,661 for the shares. The proceeds were used for general business purposes. Among other things, the placement agreement provided for the Company to issue shares of Regulation S stock at prices substantially below the quoted market price of the shares I-4 The transactions during the quarter ended September 30, 2004 were as follows:
Date Issued Title of Securities Shares Amount ----------- ------------------- ------- ------- July 8, 2004 Common Stock 398,300 $ 15,534 July 13, 2004 Common Stock 75,000 2,925 July 14, 2004 Common Stock 806,673 32,859 July 19, 2004 Common Stock 356,000 14,124 July 21, 2004 Common Stock 215,000 9,129 July 22, 2004 Common Stock 45,000 1,191 July 26, 2004 Common Stock 35,000 1,365 July 28, 2004 Common Stock 70,000 2,760 August 2, 2004 Common Stock 135,000 5,835 August 3, 2004 Common Stock 174,000 6,786 August 17, 2004 Common Stock 126,000 5,292 August 18, 2004 Common Stock 145,000 4,935 August 19, 2004 Common Stock 199,897 6,252 August 23, 2004 Common Stock 70,000 3,030 August 31, 2004 Common Stock 35,700 1,242 September 2, 2004 Common Stock 812,644 20,956 September 9, 2004 Common Stock 213,000 8,946 September 13, 2004 Common Stock 150,000 6,450 September 24, 2004 Common Stock 50,000 2,250 September 29, 2004 Common Stock 235,000 10,550 September 30, 2004 Common Stock 50,000 2,250 --------- -------- 4,397,214 $164,661 ========= ========
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) Exhibits Exhibit 31.1 - Certification of Chief Executive Officer of Bluegate Corporation required by Rule 13a - 14(1) or Rule 15d - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 - Certification of Chief Financial Officer of Bluegate Corporation required by Rule 13a - 14(1) or Rule 15d - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 -- Certification of Chief Executive Officer of Bluegate Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63. Exhibit 32.2 -- Certification of Chief Financial Officer of Bluegate Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63. II-1 (B) Reports on Form 8-K None SIGNATURES In accordance with the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized Bluegate Corporation Date: November 22, 2004 /s/ Manfred Sternberg ---------------------- Manfred Sternberg, Chief Executive Officer Bluegate Corporation Date: November 22, 2004 /s/ Mike McDonald ------------------ Mike McDonald, Chief Financial Officer II-2