-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RxzKM29z53WCxMWHzp3+b+a7qwdeiejfB3d/4wOZD9a1AVaMDo3x8UVuM/FehYva /NXqRVkKvj66bjvg8DIa0A== 0001015402-05-002466.txt : 20050513 0001015402-05-002466.hdr.sgml : 20050513 20050513153049 ACCESSION NUMBER: 0001015402-05-002466 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050513 DATE AS OF CHANGE: 20050513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLUEGATE CORP CENTRAL INDEX KEY: 0000768216 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 870565948 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-22711 FILM NUMBER: 05828895 BUSINESS ADDRESS: STREET 1: 701 NORTH POST OAK ROAD STREET 2: SUITE 630 CITY: HOUSTON STATE: TX ZIP: 77024 BUSINESS PHONE: 7136827400 MAIL ADDRESS: STREET 1: 701 NORTH POST OAK ROAD STREET 2: SUITE 630 CITY: HOUSTON STATE: TX ZIP: 77024 FORMER COMPANY: FORMER CONFORMED NAME: CRESCENT COMMUNICATIONS INC DATE OF NAME CHANGE: 20010921 FORMER COMPANY: FORMER CONFORMED NAME: BERENS INDUSTRIES INC DATE OF NAME CHANGE: 19990823 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL AIR CORP DATE OF NAME CHANGE: 19970521 10QSB 1 body_10qsb.txt BLUEGATE CORPORATION 10-QSB - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB |X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2005 | | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from --- to --- Commission file number: 000-22711 BLUEGATE CORPORATION (Name of small business issuer in its charter) Nevada 76-0640970 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 701 North Post Oak Road, Suite 630, Houston, Texas 77024 (Address of principal executive offices) voice: 713-686-1100 fax: 713-682-7402 Issuer's Telephone Number, Including Area Code Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 filing requirements for the past 90 days. Yes |X| | | No On May 9, 2005, the registrant had outstanding 4,899,637 shares of Common Stock, $0.001 par value per share. Transitional Small Business Disclosure Format: Yes | | No |X| PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. BLUEGATE CORPORATION __________ UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 F-1
BLUEGATE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET __________ MARCH 31, DECEMBER 31, 2005 2004 ASSETS (UNAUDITED) (NOTE) ------ ------------ -------------- Current assets: Cash and cash equivalents $ 36,617 $ 3,708 Accounts receivable, 212,124 209,856 Note receivable 126,026 146,814 Other 30,234 29,429 ------------ -------------- Total current assets 405,001 389,807 Goodwill 50,160 - Property and equipment, net 96,803 73,458 ------------ -------------- Total assets $ 551,964 $ 463,265 ============ ============== LIABILITIES AND STOCKHOLDERS' DEFICIT - ------------------------------------- Current liabilities: Book overdraft $ - $ 9,620 Notes payable 12,800 2,800 Notes payable to related parties 34,000 389,018 Accounts payable 592,021 715,836 Accrued liabilities 269,375 296,637 Deferred revenue 196,202 217,073 ------------ -------------- Total current liabilities 1,104,398 1,630,984 ------------ -------------- Commitment and contingencies Stockholders' deficit: Series A Convertible Non-Redeemable Preferred stock, $.001 par value, 20,000,000 shares authorized, 110,242 shares issued and outstanding, $5,000 per share liquidation preference ($551,210 aggregate liquida- tion preference) - - Series B Convertible Non-Redeemable Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding - - Common stock, $.001 par value, 50,000,000 shares auth- orized, 3,239,825 shares issued and outstanding 3,240 2,549 Additional paid-in capital 7,597,229 6,184,450 Subscription receivable (8,510) (11,141) Deferred compensation (346,867) - Unissued common stock 1,047,201 - Accumulated deficit (8,844,727) (7,343,577) ------------ -------------- Total stockholders' deficit (552,434) (1,167,719) ------------ -------------- Total liabilities and stockholders' deficit $ 551,964 $ 463,265 ============ ==============
Note: The balance sheet at December 31, 2004 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 UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS MARCH 31, 2005 AND 2004 __________ MARCH 31, MARCH 31, 2005 2004 ------------ ----------- Service revenue $ 359,547 $ 194,535 Cost of services 175,764 165,442 ------------ ----------- Gross margin 183,783 29,093 Selling, general and administrative expenses 724,788 238,173 ------------ ----------- Loss from operations (541,005) (209,080) ------------ ----------- Other income and (expense): Interest income 728 - Loss on conversion of notes payable to common stock (946,971) - Interest expense (11,283) (2,768) Other expense (2,619) - ------------ ----------- Other expense, net (960,145) (2,768) ------------ ----------- Loss from continuing operations (1,501,150) (211,848) ------------ ----------- Discontinued operations: Loss from operation of discontinued broadband internet segment - (224,424) ------------ ----------- Net income (loss) $(1,501,150) $ (436,272) ============ =========== Basic and diluted net loss per common share $ (0.46) $ (0.20) ============ =========== Weighted average shares outstanding 3,263,370 1,924,627 ============ ===========
See accompanying notes. F-3
BLUEGATE CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2005 __________ SERIES A SERIES B COMMON STOCK PREFERRED STOCK PREFERRED STOCK ADDITIONAL ------------------ -------------------- ------------------ PAID-IN SUBSCRIPTION DEFERRED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION --------- ------- --------- --------- --------- ------- ----------- -------------- -------------- Balance at December 31, 2004 2,548,809 $ 2,549 111 $ - - $ - $ 6,184,450 $ (11,141) $ - Issuance of common stock for cash 161,016 161 - - - - 26,704 - - Conversion of notes payable and accrued interest for unis- sued common stock and stock options - - - - - - 806,818 - - Issuance of common stock to an officer as compensation 100,000 100 - - - - 100,900 - - Issuance of common stock to pay con- sulting fees 430,000 430 - - - - 377,969 - (346,867) Purchase of certain assets of a company for unissued common stock - - - - - - - - - Cash received for com- mon stock that has not been issued - - - - - - - - - Receipt of cash for subscription receiv- able - - - - - - - 2,631 - Stock options issued for services - - - - - - 100,388 - - Net loss - - - - - - - - - --------- ------- --------- --------- --------- ------- ----------- -------------- -------------- Balance at March 31, 2005 3,239,825 $ 3,240 111 $ - - $ - $ 7,597,229 $ (8,510) $ (346,867) ========= ======= ========= ========= ========= ======= =========== ============== ============== UNISSUED COMMON ACCUMULATED STOCK DEFICIT TOTAL_ ---------- ------------- ------------ Balance at December 31, 2004 $ - $ (7,343,577) $(1,167,719) Issuance of common stock for cash - - 26,865 Conversion of notes payable and accrued interest for unis- sued common stock and stock options 706,041 - 1,512,859 Issuance of common stock to an officer as compensation - - 101,000 Issuance of common stock to pay con- sulting fees - - 31,532 Purchase of certain assets of a company for unissued common stock 116,160 - 116,160 Cash received for com- mon stock that has not been issued 225,000 - 225,000 Receipt of cash for subscription receiv- able - - 2,631 Stock options issued for services - - 100,388 Net loss - (1,501,150) (1,501,150) ---------- ------------- ------------ Balance at March 31, 2005 $1,047,201 $ (8,844,727) $ (552,434) ========== ============= ============
See accompanying notes. F-4
BLUEGATE CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 __________ MARCH 31, MARCH 31, 2005 2004 ------------ ----------- Cash flows from operating activities: Net loss $(1,501,150) $ (436,272) Adjustments to reconcile net loss to net cash used in operating activities: 1,281,924 207,385 ------------ ----------- Net cash used by continuing operations (219,226) (206,477) Net cash used by discontinued operations - (22,410) ------------ ----------- Net cash used by operating activities (219,226) (228,887) ------------ ----------- Cash flows from investing activities: Payments received on note receivable 20,788 - Purchase of computers and equipment (42,769) - Proceeds from disposition of property and equipment - 4,366 ------------ ----------- Net cash used by continuing operations (21,981) 4,366 Net cash used by discontinued operations - - ------------ ----------- Net cash provided (used) by investing activities (21,981) 4,366 ------------ ----------- Cash flows from financing activities: Repayment of book overdraft (9,620) (28,766) Proceeds from notes payable 10,000 40,000 Repayment of notes payable - (795) Repayment of notes payable to related parties - (14,000) Collection of subscription receivable 2,631 - Proceeds from sale of common stock 251,865 227,587 ------------ ----------- Net cash provided by continuing operations 274,116 224,026 Net cash provided by discontinued operations - - ------------ ----------- Net cash provided by financing activities 274,116 224,026 ------------ ----------- Net increase (decrease) in cash and cash equivalents 32,909 (495) Cash and cash equivalents at beginning of period 3,708 9,485 ------------ ----------- Cash and cash equivalents at end of period $ 36,617 $ 8,990 ============ =========== Non-Cash Investing and Financing Activities: Issuance of common stock for acquisition of TEKMedia Communications, Inc. $ 116,160 $ - Common stock issued for conversion of notes payable 355,018 - Common stock issued for conversion of accrued interest 56,573 - Common stock issued for conversion of Accounts payable 154,297 - See accompanying notes.
F-5 BLUEGATE CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS __________ 1. BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES ------------------------------------------------------------ Bluegate Corporation (the "Company") is a Nevada Corporation that was originally established to conduct an effort to capitalize on the telecommunications industry downturn that began during 2000. The Company has now focused its efforts on providing the healthcare community BLUEGATE, the Company's secure medical network using Cisco System's(TM) virtual private network technology to assist in compliance with the Health Insurance Portability and Accountability Act of 1996 ("HIPPA"). The Company was originally incorporated as Solis Communications, Inc. ("Solis") on July 23, 2001 and adopted a name change to Crescent Communications Inc. upon completion of a reverse acquisition of Berens Industries, Inc. 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, 2004. 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. STOCK-BASED COMPENSATION ------------------------- The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 123 - "Accounting for Stock Based Compensation." Under SFAS No. 123, the Company is permitted to either record expenses for stock options and other employee compensation plans based on their fair value at the date of grant or to continue to apply our current accounting policy under Accounting Principles Board, ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees," and recognize compensation expense, if any, based on the intrinsic value of the equity instrument at the measurement date. In December of 2002, the FASB issued SFAS No. 148, "Accounting for Stock- Based Compensation - Transition and Disclosure - An Amendment to FASB Statement No. 123" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company elected to not change to the fair value based method of accounting for stock based compensation. Additionally, the statement amended disclosure requirements of SFAS No. 123 to require more prominent disclosure in both annual and interim financial statements. F-6 BLUEGATE CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS __________ 1. BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES, CONTINUED ------------------------------------------------------------------------ SIGNIFICANT ESTIMATES ---------------------- 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. REVENUE RECOGNITION -------------------- Revenue from telecommunications services are recognized based upon contractually determined service charges to individual customers. Telecommunications services are billed in advance and revenues are deferred until the period in which the services are provided. At March 31, 2005 and December 31, 2004, deferred service revenue was $196,202 and $217,073, respectively. 2. GOING CONCERN CONSIDERATIONS ------------------------------ During the three months ended March 31, 2005, and the years ended December 31, 2004 and 2003 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, 2004 and 2003, the Company experienced negative financial results as follows:
2004 2003 ------------ ------------ Net loss $ (640,199) $(2,543,629) Negative cash flow from operations (1,299,842) (1,423,363) Negative working capital (1,241,177) (1,743,942) Stockholders' deficit (1,167,719) (1,140,379)
These negative factors have continued during the three months ended March 31, 2005 and raise substantial doubt about the Company's ability to continue as a going concern. The Company has supported current operations by: 1) raising additional operating cash through private placements of its common stock, and 2) 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-7 BLUEGATE CORPORATION 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. ACQUISITION OF TEKMEDIA COMMUNICATIONS, INC.("TEKMEDIA") ------------------------------------------------------------ On March 1, 2005, the Company acquired the assets of TEKMedia in exchange for 132,000 shares of the Company's common stock. Following is an analysis of the assets acquired and the purchase price:
Assets acquired: Accounts receivable 66,000 Goodwill 50,160 -------- Common stock issued $116,160 ========
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. F-8 BLUEGATE CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS __________ 5. STOCKHOLDERS' EQUITY --------------------- During the three months ended March 31, 2005, 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 2002. 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 three month period ended March 31, 2005 161,016 shares were issued for $26,865. - Officers and directors holding convertible notes totaling $355,018, agreed to convert those notes, related accrued interest of $56,573 and accounts payable for legal services of $154,297 into common stock. The stock was issued subsequent to March 31, 2005. In connection with the conversions, the Company issued the officers and directors a total of 1,008,630 three-year options to acquire shares of the Company's common stock. The options are exercisable after a vesting period at $1.00 per share. The unissued common stock and the stock options granted under the conversion totaled were valued at $1,512,859 and the Company recognized a loss on the conversion of $946,971 - The Company issued 10,000 shares of common stock to a director as compensation totaling $101,000. - The Company issued common stock for consulting services totaling $31,532. - The Company purchased certain assets of TEKMedia in exchange for 132,000 shares of common stock valued at $116,160. These shares were not yet issued at March 31, 2005. - The Company sold common stock for $225,000 in, however the shares have not been issued. - The Company received cash totaling $2,631 for subscription receivable. - The Company issued options to acquire shares of the Company's common stock to a consultant. The options are exercisable after a vesting period at $1.00 per share. F-9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. FORWARD-LOOKING STATEMENT This Management's Discussion and Analysis should be read in conjunction with the audited financial statements and notes thereto as set forth in our annual report on Form 10-KSB for the year ended December 31, 2004. Certain statements contained in this report, including, without limitation, statements containing the words, "likely," "forecast," "project," "believe," "anticipate," "expect," and other words of similar meaning, constitute "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 forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update any such factors or to announce publicly the results of any revision of the forward-looking statements contained or incorporated by reference herein to reflect future events or developments. In addition to the forward-looking statements contained in this Form 10-QSB, the following forward-looking factors could cause our future results to differ materially from our forward-looking statements: competition, capital resources, credit resources, funding, government compliance and market acceptance of our products and services. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon financial statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us 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, we evaluate these estimates. We base our estimates on historical experience and on assumptions that are believed to be reasonable. 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. We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. REVENUE RECOGNITION. Revenue 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 March 31, 2005, total deferred service revenue was $196,202. 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". We account for compensation cost for stock option plans in accordance with APB Opinion No. 25. Effective June 17, 2004, we 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, we will receive a total of $1,150,000 of which $900,000 was already paid to us in cash and $250,000 was a one-year promissory note due in June 2005. Additionally, DFW acquired 85% of accounts receivable associated with services provided to our customers through June 17, 2004. Further, DFW entered into a one-year sublease for a portion of our office space at 701 N. Post Oak Road, Suite 630, Houston, Texas, at a 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 healthcare providers nationally. We remain dependent on outside sources of funding for continuation of our operations. Our independent auditors made a going concern qualification in their report dated March 28, 2005 (included in our annual report on Form 10-KSB for the year ended December 31, 2004), which raises substantial doubt about our ability to continue as a going concern. During the three months ended March 31, 2005, and the years ended December 31, 2004 and 2003, we have been unable to generate cash flows sufficient to support its operations and have been dependent on debt and equity raised from qualified individual investors. During the years ended December 31, 2004 and 2003, the Company experienced negative financial results as follows:
Year Ended December 31, 2004 2003 ------------ -------------- Net loss $ (640,199) $ (2,543,629) Negative cash flow from operations (1,299,842) (1,423,363) Negative working capital (1,241,177) (1,743,942) Stockholders' deficit (1,167,719) (1,140,379)
During the three months ended March 31, 2005, we experienced negative financial results as follows:
Three Months Ended March 31, 2005 2004 -------------- -------------- Net loss $ (1,501,150) $ (436,272) Negative cash flow from continuing operations (219,226) (228,887) Negative working capital (699,397) (1,868,580) Stockholders' deficit (552,434) (1,337,064)
These factors raise substantial doubt about our ability to continue as a going concern. The financial statements contained herein 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 we be unable to continue in existence. Our ability to continue as a going concern is dependent upon our ability to generate sufficient cash flows to meet our obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitable operations. However, there is no assurance that profitable operations or sufficient cash flows will occur in the future. We have supported current operations by: 1) selling off our traditional connectivity services business, 2) raising additional operating cash through the private sale of our common stock and options, 3) selling convertible and 4) issuing stock and options as compensation to certain employees and vendors in lieu of cash payments. These steps have provided us with the cash flows to continue our business plan, but have not resulted in significant improvement in our financial position. We are considering alternatives to address our critical cash flow situation that include: - Raising capital through additional sale of our common and preferred stock and/or debt securities. - 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 our 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 our current financial position can be improved, that we can raise additional working capital or that we can achieve positive cash flows from operations. Our long-term viability as a going concern is dependent upon the following: - Our ability to locate sources of debt or equity funding to meet current commitments and near-term future requirements. - Our ability to achieve profitability and ultimately generate sufficient cash flow from operations to sustain our continuing operations. Our fiscal year end is December 31. Our operations are located in Houston, Texas. Our business consists of the sales and marketing of our HIPAA compliant VPN and HIPAA application software. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2005. During the three months ended March 31, 2005, our service revenue was $359,547 compared to $194,535 for the three months ended March 31, 2004. This represents arevenue increase of $165,012 and is primarily attributable to our efforts to market BLUEGATE (tm) which is our core business. Our cost of sales (cost of services) for the three months ended March 31, 2005 was $175,764 compared to $165,442 for the three months ended March 31, 2004. The increase in cost of sales is due to higher interconnect fees and costs associated with BLUEGATE (tm). Our gross margin for the three months ended March 31, 2005 was $183,783 compared to $29,093 for the three months ended March 31, 2004. The increase in gross margin is attributable to the fact that our gross margin improves as HIPAA revenue increases because our fixed costs are a relatively high portion of our total costs. However, we anticipate that our variable costs will increase as we expand our HIPAA business. We incurred selling, general and administrative expenses of $724,788 for the three months ended March 31, 2005 compared to $238,173 for the three months ended March 31, 2004. The increase in SG&A is attributable to our ramp up of our sale and marketing efforts. We incurred a net loss of $1,501,150 for the three months ended March 31, 2005 compared to a loss of $436,272 for the three months ended March 31, 2004. The increase in net loss is primarily attributable to non-cash expense of $946,971 that we recorded upon conversion of notes payable to common stock. Forecast of Growth in our HIPAA Customer Base. Since we refocused our -------------------------------------------------- business activities in 2004 to concentrate on our HIPAA business segment, we have added an aggregate of more than 950 HIPAA customers through May 9, 2005. We forecast an increase in the number of HIPAA customers throughout 2005. This forecast is based on the rate that we are currently acquiring new HIPAA customers. This growth in the number of HIPAA customers is tempered somewhat because we incur marketing costs when we add new customers LIQUIDITY AND CAPITAL RESOURCES Our operations for the three months ended March 31, 2005 were funded by our issuance of common stock and options for cash in private transactions, loans and the proceeds from the sale of our traditional connectivity business in 2004. We have continued to take steps to reduce operating expenses relating to our core business. We have expanded efforts to creating a market for the healthcare industry. Because of the uncertainty associated with this new market, breakeven cash flow is not expected until late 2005 at the earliest. We disposed of our ISP business segment in 2004 for cash proceeds of $900,000 and a promissory note for $250,000 due in June 2005. Our cash on hand at March 31, 2005 was $36,617. We are seeking additional capital to fund expected operating costs. We believe that 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 of this on our business may require the sale of assets, the reduction or curtailment of new customer acquisition, reduction in the scope of current operations or the curtailment of business operations. Our ability to achieve profitability will depend upon our ability to raise additional operating capital, the continued growth in demand for connectivity services and our ability to execute and deliver high quality, reliable connectivity services. Our growth is dependent on attaining profit from our operations and our raising additional capital either through the sale of stock or borrowing. There is no assurance that we will be able to raise any equity financing or sell any of our products at a profit. Our future capital requirements will depend upon many factors, including the following: - The cost of operating our VPN. - The cost of third-party software. - The cost of sales and marketing. - The rate at which we expand our operations. - The response of competitors. - Our capital expenditures. ITEM 3. CONTROLS AND PROCEDURES. (a) Evaluation of disclosure controls and procedures. Based on their evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), our principal executive officer and principal financial officer have concluded that as of the end of the period covered by this quarterly report on Form 10-QSB such disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) Changes in internal control over financial reporting. During the quarter under report, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The evaluation of our disclosure controls included a review of whether there were any significant deficiencies in the design or operation of such controls and procedures, material weaknesses in such controls and procedures, any corrective actions taken with regard to such deficiencies and weaknesses and any fraud involving management or other employees with a significant role in such controls and procedures. There have been no changes in our internal control over financial reporting. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are a party in the following litigation: Crescent Communications, Inc. v. Financial News USA, Inc., Cause No. 820,758, In the County Civil Court at Law Number One, Harris County, Texas. We paid the defendant with the shares of our common stock but the defendant never performed as promised under the contract. On March 9, 2005, the court signed a final judgment in our favor granting us the return of 37,500 shares of common stock (post-reverse split) from the defendant. Bluegate Corporation v. The Navi-Gates Corporation and Robert C. Weslock, Cause No. 2005-00534, In the 234th Judicial District Court of Harris County, Texas. We recently filed this lawsuit. We filed this lawsuit claiming breach of contract, deceptive trade practices and fraud. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES. Information responsive to this Item was previously reported on Form 8-K dated March 31, 2005 and filed April 6, 2005. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS. Exhibit Exhibit Number Name _____________________________________________________________________ 31.1 Certification pursuant to Section 13a-14 of CEO 31.2 Certification pursuant to Section 13a-14 of CFO 32.1 Certification pursuant to Section 1350 of CEO 32.2 Certification pursuant to Section 1350 of CFO SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in Houston, Texas. BLUEGATE CORPORATION May 13, 2005 By: /s/ Manfred Sternberg Manfred Sternberg Director, Chief Executive Officer, President May 13, 2005 By: /s/ Greg J. Micek Greg J. Micek Chief Financial Officer EXHIBIT INDEX Exhibit Exhibit Number Name _____________________________________________________________________ 31.1 Certification pursuant to Section 13a-14 of CEO 31.2 Certification pursuant to Section 13a-14 of CFO 32.1 Certification pursuant to Section 1350 of CEO 32.2 Certification pursuant to Section 1350 of CFO EX-31.1 2 ex31_1.txt EXHIBIT 31.1 - -------------------------------------------------------------------------------- Exhibit 31.1 pursuant to Section 13a-14 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Manfred Sternberg, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Bluegate Corporation. Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: May 13, 2005 /s/ Manfred Sternberg Manfred Sternberg Chief Executive Officer A signed original of this written statement has been provided to Bluegate Corporation and will be retained by Bluegate Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-31.2 3 ex31_2.txt EXHIBIT 31.2 - -------------------------------------------------------------------------------- Exhibit 31.2 pursuant to Section 13a-14 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Greg J. Micek, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Bluegate Corporation. Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: May 13, 2005 /s/ Greg J. Micek Greg J. Micek Chief Financial Officer A signed original of this written statement has been provided to Bluegate Corporation and will be retained by Bluegate Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.1 4 ex32_1.txt EXHIBIT 32.1 - -------------------------------------------------------------------------------- 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. I, Manfred Sternberg, the Chief Executive Officer of Bluegate Corporation hereby certify that Bluegate Corporation's periodic report on Form 10-QSB and the financial statements contained therein fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d) and that information contained in the periodic report on Form 10-QSB and the financial statements contained therein fairly represents, in all material respects, the financial condition and results of the operations of Bluegate Corporation. Date: May 13, 2005 /s/ Manfred Sternberg Manfred Sternberg Chief Executive Officer of Bluegate Corporation. A signed original of this written statement has been provided to Bluegate Corporation and will be retained by Bluegate Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 5 ex32_2.txt EXHIBIT 32.2 - -------------------------------------------------------------------------------- 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. I, Greg J. Micek, the Chief Financial Officer of Bluegate Corporation hereby certify that Bluegate Corporation's periodic report on Form 10-QSB and the financial statements contained therein fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d) and that information contained in the periodic report on Form 10-QSB and the financial statements contained therein fairly represents, in all material respects, the financial condition and results of the operations of Bluegate Corporation. Date: May 13, 2005 /s/ Greg J. Micek Greg J. Micek CFO of Bluegate Corporation A signed original of this written statement has been provided to Bluegate Corporation and will be retained by Bluegate Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----