<DOCUMENT>
<TYPE>10QSB
<SEQUENCE>1
<FILENAME>doc1.txt
<TEXT>
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]
--------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
BLUEGATE CORPORATION
(FORMERLY CRESCENT COMMUNICATIONS, INC.)
TABLE OF CONTENTS
__________
PART I. FINANCIAL INFORMATION
<S> <C>
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
</TABLE>
2
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
BLUEGATE CORPORATION
(FORMERLY CRESCENT COMMUNICATIONS, INC.)
CONDENSED CONSOLIDATED BALANCE SHEET
__________
SEPTEMBER 30, DECEMBER 31,
2004 2003
ASSETS (UNAUDITED) (NOTE)
------ --------------- --------------
<S> <C> <C>
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
=============== ==============
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
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
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
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
---------- ------- --------- ------ -------- ------ ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
========== ======= ========= ====== ======== ====== =========== ========= ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
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
--------------- ---------------
<S> <C> <C>
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
=============== ===============
</TABLE>
See accompanying notes.
F-5
<PAGE>
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:
<TABLE>
<CAPTION>
2003 2002
------------ ------------
<S> <C> <C>
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)
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
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
----------
</TABLE>
F-7
<PAGE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2004 2003 2004 2003
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
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)
=========== =========== ========== ===========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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<PAGE>
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
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<PAGE>
The transactions during the quarter ended September 30, 2004 were as follows:
<TABLE>
<CAPTION>
Date Issued Title of Securities Shares Amount
----------- ------------------- ------- -------
<S> <C> <C> <C>
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
========= ========
</TABLE>
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.
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<PAGE>
(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
<PAGE>
</TEXT>
</DOCUMENT>