Logicquest Technology, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 Q3 2010 - Logicquest Technology, Inc.	ex312-10qq32010.htm
EX-32.2 - EXHIBIT 32.2 Q3 2010 - Logicquest Technology, Inc.	ex322-10qq32010.htm
EX-32.1 - EXHIBIT 32.1 Q3 2010 - Logicquest Technology, Inc.	ex321-10qq32010.htm
EX-31.1 - EXHIBIT 31.1 Q3 2010 - Logicquest Technology, Inc.	ex311-10qq32010.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2010

[ ] 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

(Exact name of registrant as specified 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 600, Houston,Texas	77024
(Address of principal executive offices)	(Zip Code)

voice: 713-686-1100	fax: 713-682-7402
Issuer's telephone number

Indicate by check mark whether the registrant :(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions in of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	[ ]	Accelerated filer	[ ]
Non-accelerated filer	[ ]	Smaller reporting company	[X]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each the issuer's classes of common stock, as of the latest practicable date: 26,033,565 common shares outstanding as of November 5, 2010.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Unaudited Consolidated Financial Statements	F-1

Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009	F-1

Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009	F-2

Consolidated Statement of Stockholders’ Deficit for the nine months ended September 30, 2010	F-3

Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009	F-4

Notes to Consolidated Financial Statements	F-5

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	I-1

ITEM 4T. CONTROLS AND PROCEDURES	I-5

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS	II-1

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	II-1

ITEM 4. OTHER INFORMATION	II-1

ITEM 5. EXHIBITS	II-1

SIGNATURES	II-2

CERTIFICATIONS	II-3

ITEM 1. FINANCIAL STATEMENTS

BLUEGATE CORPORATION
CONSOLIDATED BALANCE SHEETS
UNAUDITED


	September 30,			December 31,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	8,991		$	27,084
Accounts receivable, net		5,306			92,469
Prepaid expenses and other		14,941			41,064
Total current assets	$	29,238		$	160,617

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	19,999		$	37,036
Accounts payable to related party		98,656			95,764
Accrued liabilities		29,963			40,693
Note payable to related party		1,200,000			1,200,000
Accrued liabilities to related parties		70,481			73,337
Deferred revenue		10,719			12,142
Derivative liabilities		17,000			25,000
Total current liabilities		1,446,818			1,483,972



Stockholders’ deficit:

Undesignated preferred stock, $.001 par value, 9,999,942 shares authorized, none issued and outstanding		-			-
Series C Convertible Non-Redeemable preferred stock, $.001 par value, 48 shares authorized, issued and outstanding at September 30, 2010 and December 31, 2009; $12,500 per share liquidation preference ($600,000 aggregate liquidation preference at September 30, 2010)		-			-
Series D Convertible Non-Redeemable preferred stock, $.001 par value, 10 and -0- shares authorized, issued and outstanding at September 30, 2010 and December 31, 2009, respectively; $8,725 per share liquidation preference ($87,250 aggregate liquidation preference at September 30, 2010)		-			-
Common stock, $.001 par value, 50,000,000 shares authorized, 26,033,565 shares issued and outstanding at September 30, 2010 and December 31, 2009		26,034			26,034
Additional paid-in capital		22,160,286			22,075,546
Accumulated deficit		(23,603,900	)		(23,424,935	)
Total stockholders’ deficit		(1,417,580	)		(1,323,355	)
Total liabilities and stockholders’ deficit	$	29,238		$	160,617

See accompanying notes to consolidated financial statements

F-1

BLUEGATE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
UNAUDITED

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009
Service revenue	$	69,190		$	86,480		$	218,613		$	274,735
Cost of services		38,097			58,496			123,660			167,295
Gross profit		31,093			27,984			94,953			107,440
Selling, general and administrative expenses		82,473			48,681			197,432			92,958
Compensation expense		-			-			-			13,469
Income (loss) from operations		(51,380	)		(20,697	)		(102,479	)		1,013
Interest expense		-			(49,706	)		(84,486	)		(162,911	)
Gain (loss) on derivative financial instruments		3,000			(44,000	)		8,000			(48,000	)
Net loss from continuing operations		(48,380	)		(114,403	)		(178,965	)		(209,898	)
Gain (loss) from discontinued operations		-			(46,656	)		-			7,736
Net loss	$	(48,380	)	$	(161,059	)	$	(178,965	)	$	(202,162	)

Basic and diluted earnings income (loss) per share
Continuing operations	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	(0.01	)
Discontinued operations		-			(0.00	)		-			0.00
Net loss		(0.00	)		(0.01	)		(0.01	)		(0.01	)

Basic and diluted weighted average shares outstanding		26,033,565			26,033,565			26,033,565			26,033,565

See accompanying notes to consolidated financial statements

F-2

CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 2010
UNAUDITED


					PREFERRED STOCK								ADDITIONAL
	COMMON STOCK				SERIES C				SERIES D				PAID-IN		ACCUMULATED
	SHARES		CAPITAL		SHARES		CAPITAL		SHARES		CAPITAL		CAPITAL		DEFICIT			TOTAL
Balance at December 31, 2009		26,033,565	$	26,034		48	$	-		-	$	-	$	22,075,546	$	(23,424,935	)	$	(1,323,355	)
Preferred stock issued for accrued interest on related party promissory note						-		-		10		-		84,740					84,740
Net loss																(178,965	)		(178,965	)
Balance at September 30, 2010		26,033,565	$	26,034		48	$	-		10	$	-	$	22,160,286	$	(23,603,900	)	$	(1,417,580	)

See accompanying notes to consolidated financial statements

F-3

BLUEGATE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
UNAUDITED


	2010			2009
Cash flows from operating activities:

Net loss	$	(178,965	)	$	(202,162	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		-			24,274
Common stock options issued for employee services		-			2,219
Derivative (gain) loss		(8,000	)		48,000
Amortization of debt issuance cost		-			20,000
Changes in operating assets and liabilities:
Accounts receivable		87,163			241,827
Prepaid expenses and other current assets		26,123			11,623
Accounts payable and accrued liabilities		(27,767	)		(178,292	)
Accounts payable to related party		2,892			(10,750	)
Accrued liabilities to related parties		81,884			(57,702	)
Deferred revenue		(1,423	)		(88,004	)
Net cash used in operating activities		(18,093	)		(188,967	)

Cash flows from financing activities:
Proceeds from related party short term debt		-			180,000
Net cash provided by financing activities		-			180,000

Net decrease in cash and cash equivalents		(18,093	)		(8,967	)
Cash and cash equivalents at beginning of period		27,084			11,283
Cash and cash equivalents at end of period	$	8,991		$	2,316

Non Cash Transactions:
Derivative liability at January 1, 2009	$	-		$	84,000
Preferred stock issued for accrued interest on related party promissory note		84,740
Supplemental information:
Cash paid for interest	$	-		$	161,247

See accompanying notes to consolidated financial statements

F-4

BLUEGATE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

1. BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements of Bluegate Corporation, have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Bluegate's Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal 2009 as reported in the Form 10-K have been omitted.

FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued ASC 820 which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 were effective January 1, 2008. ASC 820 delays the effective date for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008.

As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

The three levels of the fair value hierarchy defined by ASC 820 are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of September 30, 2010. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.


	September 30, 2010
	Level 1	Level 2		Level 3	Total
Embedded derivatives	—	$	17,000	—	$	17,000

The derivatives listed above are carried at fair value. The fair value amounts in current period earnings associated with the Company’s derivatives resulted from Level 2 fair value methodologies; that is, the Company is able to value the assets and liabilities based on observable market data for similar instruments. This observable data includes the quoted market prices and estimated volatility factors.

RECLASSIFICATIONS

We have reclassified certain prior-year amounts to conform to the current year’s presentation.

F-5

2. GOING CONCERN CONSIDERATIONS

During the nine months ended September 30, 2010, Bluegate 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. In addition to negative cash flow from operations, Bluegate has experienced recurring net losses, and has a negative working capital and shareholders’ deficit.

These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if Bluegate is unable to continue as a going concern.

3. DISPOSITION OF CERTAIN ASSETS AND BUSINESS

In order to preserve common shareholder value, avoid bankruptcy and minimize Bluegate’s ongoing loss, effective November 7, 2009, Bluegate entered into the following transactions: 1) disposed of certain Medical Grade Network (“MGN”) assets and business and the elimination of certain liabilities, consisting primarily of: a) furniture, computers and related software and peripherals with a $17,889 book value; b) contracts, agreements, lists of telephone and fax numbers, licenses, permits, intellectual properties, registered mark for MGN and business name of Bluegate with a -0- net book value; c) eliminated liabilities of $43,607 principally related to customer product prepays which were assumed by the purchaser to Sperco, LLC (“Sperco”) (an entity controlled by Stephen Sperco (“SS”), our CEO/President/Director) for $200,000, with payment made by a combination of $100,000 cash and $100,000 forgiveness of debt to SAI Corporation (“SAIC”) (an entity controlled by SS), plus a net adjustment of $7,100 due to Bluegate from Sperco resulting from Bluegate’s collection of principally accounts receivable totaling $161,900 on behalf of Sperco for the period from November 8, 2009 through December 31, 2009, offset by Sperco’s payment of $169,000 to Bluegate for the personnel, facilities, tools, and resources necessary for Bluegate to support both the MGN and HIMS operations for Sperco for the same period; 2) a Separation Agreement and Mutual Release in Full of all claims with Manfred Sternberg (“MS”) (former Director/Corporate Officer), which included the elimination of $28,499 of accrued director fees and vehicle allowances in exchange for repayment of a loan plus accrued interest totaling $44,369 to MS; and 3) a Separation Agreement and Mutual Release in Full of all claims with William Koehler (“WK”) (former Director/Corporate Officer), which included the elimination of $28,499 of accrued director fees and vehicle allowances in exchange for repayment of a loan plus accrued interest totaling $44,374 with a direct payment to WK’s American Express account and a $1 payment to WK; and 4) disposed of certain Trilliant Technology Group, Inc.’s assets and business (consisting primarily of: a) Computers and related software and peripherals with a -0- net book value; b) lists of telephone and fax numbers and intellectual properties with a -0- net book value) to Trilliant Corporation (an entity controlled by WK) for a cash payment of $5,000; and 5) disposed of certain Bluegate Healthcare Information Management Systems (“HIMS”) assets and business (consisting primarily of: a) Contracts, agreements and intellectual properties with a -0- net book value) to SAIC in exchange for a Mutual Release in Full of certain claims and a $1 payment to SAIC; and 6) obtained a Fairness Opinion dated November 6, 2009 presented by Convergent Capital Appraisers.

As a result of these transactions, Bluegate received $105,000 cash; reduced the secured note payable to SAIC by $100,000; paid off unsecured notes payable and accrued interest of $88,743 to MS and WK; eliminated $56,998 of accrued liabilities to MS and WK; recorded $24,234 of expenses (principally legal and professional); removed the remaining book value of fixed assets of $17,889, eliminated $43,607 of customer liabilities assumed by Sperco and the net effect of $263,484 as an increase to Additional paid-in capital since the effect was treated as related party forgiveness of debt. There was no income tax (benefit) recorded as a result of the disposition since Bluegate has sufficient unused net operating losses available. Additionally the agreement provided for Sperco, LLC to contract the services of Bluegate employees and resources from November 8, 2009 through December 31, 2009 for $169,000 and the $169,000 was treated as an increase to Additional paid-in capital. The revenue and loss applicable to discontinued operations in 2009 were $2,642,450 and 112,180, respectively.

Effective January 1, 2010, Sperco, LLC commenced providing management, accounting and administrative services, as well as, network infrastructure and engineering support to Bluegate as needed in exchange for space and associated services. Effective July 1, 2010 Bluegate agreed to pay $15,000 monthly for those services and as of September 30, 2010 Bluegate owes $45,000 for those services. The $45,000 is included in the $98,656 balance under the caption accounts payable to related party on the balance sheet.

F-6

4. NOTES PAYABLE TO RELATED PARTY

Notes payable at September 30, 2010 and December 31, 2009 are summarized below:		9/30/2010				12/31/2009
Secured note payable to related party: During 2007, the Company entered into a line of credit agreement with SAI Corporation ("SAIC"), a corporation controlled by our CEO, Stephen Sperco (“SS”), to borrow up to $500,000. On February 28, 2008, the line of credit agreement with SAIC was amended to increase the borrowing to $700,000 and on February 28, 2008, Bluegate borrowed the additional $200,000 from SAIC for working capital purposes. As condition to and as additional consideration for SAIC’s agreement to lend the funds to the Company, the Company granted SAIC a security interest in its assets as more specifically detailed in the Promissory Note and Security Agreement, and increased the interest rate from 12% to 15% per annum. On July 14, 2008, the line of credit agreement with SAIC was amended to increase the borrowing to $900,000 and on July 31, 2008, Bluegate borrowed the additional $200,000 from SAIC for working capital purposes. Upon Bluegate borrowing the additional $200,000, the Company agreed to pay (1) SAIC a $40,000 origination fee and (2) Sperco Technology Group, Inc. (“STG”), a corporation controlled by SS, all past due amounts totaling $104,972. On August 14, 2008, the Company entered into a short term unsecured loan with SAIC to meet its working capital needs to borrow $65,000. Upon borrowing the $65,000, the Company agreed to pay SAIC a $6,500 origination fee and to repay SAIC with the first available funds once the August 15, 2008 payroll and medical insurance premium was paid. The Company paid the $65,000 loan and $6,500 fee on August 15, 2008. On August 28, 2008, the Company borrowed $50,000 from SAIC and agreed to pay SAIC a $5,000 origination fee. The Company paid the $50,000 funds borrowed and $5,000 fee on September 11, 2008. On October 16, 2008, the line of credit agreement with SAIC was amended to increase the borrowing to $1,100,000 and on October 21, 2008, Bluegate borrowed the additional $200,000 from SAIC for working capital purposes. Upon Bluegate borrowing the additional $200,000, the Company agreed to pay (1) SAIC a $20,000 origination fee and (2) STG all past due amounts totaling $56,837. On February 23, 2009, the line of credit agreement with SAIC was amended to increase the borrowing to $1,300,000 and on February 26, 2009, Bluegate borrowed the additional $200,000 from SAIC for working capital purposes. Upon Bluegate borrowing the additional $200,000, the Company agreed to pay SAIC a $20,000 origination fee. The note payable to SAIC is due on demand and pursuant to the terms of the note; SAIC made a demand for payment during 2009. Thirty days elapsed since SAIC made demand for payment and we were unable to repay SAIC and, as a result, this debt was in default in the principal amount of $1,300,000. Effective November 7, 2009, as a result of the Company entering into an Asset Sale and Purchase Agreement to sell certain Bluegate Corporation Medical Grade Network (“MGN”) and Healthcare Information Management Systems (“HIMS”) assets to Sperco, LLC (a company controlled by Stephen Sperco) and SAIC, respectively, the principal amount of the SAIC debt was reduced to $1,200,000 and SAIC rescinded its demand for payment. Additionally, interest on the note payable to SAIC was suspended from November 1, 2009 through February 28, 2010. Effective May 22, 2010, we sold 10 shares of Series D Preferred Stock to SAIC. SAIC agreed to grant a concession to the Company for the purchase of the 10 shares of a newly created Series D Convertible non-Redeemable Preferred Stock, par value $.001, by modifying the existing Promissory Note and Security Agreement as follows: (i) SAIC's waiver of accrued interest of $84,740 for the period from February 1, 2010 through May 22, 2010, and (ii) SAIC's waiver of any applicable interest payments for the period from May 23, 2010 through December 31, 2010 (estimated to be up to $109,973 without any present value effect).		$	1,200,000			$	1,200,000

5. EQUITY TRANSACTIONS

As of September 30, 2010, the company has outstanding: (i) 26,033,565 shares of common stock; (ii) 17,437,800 warrants; (iii) 7,048,597 options; and, (iv) preferred stock that are convertible into 1,450,000 shares of common stock, resulting in on a fully diluted basis, 51,969,962 shares of common stock. However, the company currently has only 50,000,000 shares of common stock authorized by our Articles of Incorporation. If all of the holders of warrants, options, convertible debt and preferred stock requested to exercise or convert all of the warrants, options, convertible debt and preferred stock, we would be unable to accommodate 1,969,962 shares of common stock in those requests. The company could have liability in the future if an option holder, warrant holder, preferred stock holder or holder of convertible debt desires to exercise or convert but cannot because we do not have enough unissued common stock available for issuance. However, the following individual or entities have waived their reservation of common stock underlying options and warrants until such time that the board of directors deems the waiver is not necessary as follows: Stephen Sperco and related entities - 2,000,000 shares.

In May 2010, Bluegate authorized 10 shares of Convertible Preferred Stock Series D, $.001 par value per share. Each holder of shares of Series D Convertible Preferred Stock may at his option and at any time convert any or all such shares into fully paid an non-assessable shares of Bluegate’s common stock at a conversion ratio of 25,000 shares of common stock for each share of Series D Convertible Preferred Stock. There are no dividends on Series D Convertible Preferred Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of shares of Series D Convertible Preferred Stock then outstanding will be entitled to receive out of assets of the Company available for distribution to stockholders, before any distribution of assets is made to holders of any other class of capital stock of the Company, an amount equal to $8,725 per share.

On May 22, 2010, Bluegate issued 10 shares of preferred stock Series D, par value of $.001, for a total of $84,740 interest forgiveness from a certain related party. See Note 4.

F-7

6. DERIVATIVE LIABILITY

Embedded feature of equity-linked financial instrument:

In June 2008, the FASB finalized ASC 815-15, "Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock". The EITF lays out a procedure to determine if an equity-linked financial instrument (or embedded feature) is indexed to its own common stock. The EITF is effective for fiscal years beginning after December 15, 2008. 9,034,800 of Bluegate’s outstanding warrants that were previously classified in equity were reclassified to derivative liabilities on January 1, 2009 as a result of this EITF. The fair value of these liabilities was $17,000 at September 30, 2010. The $8,000 change in fair value of these liabilities from January 1, 2010 is reported in our consolidated statement of operations as a gain on derivative financial instruments. The fair value of these liabilities will be re-measured at the end of every reporting period and the change in fair value will be reported in our consolidated statement of operations as a gain or loss on derivative financial instruments.

Bluegate used the Black-Scholes option pricing model to value the derivative liability using the following assumptions: number of options as set forth in the option agreements; no expected dividend yield; expected volatility of 340%; risk-free interest rates of 5.0%; and expected terms based on the contractual term.

7. COMMITMENTS AND CONTINGENCIES

Lease Commitment:

The Company operates from leased office space under an operating lease that was to expire in November 2013. Effective July 1, 2010, the Company amended its lease agreement with the landlord to: (a) reduce the monthly rent to $4,000; (b) a termination date of December 31, 2010; and (c) agree that the landlord and tenant each have the right to cancel the lease with a thirty day written notice.

Effective July 1, 2010, the Sperco entities agreed to pay a monthly amount of $4,000 for office space and associated services to Bluegate for the Sperco entities. As of September 30, 2010, Bluegate received $12,000 in rent payments from the Sperco entities which reduced rent expense for that period.

Contingencies:

In September 2010, Bluegate received notice that a prior client of Bluegate, Renaissance Healthcare Systems, Inc. through the Chapter 7 Trustee, filed a summons in an adversary proceeding against Bluegate Corporation while in bankruptcy under the recovery of money/property fraudulent transfer clause, attempting to reach back two years prior to the petition date. The amount in question is $68,480, (specifically four monthly payments Bluegate received from its client in the ordinary course of business from March 18, 2008 through June 13, 2008), plus pre-judgment and post judgment interest, costs and attorneys fees.

We believe the case is without merit and have engaged outside counsel to assist us in filing our response. Based upon preliminary communication for settlement purposes with the trustees counsel, we were informed that the matter could likely be settled for $25,000; however, the Company cannot predict with certainty and there can be no assurance as to the ultimate outcome or effect of this lawsuit. As of September 30, 2010, we have recorded $25,000 under the caption “accrued liabilities” on the balance sheet and $25,000 under the caption “selling, general and administrative expenses” on the consolidated statement of operations.

F-8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENT

This Management's Discussion and Analysis of Financial Condition and Results of Operations as of September 30, 2010 and for the nine months then ended, should be read in conjunction with the audited consolidated financial statements and notes thereto set forth in our annual report on Form 10-K for 2009.

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 Exchange 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 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-Q, 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.

OUR BUSINESS SUBSEQUENT TO THE NOVEMBER 7, 2009 DISPOSITION OF CERTAIN ASSETS AND BUSINESS

Bluegate consists of the networking service (carrier/circuit) business that provides internet connectivity to corporate clients on a subscription basis; essentially operating as a broker.

COMPETITION

Most of our competitors have greater financial and other resources than we have, and there is no assurance that we will be able to successfully compete.

Our web site is www.bluegate.com.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon consolidated financial statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated 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. Some services are billed in advance and, accordingly, revenues are deferred until the period in which the services are provided.

STOCK-BASED COMPENSATION

Accounting Standard 718, "Accounting for Stock-Based Compensation" ("ASC 718") established financial accounting and reporting standards for stock-based employee compensation plans. It defines a fair value based method of accounting for an employee stock option or similar equity instrument. In January 2006, Bluegate implemented ASC 718, and accordingly, Bluegate accounts for compensation cost for stock option plans in accordance with ASC 718.

Bluegate accounts for share based payments to non-employees in accordance with ASC 505-50 “Accounting for Equity Instruments Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services”.

DERIVATIVE FINANCIAL INSTRUMENTS

Bluegate does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Bluegate evaluates all of it financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, Bluegate uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

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GOING CONCERN

We remain dependent on outside sources of funding for continuation of our operations. Our independent registered public accounting firm issued a going concern qualification in their report dated March 15, 2010 (included in our annual report on Form 10-K for the year ended December 31, 2009), which raises substantial doubt about our ability to continue as a going concern.

During the nine months ended September 30, 2010 and the year ended December 31, 2009, we have been unable to generate cash flows sufficient to support our operations and have been dependent on debt and equity raised from qualified individual investors and loans from a related party.

During the nine months ended September 30, 2010 and 2009, we experienced negative financial results as follows:

	Nine Months Ended September 30,
	2010			2009
Net loss from continuing operations	$	( 178,965	)	$	(209,898	)
Negative cash flow from operations		(18,093	)		(188,967	)
Negative working capital		(1,417,580	)		(1,658,384	)
Stockholders’ deficit		(1,417,580	)		(1,638,277	)

These factors raise substantial doubt about our ability to continue as a going concern. The consolidated 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) raising additional operating cash through the private sale of our preferred and common stock, (2) selling convertible debt and common stock to certain key stockholders, (3) issuing stock and options as compensation to certain employees and vendors in lieu of cash payments and (4) disposing of certain assets and business (see footnote 3).

RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2010 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2009

	Three Months Ended September 30,									Increase (Decrease)
	2010			2009			2008			2010 from 2009			2009 from 2008
Service revenue	$	69,190		$	86,480		$	136,086		$	(17,290	)	$	(49,606	)
Cost of services		38,097			58,496			108,651			(20,399	)		(50,155	)
Gross profit		31,093			27,984			27,435			3,109			549
Selling, general and administrative expenses		82,473			48,681			51,424			33,792			(2,743	)
Compensation expense		-			-			98,817			-			(98,817	)
Loss from operations		(51,380	)		(20,697	)		(122,806	)		(30,683	)		(102,109	)
Interest expense		-			(49,706	)		(83,712	)		(49,706	)		(34,006	)
Gain (loss) on derivative financial instruments		3,000			(44,000	)		-			(47,000	)		44,000
Net loss from continuing operations		(48,380	)		(114,403	)		(206,518	)		(66,023	)		(92,115	)
Gain (loss) from discontinued operations		-			(46,656	)		19,135			(46,656	)		(65,791	)
Net loss	$	(48,380	)	$	(161,059	)	$	(187,383	)	$	(112,679	)	$	(26,324	)

Service Revenue.

The decrease in Service Revenue of $49,606 from 2008 to 2009 and $17,290 from 2009 to 2010 is due to a reduction in our networking service (carrier/circuit) business that provides internet connectivity to corporate clients on a subscription basis.

Cost of Services.

The net decrease in Cost of Services of $50,155 from 2008 to 2009 and $20,399 from 2009 to 2010 is due to a reduction in our networking service (carrier/circuit) business that provides internet connectivity to corporate clients on a subscription basis.

Gross Profit.

Our Gross Profit increased $549 from 2008 to 2009 and increased $3,109 from 2009 to 2010. Our Gross Profit as a percentage of Service Revenue increased from 20% in 2008 to 32% in 2009 and to 45% in 2010 primarily as a result of the changes in the Service Revenue and Cost of Services as described above.

Selling, General and Administrative Expenses (SG&A).

The decrease in SG&A of $2,743 from 2008 to 2009 was insignificant and the $33,792 increase in SG&A from 2009 to 2010 was primarily a result of recording $25,000 for the possible settlement of a lawsuit.

Compensation Expense.

The decrease in Compensation Expense of $98,817 from 2008 to 2009 is principally comprised of the decrease related to options issued for employee services.

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Interest Expense.

The decrease in Interest Expense of $34,006 from 2008 to 2009 was a result of the borrowings under the secured note payable to related party. The decrease in Interest Expense of $49,706 from 2009 to 2010 resulted from the issuance of Preferred stock for the elimination of accrued interest on the related party promissory note for the period from May 23, 2010 through December 31, 2010.

Gain (Loss) on Derivative Financial Instruments.

In June 2008, the FASB finalized ASC 815-15, "Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock". The pronouncement lays out a procedure to determine if an equity-linked financial instrument (or embedded feature) is indexed to its own common stock. The pronouncement is effective for fiscal years beginning after December 15, 2008. Some of Bluegate’s outstanding warrants that were previously classified in equity were reclassified to derivative liabilities on January 1, 2009 as a result of this pronouncement. Bluegate estimated the fair value of these liabilities as of January 1, 2009 to be $84,000. The fair values of these liabilities were $17,000 and $132,000 at September 30, 2010 and 2009, respectively. The $47,000 and $44,000 change in fair value for the three months is reported in our consolidated statement of operations as a gain and loss on derivative financial instruments as of September 30, 2010 and 2009, respectively.

Net Loss from Continuing Operations.

The Net Loss from Continuing Operations decreased $92,115 from 2008 to 2009 and $66,023 from 2009 to 2010 due to the items described above.

Gain (Loss) From Discontinued Operations.

The decrease in the Gain From Discontinued Operations of $65,791 from 2008 to 2009 and the decrease in the Loss From Discontinued Operations of $46,656 from 2009 to 2010 were a result of the disposition of certain assets and business effective November 7, 2009.

Net Loss.

The Net Loss decreased $26,324 from 2008 to 2009 and $112,679 from 2009 to 2010 due to the items described above.

FINANCIAL CONDITION

	Three Months Ended September 30,									Increase (Decrease)
	2010			2009			2008			2010 from 2009			2009 from 2008
Net cash used in operating activities	$	(21,243	)	$	(31,698	)	$	(252,601	)	$	(10,455	)	$	(220,903	)

Net cash provided by financing activities		-			-			200,000			-			(200,000	)
Net (decrease) in cash	$	(21,243	)	$	(31,698	)	$	(52,601	)	$	(10,455	)	$	20,903
Cash balance at end of period	$	8,991		$	2,316		$	22,071

Operating Activities.

The net decrease of $220,903 in cash used in operations from 2008 to 2009 is primarily attributable to the following discontinued operations effective November 7, 2009: (1) a decrease in personnel related to the completion of certain large application development engagements; (2) a reduction in product sales; (3) the effects of additional cost control measures, and (4) partially offset by an increase of personnel and salaries related to the implementation project management and consulting services. The decrease of $10,455 in cash used in operations from 2009 to 2010 is primarily due to the effects of the discontinued operations effective November 7, 2009.

Financing Activities.

The decrease of $200,000 in cash used in financing activities from 2008 to 2009 is due to a net decrease in related party short term debt.

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RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30, 2010 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2009

	Nine Months Ended September 30,									Increase (Decrease)
	2010			2009			2008			2010 from 2009			2009 from 2008
Service revenue	$	218,613		$	274,735		$	496,862		$	(56,122	)	$	(222,127	)
Cost of services		123,660			167,295			352,476			(43,635	)		(185,181	)
Gross profit		94,953			107,440			144,386			(12,487	)		(36,946	)
Selling, general and administrative expenses		197,432			92,958			182,808			104,474			(89,850	)
Compensation expense		-			13,469			1,021,189			(13,469	)		(1,007,720	)
Income (loss) from operations		(102,479	)		1,013			(1,059,611	)		103,492			(1,060,624	)
Interest expense		(84,486	)		(162,911	)		(123,891	)		(78,425	)		39,020
Gain (loss) on derivative financial instruments		8,000			(48,000	)		-			(56,000	)		(48,000	)
Net income (loss) from continuing operations		(178,965	)		(209,898	)		(1,183,502	)		(30,933	)		(973,604	)
Gain (loss) from discontinued operations		-			7,736			(428,377	)		(7,736	)		436,113
Net income (loss)	$	(178,965	)	$	(202,162	)	$	(1,611,879	)	$	(23,197	)	$	(1,409,717	)

Service Revenue.

The decrease in Service Revenue of $222,127 from 2008 to 2009 and $56,122 from 2009 to 2010 is due to a reduction in our networking service (carrier/circuit) business that provides internet connectivity to corporate clients on a subscription basis.

Cost of Services.

The net decrease in Cost of Services of $185,181 from 2008 to 2009 and $43,635 from 2009 to 2010 is due to a reduction in our networking service (carrier/circuit) business that provides internet connectivity to corporate clients on a subscription basis.

Gross Profit.

Our Gross Profit decreased $36,946 from 2008 to 2009 and $12,487 from 2009 to 2010. Our Gross Profit as a percentage of Service Revenue increased from 29% in 2008 to 39% in 2009 and to 43% in 2010 primarily as a result of the changes in the Service Revenue and Cost of Services as described above.

Selling, General and Administrative Expenses (SG&A).

The decrease in SG&A of $89,850 from 2008 to 2009 is due primarily to: (1) the effects of additional cost control measures, and (2) recording miscellaneous income of $54,768 as an offset to SG&A. The $104,474 increase in SG&A from 2009 to 2010 is due primarily to: (1) no recording of $54,768 of miscellaneous income as in the prior year, and (2) recording $25,000 for the possible settlement of a lawsuit.

Compensation Expense.

The decrease in Compensation Expense of $1,007,720 from 2008 to 2009 is principally comprised of the following; (1) $519,000 decrease related to conversion of related party debt for common stock; (2) $341,000 decrease related to options issued for employee services; (3) $109,000 decrease related to warrants issued to borrow funds from a related party; and (4) $17,000 decrease related to related party purchase of common stock for cash. The decrease in Compensation Expense of $13,469 from 2009 to 2010 is due to the elimination of the board of directors’ fees.

Interest Expense.

The increase in Interest Expense of $39,020 from 2008 to 2009 was a result of the increase in borrowings under the secured note payable to related party. The decrease of $78,425 from 2009 to 2010 was attributable to the $100,000 reduction of the secured note payable and suspension of interest charged for the month of January 2010 to related party as a result of the disposition of certain assets and business effective November 7, 2009.

Gain (Loss) Loss on Derivative Financial Instruments.

In June 2008, the FASB finalized ASC 815-15, "Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock". The pronouncement lays out a procedure to determine if an equity-linked financial instrument (or embedded feature) is indexed to its own common stock. The pronouncement is effective for fiscal years beginning after December 15, 2008. Some of Bluegate’s outstanding warrants that were previously classified in equity were reclassified to derivative liabilities on January 1, 2009 as a result of this pronouncement. Bluegate estimated the fair value of these liabilities as of January 1, 2009 to be $84,000. The fair values of these liabilities were $17,000 and $132,000 at September 30, 2010 and 2009, respectively. The $56,000 and $48,000 change in fair value for the nine months is reported in our consolidated statement of operations as a gain and loss on derivative financial instruments as of September 30, 2010 and 2009, respectively.

Net Loss from Continuing Operations.

The Net Loss from Continuing Operations decreased $973,604 from 2008 to 2009 and $30,933 from 2009 to 2010 due to the items described above.

Gain (Loss) From Discontinued Operations.

The increase in the Gain From Discontinued Operations of $436,113 from 2008 to 2009 and the decrease in the Gain From Discontinued Operations of $7,736 from 2009 to 2010 were a result of the disposition of certain assets and business effective November 7, 2009.

Net Loss.

The Net Loss decreased $1,409,717 from 2008 to 2009 and $23,197 from 2009 to 2010 due to the items described above.

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FINANCIAL CONDITION

	Nine Months Ended September 30,									Increase (Decrease)
	2010			2009			2008			2010 from 2009			2009 from 2008
Net cash (used in) operating activities	$	(18,093	)	$	(188,967	)	$	(461,270	)	$	(170,874	)	$	(272,303	)
Net cash (used in) investing activities		-			-			(12,870	)		-			(12,870	)
Net cash provided by financing activities		-			180,000			452,508			(180,000	)		(272,508	)
Net decrease in cash	$	(18,093	)	$	(8,967	)	$	(21,632	)	$	(9,126	)	$	12,665

Cash balance at end of period	$	8,991		$	2,316		$	22,071

Operating Activities.

The net decrease of $272,303 in cash used in operations from 2008 to 2009 is primarily attributable to the following discontinued operations effective November 7, 2009: (1) a decrease in personnel related to the completion of certain large application development engagements; (2) a reduction in product sales; (3) the effects of additional cost control measures, and (4) partially offset by an increase of personnel and salaries related to the implementation project management and consulting services. The decrease of $170,874 in cash used in operations from 2009 to 2010 is primarily due to the effects of the discontinued operations effective November 7, 2009.

Investing Activities.

The decrease of $12,870 in cash used in investing activities from 2008 to 2009 was a result of no purchases of fixed assets.

Financing Activities.

The decrease of $272,508 in cash provided by financing activities from 2008 to 2009 is due to: (1) a $295,000 decrease in investments in the company’s common stock and warrants; and (2) a $22,000 net increase in related party short term debt. The decrease of $180,000 in cash provided by financing activities from 2009 to 2010 is due to the decrease in proceeds from related party short term debt.

BLUEGATE STRATEGY

Our strategy is to stabilize our internet connectivity business and pursue expansion of our market outside of the healthcare industry.

LIQUIDITY AND CAPITAL RESOURCES

Operations for the nine months ended September 30, 2010 have been funded by the elimination of personnel and the disposition of certain assets and business. As of September 30, 2010, our cash and cash equivalents were $8,991; total current assets were $29,238, total current liabilities were $1,446,818 and total stockholders’ deficit was $1,417,580.

We intend to use debt to cover the anticipated negative cash flows until we can operate at a break-even cash flow mode. 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.

Our ability to achieve profitability will depend upon 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.

ITEM 4T. CONTROLS AND PROCEDURES

(a)	Evaluation of disclosure controls and procedures.
	The Company’s Chief Executive Officer and Principal Accounting Officer participated in an evaluation by management of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2010. Based on their participation in that evaluation, the Company’s Chief Executive Officer and Principal Accounting Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2010 to ensure that required information is disclosed on a timely basis in its reports filed or furnished under the Exchange Act.
(b)	Changes in internal control over financial reporting.
	There was no change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

NONE.

ITEM 4. OTHER INFORMATION

NONE

ITEM 5. EXHIBITS

Exhibit
Number	Name

31.1	CERTIFICATION REQUIRED BY RULE 13a - 14(a) 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 OF THE CHIEF EXECUTIVE OFFICER

31.2	CERTIFICATION REQUIRED BY RULE 13a - 14(a) 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 OF THE CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER

32.1	CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350), OF THE CHIEF EXECUTIVE OFFICER

32.2	CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350), OF THE CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Bluegate Corporation

Date:	November 8, 2010	/s/	Stephen J. Sperco

			Stephen J. Sperco,
			Chief Executive Officer


Bluegate Corporation

Date:	November 8, 2010	/s/	Charles E. Leibold

			Charles E. Leibold,
			Chief Financial Officer and Principal Accounting Officer

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