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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

———————


FORM 10-K

   

þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2013


OR


¨

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

Incorporation or Organization)

(IRS Employer

Identification No.)


701 North Post Oak Road, Suite 350,

 

Houston, Texas

77024

(Address of principal executive offices)

(Zip Code)


Registrant's telephone number, including area code 713-686-1100


Securities registered pursuant to Section 12(b) of the Act:


Title of each class

 

Name of each exchange on which registered

None

 

None


Securities registered pursuant to Section 12(g) of the Act:


Common Stock, $0.001 par value, listed on the Over-The-Counter Bulletin Board.

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨  No þ


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes þ  No ¨


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 filing requirements for the past 90 days.  Yes þ  No ¨


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate 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 þ  No ¨


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ


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 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

þ

 

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ¨  No þ


As of January 22, 2014, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was last sold based on the closing price on that date was approximately $83,683. On January 22, 2014, the registrant had outstanding 46,033,565 shares of Common Stock, $0.001 par value per share.


Documents Incorporated by Reference


None

 

 




 



TABLE OF CONTENTS


 

 

PAGE

 

PART I

 

 

 

 

Item 1.

Business

1

Item 1A.

Risk Factors

4

Item 2.

Properties

6

Item 3.

Legal Proceedings

6

                            

 

                            

 

PART II

 

 

 

 

Item 5.

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

7

Item 6.

Selected Financial Data

8

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

8

Item 8.

Financial Statements and Supplementary Data

F-1

Item 9.

Changes In and Disagreements with Accountants On Accounting and Financial Disclosure

12

Item 9A

Controls and Procedures

12

Item 9B.

Other Information

12

 

 

 

 

PART III

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

13

Item 11.

Executive Compensation

16

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

18

Item 13.

Certain Relationships and Related Transactions, and Director Independence

20

Item 14.

Principal Accountant Fees and Services

22

 

 

 

 

PART IV

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

23

 

 

 

SIGNATURES

 

24





 


PART I


Item 1.Business.


INTRODUCTION


Bluegate Corporation (the “Company”) was originally incorporated as Solis Communications, Inc. on July 23, 2001 and adopted a name change to Crescent Communications Inc. upon completion of a reverse acquisition of Berens Industries, Inc. In 2004, we changed our name to Bluegate Corporation (“Bluegate”).


Bluegate is a Nevada Corporation that consists of the networking service (carrier/circuit) business, which provides internet connectivity to corporate clients on a subscription basis; essentially operating as a value added provider.


In this Form 10-K, we refer to ourselves as "Bluegate," "We," Us," “the Company,” and "Our."


Our executive offices are located at: Bluegate Corporation, 701 North Post Oak Road, Suite 350, Houston, Texas 77024; tel. voice: 713-686-1100, fax: 713-682-7402. Our Web site is www.bluegate.com.


Our growth is dependent on attaining profit from our operations and our raising capital through the sale of stock or debt. There is no assurance that we will be able to raise any equity financing or sell any of our products at a profit.


Our functional currency is the U.S. dollar. Our independent registered public accounting firm issued a going concern qualification in their report dated January 22, 2014, which raises substantial doubt about our ability to continue as a going concern.


Our stock is traded on the Over-The-Counter Bulletin Board (“OTCBB”) and our trading symbol is "BGAT."


CORPORATE HISTORY


In 1996, Congress passed the Health Insurance Portability and Accountability Act ("HIPAA"). Two of the many features of HIPAA were a mandate that the healthcare industry move toward using electronic communication technology to streamline and reduce the cost of healthcare, and a requirement that healthcare providers treat virtually all healthcare information as confidential, especially when electronically transmitted.


In 2001, Mr. Manfred Sternberg acquired effective control of the company and during 2002 and 2003 under his leadership, the company commenced development and completion of the necessary systems to offer integrated HIPAA compliant Medical Grade Network® to the health care community to provide electronic systems required by increasing U.S. public policy mandates to accelerate the movement to secure electronic health records.


In 2003, a minority amount of our revenue was related to our HIPAA business. In 2004, a majority of our revenue was related to our HIPAA business. In 2005, all of our revenues were related to our health care service model.


In 2004, to accelerate our movement into the electronic health record business, we sold our Internet Service Provider ("ISP") customer base effective June 21, 2004 to concentrate on our health care IT solutions model and its Medical Grade Network®.


In 2004, we contracted with the largest healthcare system in Texas to provide physicians with Internet bandwidth and managed security services using our Medical Grade Network®.


In March 2005 we acquired substantially all of the assets and assumed certain ongoing contractual obligations of TEKMedia Communications, Inc., a company that provided traditional IT consulting services, in exchange for 132,000 shares of the Company’s common stock valued at $116,160.




1



 


In September 2005 we acquired substantially all of the assets and assumed certain ongoing contractual obligations of Trilliant Corporation, a company that provides assessment, design, vendor selection, procurement and project management for large technology initiatives, particularly in the healthcare arena. The acquisition strengthened Bluegate as a competitor in the technology management industry. The purchase price consisted of $161,033 cash and 258,308 shares of Bluegate's common stock valued at $180,816. The asset sale and purchase agreement provided for additional consideration up to 827,160 common shares depending on the acquired business’ revenue through September 2007 and royalty payments based on sales through September 2007 of certain software acquired. In accordance with the asset sale and purchase agreement, 407,407 shares of Bluegate’s common stock valued at $301,481 was issued in 2006 as additional consideration based upon the acquired business’ revenue calculation after the first year and 419,753 shares of Bluegate’s common stock valued at $33,580 was issued in 2007 as additional consideration based upon the acquired business’ revenue calculation after the second year.


Effective June 28, 2007, we sold 8 shares of Series C Preferred Stock for $100,000 in cash to SAI Corporation, a corporation controlled by Stephen Sperco who is our CEO and a Director. We also granted to SAI Corporation warrants to purchase up to 1,000,000 shares of our common stock at an exercise price of $0.17 per share expiring in June 2012. On the same day we sold 40 shares of Series C Preferred Stock for $500,000 in cash to Stephen Sperco. We also granted to Mr. Sperco warrants to purchase up to 5,000,000 shares of our common stock at an exercise price of $0.17 per share expiring in June 2012. Each share of Preferred Stock is convertible into 25,000 shares of common stock. Each share of Preferred Stock has 15 times the number of votes its conversion-equivalent number of shares of common stock, or 375,000 votes per share of Preferred Stock. The 48 shares of Preferred Stock will have an aggregate of 18 million votes. The Preferred Stock votes along with the common stock on all matters requiring a vote of shareholders and the Preferred Stock is not redeemable by us.


As a result of his purchase of Series C Preferred Stock described above, and his previously acquired stock and warrants, and most recent conversion of certain debt to equity and additional warrants received in 2008, Mr. Sperco beneficially owns 44% of our common stock without taking into account the super voting power of the Preferred stock, and 62% when taking into account the super voting power of the Preferred Stock. One of the conditions of Mr. Sperco’s purchase of the Preferred Stock was that both he and Dale Geary be appointed as Directors.


Effective May 31, 2009, Mr. Koehler resigned as President from the company.


Effective July 29, 2009, Charles Leibold became a Director as a result of: (A) the June 12, 2009 written consent of a majority of our shareholders; (B) the June 22, 2009 filing of a Preliminary Information Statement; (C) the July 8, 2009 filing of a Definitive Information Statement; and, (D) the July 9, 2009 mailing of the Definitive Information Statement to our shareholders. The Definitive Information Statement had a record date of June 25, 2009. Mr. Leibold remains our Chief Financial Officer and Principal Accounting Officer.


Effective July 30, 2009, the titles of CEO and President were combined, and Stephen Sperco was appointed President. Mr. Sperco is our CEO/President/Director. Stephen Sperco was appointed Chairman of the Board. The executive officer position of Chief Strategy Officer was eliminated and Mr. Sternberg’s employment was terminated.


Effective October 27, 2009, Mr. Koehler resigned as Director and effective October 28, 2009, Mr. Sternberg and Mr. Geary resigned as Directors.




2



 


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) entered into 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) entered into 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.


Pursuant to the State of Nevada Revised Statutes, which authorizes the taking of action by written consent of the shareholders without a meeting, a super majority of the voting power of the shareholders of Bluegate gave their consent to the above actions. In April 2010, Bluegate filed a Definitive Information Statement on Schedule 14C with the SEC and mailed the notice to shareholders.


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.


On May 22, 2010, we sold 10 shares of Series D preferred stock to SAI Corporation (“SAIC”), a corporation controlled by Stephen Sperco by modifying the existing Promissory Note and Security Agreement as follows: (1) SAIC's waiver of accrued interest of $84,740 for the period from February 1, 2010 through May 22, 2010, and (2) 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). Each share of Series D convertible preferred stock may be converted, at the option of the shareholder, into 25,000 shares of common stock or a total of 250,000 shares of common stock. Each share of preferred stock has 150 times the number of votes its conversion-equivalent number of shares of common stock, or 3,750,000 votes per share of preferred stock. The 10 shares of preferred stock will have an aggregate of 37,500,000 million votes. The Preferred Stock votes along with the common stock on all matters requiring a vote of shareholders and the Preferred Stock is not redeemable by us.


On December 27, 2010 our 100% owned subsidiary, Trilliant Technology Group, Inc. was dissolved.


On December 29, 2011 we issued 20,000,000 shares of common stock to SAIC for the cancellation of 7,500,000 warrants and the partial settlement of the related party promissory note for $30,000 and the waiving of accrued interest payable of $230,000, for a total of $260,000. The conversion and purchase price per share was $0.013 when the market price was $0.003; therefore there was no excess of the fair value of the stock over the debt converted.


As a result of the purchase of Series D Preferred Stock described above, and the previously and subsequently acquired common and preferred stock, options, warrants, and conversion of certain debt to equity, SAIC beneficially owns 59% of our common stock without taking into account the super voting power of the Preferred stock, and 81% when taking into account the super voting power of the Preferred Stock. 




3



 


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 value added provider.


BLUEGATE STRATEGY


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


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 BUSINESS - CUSTOMERS AND VENDORS


Major Customers. During 2013, our top five customers accounted for 41% of our service revenue and no single customer accounted for more than 12% of service revenue.


Major Vendors. During 2013, our top five vendors accounted for 92% of our purchases and no single vendor accounted for more than 56% of purchases.


EMPLOYEES


As a result of the disposition of certain assets and business, effective January 1, 2010 there are no Bluegate Corporation employees. 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.


AVAILABLE INFORMATION ABOUT US


The public may read and copy any materials we file with the Securities and Exchange Commission (“SEC”) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, on official business days during the hours of 10:00 am to 3:00 pm. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission at (http://www.sec.gov). Our Internet site is www.bluegate.com.


Item 1A. Risk Factors.


Our future performance is subject to a variety of risks. If any of the events or circumstances described in the following risk factors actually occurs, our business, financial condition or results of operations could suffer. In addition to the following disclosures, please refer to the other information contained in this report, including consolidated financial statements and related notes, and information contained in the Company’s other SEC filings. This document contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. This section discusses the business risk factors that might cause those differences.


RISKS RELATED TO OUR FINANCIAL OPERATIONS:


OUR PAST LOSSES RAISE DOUBTS ABOUT OUR ABILITY TO OPERATE PROFITABLY OR CONTINUE AS A GOING CONCERN


We have experienced substantial operating losses and we expect to incur operating losses until sales increase. We will also need to raise sufficient funds to finance our activities. We may be unable to achieve or sustain profitability. Our independent registered public accounting firm included an explanatory paragraph in their report indicating substantial doubt about our ability to continue as a going concern. These factors raise substantial doubt as to our ability to continue as a going concern.




4



 


OUR EXPECTED FUTURE LOSSES RAISE DOUBTS ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN UNLESS WE CAN RAISE CAPITAL


Future events may lead to increased costs that could make it difficult for us to succeed. To raise additional capital, we may sell additional equity securities, or accept debt financing or obtain financing through a bank or other entity. There is no limit as to the amount of debt we may incur. Additional financing may not be available to us or may not be available on terms acceptable to us. If additional funds are raised through the issuance of additional stock, there may be a significant dilution in the value of our outstanding common stock.


WE MAY NOT BE ABLE TO RAISE THE REQUIRED CAPITAL TO CONDUCT OUR OPERATIONS


We may require additional capital resources in order to conduct our operations. If we cannot obtain additional funding, we may make reductions in the scope and size of our operations. In order to grow and expand our business, and to introduce our services to the marketplace, we will need to raise additional funds.


RISKS RELATED TO OUR BUSINESS OPERATIONS:


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.


IF WE DO NOT KEEP PACE WITH OUR COMPETITORS AND WITH TECHNOLOGY AND MARKET CHANGES, OUR SERVICES MAY BECOME OBSOLETE AND OUR BUSINESS MAY SUFFER


The market for our services is competitive and could be subject to rapid technological changes. We believe that there are potentially many competitive approaches being pursued, including some by private companies from which information is difficult to obtain. Many of our competitors have significantly greater resources and more services that directly compete with our services. Our competitors may have developed, or could in the future develop, new technologies that compete with our services and even render our services obsolete.


WE COULD HAVE SYSTEMS FAILURES THAT COULD ADVERSELY AFFECT OUR BUSINESS


Our business depends on the efficient and uninterrupted operation of both our suppliers and our computer and communications hardware systems and infrastructure. Although we have taken precautions against system failure, interruptions could result from natural disasters, power losses, Internet failures, telecommunication failures, and similar events. Our systems are also subject to human error, security breaches, computer viruses, break-ins, "denial of service" attacks, sabotage, intentional acts of vandalism, and tampering designed to disrupt our computer systems. We also lease telecommunications lines from local and regional carriers, whose service may be interrupted. Any damage or failure that interrupts or delays network operations could materially and adversely affect our business.


OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE FAIL TO ADEQUATELY ADDRESS SECURITY ISSUES


We have taken measures to protect the integrity of our technology infrastructure and the privacy of confidential information. Nonetheless, our technology infrastructure is potentially vulnerable to physical or electronic break-ins, viruses or similar problems. If a person or entity circumvents our security measures, they could jeopardize the security of confidential information stored on our systems, misappropriate proprietary information or cause interruptions in our operations. We may be required to make substantial additional investments and efforts to protect against or remedy security breaches. Security breaches that result in access to confidential information could damage our reputation and expose us to a risk of loss or liability.


RISKS RELATED TO OUR SECURITIES:


SINCE WE HAVE NOT PAID ANY DIVIDENDS ON OUR COMMON STOCK AND DO NOT INTEND TO DO SO IN THE FUTURE, A PURCHASER OF OUR COMMON STOCK WILL ONLY REALIZE A GAIN ON HIS INVESTMENT IF THE MARKET PRICE OF OUR COMMON STOCK INCREASES


We have never paid, and do not intend, to pay any cash dividends on our common Stock for the foreseeable future. An investor, in all likelihood, will only realize a profit on his investment if the market price of our common stock increases in value.




5



 


BECAUSE SHARES OF OUR COMMON STOCK MAY MOST LIKELY TRADE UNDER $5.00 PER SHARE, THE APPLICATION OF THE PENNY STOCK REGULATION COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND MAY AFFECT THE ABILITY OF HOLDERS OF OUR COMMON STOCK TO SELL THEIR SHARES


Our securities may be considered a penny stock. Penny stocks generally are defined as securities with a price of less than $5.00 per share other than securities registered on national securities exchanges or quoted on the Nasdaq stock market, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. Our securities may be subject to penny stock rules that impose additional sales practice requirements on broker-dealers who sell penny stock securities to persons other than established customers and accredited investors. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of penny stock securities and have received the purchaser's written consent to the transaction prior to the purchase. For any transaction involving a penny stock, unless exempt, the penny stock rules require the delivery, prior to the transaction, of a disclosure schedule prescribed by the Commission relating to the penny stock market. The broker-dealer also must disclose the sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Monthly statements must be sent by the broker-dealer disclosing recent price information on the limited market in penny stocks. The penny stock rules may restrict the ability of broker-dealers to sell our securities and may have the effect of reducing the level of trading activity of our common stock in the public market.


RISKS RELATED TO OUR CORPORATE GOVERNANCE:


OUR OFFICERS AND DIRECTORS HAVE LIMITED LIABILITY AND HAVE INDEMNITY RIGHTS


The Nevada Revised Statutes, our Articles of Incorporation and our By-Laws provide that we may indemnify our officers and directors against losses or liabilities which arise in their corporate capacity. The effect of these provisions could be to dissuade lawsuits against our officers and directors.


Item 2. Properties.


We lease office space located at 701 North Post Oak Road, Suite 350, Houston, Texas 77024, on a month-to-month basis for $1,000 per month.


Item 3. Legal Proceedings.


None.




6



 


PART II


Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.


Our stock is traded on the OTCBB and our trading symbol is "BGAT." The following table sets forth the quarterly high and low bid price per share for our common stock. These bid and asked price quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual prices. Our fiscal year ends December 31.


COMMON STOCK PRICE RANGE


 

2013

 

2012

 

HIGH

 

LOW

 

HIGH

 

LOW

First Quarter

$0.0250

 

$0.0070

 

$0.0100

 

$0.0015

Second Quarter

0.0200

 

0.0086

 

0.0050

 

0.0015

Third Quarter

0.0089

 

0.0085

 

0.0290

 

0.0030

Fourth Quarter

0.0890

 

0.0035

 

0.0100

 

0.0007


COMMON STOCK


On January 21, 2014, we had outstanding 46,033,565 shares of Common Stock, $0.001 par value per share.


On January 21, 2014, the closing bid price of our stock was $0.0065 per share.


On January 21, 2014, we had approximately 508 shareholders of record.


One of our record stockholders is a nominee located offshore with record ownership (not beneficial ownership) of approximately 3% of our shares of common stock. Our transfer agent is American Stock Transfer and Trust Company.


We have not paid any cash dividends and we do not expect to declare or pay any cash dividends in the foreseeable future. Payment of any cash dividends will depend upon our future earnings, if any, our financial condition, and other factors as deemed relevant by the Board of Directors.


SALE OF UNREGISTERED SECURITIES


None.


SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS


 

 

Number of securities to be

issued upon exercise of

outstanding options,

warrants and rights

 

 

Weighted-average

exercise price of

outstanding options,

warrants and rights

 

 

Number of securities

remaining available for

future issuance under

equity compensation plans

(excluding securities

reflected in column (a))

 

PLAN CATEGORY:

    

(a)

 

 

(b)

 

 

(c)

 

Equity compensation plans approved by security holders

 

 

-

 

 

$

-

 

 

 

-

 

Equity compensation plans not approved by security holders

 

 

-

 

 

$

-

 

 

 

1,867,315

(1)

———————

(1)

These shares are the remaining unissued shares under our 2005 Stock and Stock Option Plan (the 2005 Plan).


EMPLOYEE STOCK OPTION PLANS


The Company had adopted the 2002 Stock and Stock Option Plan under which incentive stock options for up to 450,000 common shares may be awarded to officers, directors and key employees. The plan was designed to attract and reward key executive personnel. As of December 31, 2007, Bluegate has granted all 450,000 options and the 2002 stock plan is not active. Stock options granted pursuant to the 2002 plan expire as determined by the board of directors. All of the options granted were at an option price equal to the fair market value of the common stock at the date of grant.




7



 


In 2005 we adopted the 2005 Stock and Stock Option Plan (the "2005 Plan"). The purpose of the 2005 Plan is to further our interests, our subsidiaries and our stockholders by providing incentives in the form of stock options to key employees, consultants, directors and others who contribute materially to our success and profitability. The grants recognize and reward outstanding individual performances and contributions and will give such persons a proprietary interest in us, thus enhancing their personal interest in our continued success and progress. The 2005 Plan also assists us and our subsidiaries in attracting and retaining key employees and Directors. The 2005 Plan is administered by the Board of Directors. The Board of Directors has the exclusive power to select the participants in the 2005 Plan, to establish the terms of the stock and options granted to each participant, provided that all options granted shall be granted at an exercise price equal to at least 85% of the fair market value of the common stock covered by the option on the grant date and to make all determinations necessary or advisable under the 2005 Plan. The maximum aggregate number of shares of common stock that may be granted or optioned and sold under the Plan is 3,000,000 shares. As of December 31, 2013, 1,132,685 shares of common stock have been granted pursuant to the 2005 Plan.


Item 6. Selected Financial Data.


Disclosure is not required as a result of our Company’s status as a smaller reporting company.


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.


The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes and the discussions under “Application of Critical Accounting Policies,” which describes key estimates and assumptions we make in the preparation of our financial statements.


OVERVIEW


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


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 January 22, 2014, which raises substantial doubt about our ability to continue as a going concern.


During the years ended December 31, 2013 and 2012, 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. We experienced negative financial results as follows:


 

 

2013

 

 

2012

 

Net loss

 

$

(556,224

)

 

$

(528,397

)

Negative cash flow from operations

 

 

(64,639

)

 

 

(47,175

)

Negative working capital

 

 

(2,782,171

)

 

 

(2,225,947

)

Stockholders’ deficit

 

 

(2,782,171

)

 

 

(2,225,947

)


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.


LIQUIDITY AND CAPITAL RESOURCES


Operations for the year ended December 31, 2013 have been funded by loans from related parties. As of December 31, 2013, our cash and cash equivalents were $4,723; total current assets were $14,857, total current liabilities were $2,797,028 and total stockholders’ deficit was $2,782,171.


We intend to use debt to cover the anticipated negative cash flows until we can operate at a break-even cash flow mode. We may seek additional capital to fund potential costs associated with possible expansion and/or acquisitions. 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.




8



 


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.


RESULTS OF OPERATIONS


 

 

Year Ended December 31,

 

 

Increase (Decrease)

 

 

 

2013

 

 

2012

 

 

2011

 

 

2013 from 2012

 

 

2012 from 2011

 

Service revenue

 

$

100,463

 

 

$

143,334

 

 

$

222,758

 

 

$

(42,871

)

 

$

(79,424

)

Cost of services

 

 

102,168

 

 

 

120,331

 

 

 

147,233

 

 

 

(18,163

)

 

 

(26,902

)

Gross profit (loss)

 

 

(1,705

)

 

 

23,003

 

 

 

75,525

 

 

 

(24,708

)

 

 

(52,522

)

Selling, general and administrative expenses

 

 

242,969

 

 

 

247,590

 

 

 

277,084

 

 

 

(4,621

)

 

 

(29,494

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(244,674

)

 

 

(224,587

)

 

 

(201,559

)

 

 

20,087

 

 

 

23,028

 

Interest expense

 

 

(311,550

)

 

 

(303,810

)

 

 

(293,760

)

 

 

7,740

 

 

 

10,050

 

Gain on derivative financial instrument

 

 

-

 

 

 

-

 

 

 

22,000

 

 

 

-

 

 

 

(22,000

)

Net loss

 

$

(556,224

)

 

$

(528,397

)

 

$

(473,319

)

 

$

27,827

 

 

$

55,078

 


Service Revenue.


The decrease in Service Revenue of $79,424 from 2011 to 2012 and $42,871 from 2012 to 2013 is primarily 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 $26,902 from 2011 to 2012 and $18,163 from 2012 to 2013 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 $52,522 from 2011 to 2012 and $24,708 from 2012 to 2013. Our Gross Profit as a percentage of Service Revenue decreased from 34% in 2011 to 16% in 2012 and to negative 2% in 2013 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 decreases in SG&A from 2011 to 2012 of $29,494 and from 2012 to 2013 of $4,621 are primarily due to the decrease of certain expenses attributable to the reduction in our networking service (carrier/circuit) business.


Interest Expense.


The increase in Interest Expense of $10,050 from 2011 to 2012 was a result of one additional $10,000 late charge penalty in 2012. The increase in Interest Expense of $7,740 from 2012 to 2013 was a result of the increase in borrowings under the secured note payable to related party.


Gain 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 value of these liabilities was -0- at December 31, 2013 and 2012. The $22,000 change in fair value for 2011 was reported in our statement of operations as a gain on derivative financial instruments as of December 31, 2011.




9



 


Net Loss.


The Net Loss increased $55,078 from 2011 to 2012 and $27,827 from 2012 to 2013 due to the items described above.


FINANCIAL CONDITION


 

 

Year Ended December 31,

 

 

Increase (Decrease)

 

 

 

2013

 

 

2012

 

 

2011

 

 

2013 from 2012

 

 

2012 from 2011

 

Net cash (used in) operating activities

 

$

(64,639

)

 

$

(47,175

)

 

$

(34,276

)

 

$

17,464

 

 

$

12,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

65,600

 

 

 

45,000

 

 

 

30,000

 

 

 

20,600

 

 

 

15,000

 

Net increase (decrease) in cash

 

$

961

 

 

$

(2,175

)

 

$

(4,276

)

 

$

3,136

 

 

$

2,101

 

Cash balance at end of period

 

$

4,723

 

 

$

3,762

 

 

$

5,937

 

 

 

 

 

 

 

 

 


Operating Activities.


The increase of $12,899 from 2011 to 2012 and $17,464 from 2012 to 2013 in cash used in operations is primarily due to the decreases in service revenue due to a reduction in our networking service (carrier/circuit) business while certain fixed costs remained relatively constant.


Financing Activities.


The increases in cash provided by financing activities from 2011 to 2012 of $15,000 and from 2012 to 2013 of $20,600 are due to the increase in proceeds from related party short term debt.


FORECAST


Bluegate consists of the networking service (carrier/circuit) business that provides internet connectivity to corporate clients on a subscription basis; essentially operating as a value added provider. Our strategy is to stabilize our internet connectivity business and pursue expansion of our market outside of the Healthcare industry.


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 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. At December 31, 2013 and 2012, total deferred service revenue was $2,237 and $7,813, respectively.


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.




10



 


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.


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 January 22, 2014, which raises substantial doubt about our ability to continue as a going concern.


During the years ended December 31, 2013 and 2012, 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. We experienced negative financial results as follows:


 

 

2013

 

 

2012

 

Net loss

 

$

(556,224

)

 

$

(528,397

)

Negative cash flow from operations

 

 

(64,639

)

 

 

(47,175

)

Negative working capital

 

 

(2,782,171

)

 

 

(2,225,947

)

Stockholders’ deficit

 

 

(2,782,171

)

 

 

(2,225,947

)


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 loans from a related party.


These steps have provided us with the cash flows to continue our business, but have not resulted in significant improvement in our financial position. We are considering alternatives to address our cash flow situation that include:


·

Raising capital through additional sale of our common stock and/or debt securities

·

Reducing cash operating expenses to levels that are in line with current revenues.


These alternatives could result in substantial dilution of existing stockholders. There can be no assurance 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.




11



 


Item 8. Financial Statements and Supplementary Data.


BLUEGATE CORPORATION

———————

FINANCIAL STATEMENTS

WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012



TABLE OF CONTENTS

———————

 

PAGE

 

 

Report of Independent Registered Public Accounting Firm

F-2

Financial Statements:

 

Balance Sheets as of December 31, 2013 and 2012

F-3

Statements of Operations for the years ended December 31, 2013 and 2012

F-4

Statements of Stockholders' Deficit for the years ended December 31, 2013 and 2012

F-5

Statements of Cash Flows for the years ended December 31, 2013 and 2012

F-6

Notes to Financial Statements

F-7




F-1



 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To

the Board of Directors

Bluegate Corporation

Houston, Texas


We have audited the accompanying balance sheets of Bluegate Corporation (“Bluegate”) as of December 31, 2013 and 2012 and the related statements of operations, changes in stockholders’ deficit and cash flows for each of the years then ended. These financial statements are the responsibility of Bluegate’s management. Our responsibility is to express an opinion on these financial statements based on our audits.


We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bluegate as of December 31, 2013 and 2012 and the results of their operations and their cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.


The accompanying financial statements have been prepared assuming that Bluegate will continue as a going concern. As discussed in Note 2 to the financial statements, Bluegate has negative working capital and suffered recurring losses from operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.




MALONEBAILEY, LLP

www.malone-bailey.com

Houston, Texas

January 22, 2014




F-2



 


BLUEGATE CORPORATION

BALANCE SHEETS


 

 

DECEMBER 31,

 

 

DECEMBER 31,

 

 

 

2013

 

 

2012

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,723

 

 

$

3,762

 

Accounts receivable, net

 

 

357

 

 

 

3,233

 

Prepaid expenses and other

 

 

9,777

 

 

 

10,435

 

Total current assets

 

$

14,857

 

 

$

17,430

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,097

 

 

$

12,435

 

Accounts payable to related party

 

 

717,266

 

 

 

519,241

 

Accrued liabilities

 

 

6,228

 

 

 

20,837

 

Note payable to related party

 

 

1,310,600

 

 

 

1,245,000

 

Accrued liabilities to related parties

 

 

749,600

 

 

 

438,051

 

Deferred revenue

 

 

2,237

 

 

 

7,813

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

2,797,028

 

 

 

2,243,377

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies - Note 9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 December 31, 2013 and 2012; $12,500 per share liquidation preference ($600,000 aggregate liquidation preference at December 31, 2013)

 

 

-

 

 

 

-

 

Series D Convertible Non-Redeemable preferred stock, $.001 par value, 10 shares authorized, issued and outstanding at December 31, 2013 and 2012, respectively; $8,725 per share liquidation preference ($87,250 aggregate liquidation preference at December 31, 2013)

 

 

 

 

 

 

 

 

Common stock, $.001 par value, 50,000,000 shares authorized, 46,033,565 shares issued and outstanding at December 31, 2013 and 2012, respectively

 

 

46,034

 

 

 

46,034

 

Additional paid-in capital

 

 

22,400,286

 

 

 

22,400,286

 

Accumulated deficit

 

 

(25,228,491

)

 

 

(24,672,267

)

Total stockholders’ deficit

 

 

(2,782,171

)

 

 

(2,225,947

)

Total liabilities and stockholders’ deficit

 

$

14,857

 

 

$

17,430

 


The accompanying notes are an integral part of these financial statements.



F-3



 


BLUEGATE CORPORATION

STATEMENTS OF OPERATIONS


 

 

FOR THE YEAR ENDED

DECEMBER 31,

 

 

 

2013

 

 

2012

 

Service revenue

 

$

100,463

 

 

$

143,334

 

Cost of services

 

 

102,168

 

 

 

120,331

 

Gross profit (loss)

 

 

(1,705

)

 

 

23,003

 

Selling, general and administrative expenses

 

 

242,969

 

 

 

247,590

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(244,674

)

 

 

(224,587

)

Interest expense

 

 

(311,550

)

 

 

(303,810

)

 

 

 

 

 

 

 

 

 

Net loss

 

$

(556,224

)

 

$

(528,397

)

 

 

 

 

 

 

 

 

 

Net loss per share – basic and diluted

 

$

(0.01

)

 

$

(0.01

)

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding

 

 

46,033,565

 

 

 

46,033,565

 


The accompanying notes are an integral part of these financial statements.



F-4



 


BLUEGATE CORPORATION

STATEMENT OF STOCKHOLDERS' DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012


 

 

 

 

 

 

 

 

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, 2011

 

 

46,033,565

 

 

$

46,034

 

 

 

48

 

 

$

-

 

 

 

10

 

 

$

-

 

 

$

22,400,286

 

 

$

(24,143,870

)

 

$

(1,697,550

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(528,397

)

 

 

(528,397

)

Balance at December 31, 2012

 

 

46,033,565

 

 

 

46,034

 

 

 

48

 

 

 

-

 

 

 

10

 

 

 

-

 

 

 

22,400,286

 

 

 

(24,672,267

)

 

 

(2,225,947

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(556,224

)

 

 

(556,224

)

Balance at December 31, 2013

 

 

46,033,565

 

 

$

46,034

 

 

 

48

 

 

$

-

 

 

 

10

 

 

$

-

 

 

$

22,400,286

 

 

$

(25,228,491

)

 

$

(2,782,171

)


The accompanying notes are an integral part of these financial statements.





F-5



 


BLUEGATE CORPORATION

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012


 

 

2013

 

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(556,224

)

 

$

(528,397

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,876

 

 

 

(665

)

Prepaid expenses and other current assets

 

 

658

 

 

 

(3,848

)

Accounts payable and accrued liabilities

 

 

(15,947

)

 

 

(8,258

)

Accounts payable to related party

 

 

198,025

 

 

 

198,577

 

Accrued liabilities to related parties

 

 

311,549

 

 

 

303,810

 

Deferred revenue

 

 

(5,576

)

 

 

(8,394

)

Net cash used in operating activities

 

 

(64,639

)

 

 

(47,175

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from related party short term debt

 

 

65,600

 

 

 

45,000

 

Net cash provided by financing activities

 

 

65,600

 

 

 

45,000

 

Net increase (decrease) in cash and cash equivalents

 

 

961

 

 

 

(2,175

)

Cash and cash equivalents at beginning of period

 

 

3,762

 

 

 

5,937

 

Cash and cash equivalents at end of period

 

$

4,723

 

 

$

3,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

-

 

 

$

-

 

Cash paid for income taxes

 

$

-

 

 

$

-

 


The accompanying notes are an integral part of these financial statements.




F-6



 


BLUEGATE CORPORATION

NOTES TO FINANCIAL STATEMENTS

———————


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Bluegate Corporation (“Bluegate” or the “Company") is a Nevada Corporation that consists of the networking service (carrier/circuit) business. It provides internet connectivity to corporate clients on a subscription basis; essentially operating as a value added provider.


The Company was originally incorporated as Solis Communications, Inc. on July 23, 2001 and adopted a name change to Crescent Communications Inc. upon completion of a reverse acquisition of Berens Industries, Inc. In 2004, we changed our name to Bluegate Corporation.


Following is a summary of the Company's significant accounting policies:


SIGNIFICANT ESTIMATES


The preparation of 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 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.


CASH AND CASH EQUIVALENTS


The Company considers all highly liquid short-term investments with an original maturity of three months or less when purchased, to be cash equivalents.


ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS


Accounts receivable are amounts due on sales, are unsecured and are carried at their estimated collectible amounts. Credit is generally extended on a short-term basis; thus accounts receivable do not bear interest although a finance charge may be applied to such receivables that are more than thirty days past due. Accounts receivable are periodically evaluated for collectability based on past credit history with clients. Provisions for losses on accounts receivable are determined on the basis of loss experience, known and inherent risk in the account balance and current economic conditions. In February 2008, as a result of the transaction described in footnote 5 – note payable to related party and footnote 8 – stockholders’ deficit, as condition to and as additional consideration for SAI Corporation’s (“SAIC”) agreement to lend 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.


INCOME TAXES


The Company uses the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their financial amounts at year-end. The Company provides a valuation allowance to reduce deferred tax assets to their net realizable value.


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 Accounting Standard 505-50 “Accounting for Equity Instruments Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”




F-7



BLUEGATE CORPORATION

NOTES TO FINANCIAL STATEMENTS, CONTINUED

———————

 


REVENUE RECOGNITION


Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured.


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. At December 31, 2013 and 2012, deferred service revenue was $2,237 and $7,813 respectively.


LOSS PER SHARE


Basic and diluted net loss per share is computed on the basis of the weighted average number of shares of common stock outstanding during each period. Potentially dilutive options that were outstanding during 2013 and 2012 were not considered in the calculation of diluted earnings per share because the Company's net loss rendered their impact anti-dilutive. Accordingly, basic and diluted losses per share were identical for the years ended December 31, 2013 and 2012.


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS


The Company does not expect any recent accounting pronouncements to have a material impact to its financial position or result of operations.


2. GOING CONCERN CONSIDERATIONS


During the years ended December 31, 2013 and 2012, 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. We experienced negative financial results as follows:


 

 

2013

 

 

2012

 

Net loss

 

$

(556,224

)

 

$

(528,397

)

Negative cash flow from operations

 

 

(64,639

)

 

 

(47,175

)

Negative working capital

 

 

(2,782,171

)

 

 

(2,225,947

)

Stockholders’ deficit

 

 

(2,782,171

)

 

 

(2,225,947

)


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 obtaining loans from a related party.


These steps have provided us with the cash flows to continue our business, but have not resulted in significant improvement in our financial position. We are considering alternatives to address our cash flow situation that include:


·

Raising capital through additional sale of our common stock and/or debt securities

·

Reducing cash operating expenses to levels that are in line with current revenues.


These alternatives could result in substantial dilution of existing stockholders. There can be no assurance 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.




F-8



BLUEGATE CORPORATION

NOTES TO FINANCIAL STATEMENTS, CONTINUED

———————

 


3. ACCOUNTS RECEIVABLE, NET


Accounts receivable, net consists of the following at December 31, 2013 and 2012:


 

 

2013

 

 

2012

 

Accounts receivable

 

$

2,668

 

 

$

3,281

 

Less allowance for bad debts

 

 

(2,311

)

 

 

(48

)

 

 

$

357

 

 

$

3,233

 


4. ACCOUNTS PAYABLE TO RELATED PARTY


The accounts payable to related party balance is owed to Sperco, LLC ("SLLC") (an entity controlled by Stephen J. Sperco, Bluegate's CEO/President/Director) and is summarized below:


 

 

12/31/2013

 

 

12/31/2012

 

During November 2009, Bluegate entered into an Asset Sale and Purchase Agreement to sell certain assets to SLLC, and as a result, these balances represent funds collected by Bluegate on behalf of SLLC. These balances were reduced each year by $52,000 as a result of SLLC agreeing to pay Bluegate for office space and associated services for the Sperco entities for the period from July 1, 2010 through July 31, 2011.

 

$

46,766

 

 

$

46,741

 

As a result of the November 2009 transaction, commencing January 1, 2010, Bluegate had no employees and agreed to pay SLLC a monthly amount of $15,000 for management, accounting and administrative services, as well as, infrastructure and network engineering support. In August 2012 the monthly amount was $18,500 and beginning September 2012 the monthly amount was revised to $15,500 to reflect support for a new project engagement.

 

 

641,500

 

 

 

455,500

 

Commencing August 1, 2011, SLLC and Bluegate moved from Suite 600 to Suite 350 and Bluegate agreed to pay SLLC $1,000 rent on a month-to-month basis.

 

 

29,000

 

 

 

17,000

 

 

 

$

717,266

 

 

$

519,241

 




F-9



BLUEGATE CORPORATION

NOTES TO FINANCIAL STATEMENTS, CONTINUED

———————

 


5. NOTE PAYABLE TO RELATED PARTY


Note payable at December 31, 2013 and 2012 is summarized below:


 

 

12/31/2013

 

 

12/31/2012

 

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 J. Sperco, to borrow up to $500,000. The line of credit has been amended several times due to Bluegate’s need to borrow funds for working capital purposes and has been increased to $1,311,000. As a condition to and as additional consideration for SAIC’s agreement to lend additional 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. Principal and interest is due on demand. Interest is at the rate of 15% per annum and payments are due and payable monthly at the end of each month until the outstanding principal balance is paid in full. The Company agreed to pay a late charge in the amount of $10,000 on any interest payment more than fifteen days delinquent. During 2013, Bluegate borrowed $65,600 for working capital purposes. During 2013 and 2012, the Company incurred interest expense on the related party note payable debt of $311,550 and $303,810, respectively.

 

$

1,310,600

 

 

$

1,245,000

 


6. ACCRUED LIABILITIES TO RELATED PARTIES


The accrued liabilities to related parties is summarized below:


 

 

12/31/2013

 

 

12/31/2012

 

Accrued interest on the note payable to SAIC

 

$

705,681

 

 

$

394,132

 

Fees accrued through March 31, 2009 to former Board of Director, Dale Geary

 

 

20,419

 

 

 

20,419

 

Fees accrued through March 31, 2009 to Board of Director, Stephen J. Sperco

 

 

17,500

 

 

 

17,500

 

Vehicle allowance accrued through December 31, 2008 to Stephen J. Sperco

 

 

6,000

 

 

 

6,000

 

 

 

$

749,600

 

 

$

438,051

 


7. INCOME TAXES


The composition of deferred tax assets at December 31, 2013 and 2012 were as follows:


 

 

2013

 

 

2012

 

Deferred tax assets

 

 

 

 

 

 

 

 

Benefit from carryforward of net operating loss

 

$

2,420,000

 

 

$

2,323,000

 

Less valuation allowance

 

 

(2,420,000

)

 

 

(2,323,000

)

Net deferred tax asset

 

$

-

 

 

$

-

 


The difference between the income tax benefit in the accompanying statement of operations and the amount that would result if the U.S. Federal statutory rate of 34% were applied to pre-tax loss for 2013 and 2012 is attributable to the valuation allowance.


At December 31, 2013, for federal income tax and alternative minimum tax reporting purposes, the Company has $7,117,000 in unused net operating losses available for carryforward to future years which will expire in various years through 2033. The majority of the unused net operating loss carryforward is limited to an annual amount of approximately $270,000 due to the change in control on June 28, 2007 (see below footnote 8 - Series C Preferred Stock).




F-10



BLUEGATE CORPORATION

NOTES TO FINANCIAL STATEMENTS, CONTINUED

———————

 


8. STOCKHOLDERS’ DEFICIT


SERIES C PREFERRED STOCK


In June 2007, Bluegate's board of directors approved the issuance of 48 shares of Series C voting convertible non-redeemable preferred stock with a par value of $0.001 per share and a liquidation value of $12,500 per share. Each share of Series C convertible preferred stock may be converted, at the option of the shareholder, into 25,000 shares of common stock or a total of 1,200,000 shares of common stock. Each share of preferred stock has 15 times the number of votes its conversion-equivalent number of shares of common stock, or 375,000 votes per share of preferred stock. The 48 shares of preferred stock will have an aggregate of 18 million votes.


On June 28, 2007, we sold 8 shares of Series C preferred stock for $100,000 in cash to SAI Corporation ("SAIC"), a corporation controlled by Stephen Sperco ("Sperco"). We also granted to SAIC warrants to purchase up to 1,000,000 common shares at $0.17 per share expiring in June 2012. On the same day we sold 40 shares of Series C preferred stock for $500,000 in cash to Sperco. We also granted to Sperco warrants to purchase up to 5,000,000 common shares at $0.17 per share expiring in June 2012. Mr. Sperco is our CEO and a director. On February 14, 2008, as a result of an equity transaction described below in Common Stock item (2), certain adjustment provisions in these warrant agreements were triggered. Pursuant to the adjustment provisions, the exercise price of the previously issued warrants to purchase 6,000,000 common shares at $0.17 per share was reduced to $0.0333334 per share.


Based upon the $600,000 investment in Series C preferred stock, we allocated the relative fair value of $100,000 to preferred stock and $500,000 to the warrants.


Bluegate analyzed the conversion feature associated with the preferred stock for derivative accounting consideration under ASC 815-20 Accounting for Derivative Instruments and Hedging Activities and ASC 815-15 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock. Bluegate determined the conversion feature met the criteria for classification in equity and did not require derivative treatment under ASC 815-20 and ASC 815-15.


In accordance with ASC 470-20, Application of Issue No. 98-5 Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, which provides guidance on the calculation of a beneficial conversion feature on a convertible instrument, Bluegate has determined that the Series C shares issued had an aggregate beneficial conversion feature of $500,000 as of the date of issuance, resulting in a total discount of $600,000. Bluegate recorded this beneficial conversion feature as a deemed dividend upon issuance.


The warrants issued in this transaction were subject to a registration rights agreement which required Bluegate to register the underlying shares by September 28, 2007 or pay liquidated damages of 1.5% of the purchase price of the investment each month the shares were not registered. We filed with the Securities and Exchange Commission a Registration Statement which was effective as of August 30, 2007 with respect to these securities. There was no liability related to the registration rights agreements.


As a result of this transaction, net operating losses accumulated up through the change in control are limited by Internal Revenue Code Section 382 due to the change in control (see above footnote 7 – Income Taxes).


SERIES D PREFERRED STOCK


In May 2010, Bluegate’s board of directors approved the issuance of 10 shares of Series D voting convertible non-redeemable preferred stock with a par value of $.001 per share and a liquidation value of $8,725 per share. Each share of Series D convertible preferred stock may be converted, at the option of the shareholder, into 25,000 shares of common stock or a total of 250,000 shares of common stock. Each share of preferred stock has 150 times the number of votes its conversion-equivalent number of shares of common stock, or 3,750,000 votes per share of preferred stock. The 10 shares of preferred stock will have an aggregate of 37,500,000 million votes.


On May 22, 2010, we sold 10 shares of Series D preferred stock to SAI Corporation (“SAIC”), a corporation controlled by Stephen Sperco by modifying the existing Promissory Note and Security Agreement as follows: (1) SAIC's waiver of accrued interest of $84,740 for the period from February 1, 2010 through May 22, 2010, and (2) 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). See footnote 5.




F-11



BLUEGATE CORPORATION

NOTES TO FINANCIAL STATEMENTS, CONTINUED

———————

 


STOCK OPTION PLANS


The Company had adopted the 2002 Stock and Stock Option Plan under which incentive stock options for up to 450,000 common shares may be awarded to officers, directors and key employees. The plan was designed to attract and reward key executive personnel. As of December 31, 2007, Bluegate has granted all 450,000 options and the 2002 stock plan is not active.


Stock options granted pursuant to the 2002 plan expire as determined by the board of directors. All of the options granted were at an option price equal to the fair market value of the common stock at the date of grant.


In 2005 the Company adopted the 2005 Stock and Stock Option Plan. The purpose of the 2005 plan is to further our interests, our Subsidiaries and our stockholders by providing incentives in the form of stock options to key employees, consultants, directors and others who contribute materially to our success and profitability. The grants recognize and reward outstanding individual performances and contributions and will give such persons a proprietary interest in us, thus enhancing their personal interest in our continued success and progress. The 2005 Plan also assists us and our subsidiaries in attracting and retaining key employees and Directors and is administered by the Board of Directors. The Board of Directors has the exclusive power to select the participants, to establish the terms of the stock and options granted to each participant, provided that all options granted shall be granted at an exercise price equal to at least 85% of the fair market value of the common stock covered by the option on the grant date and to make all determinations necessary or advisable under the 2005 plan. The maximum aggregate number of shares of common stock that may be granted or optioned and sold under the plan is 3,000,000 shares. As of December 31, 2013, 1,132,685 shares of common stock have been granted.


When applicable, Bluegate uses the Black-Scholes option pricing model to value stock options and warrants and the simplified method of calculating expected term as described in ASC 718.


SUMMARY OF STOCK OPTIONS


Non-statutory Stock Options

 

Shares

 

 

Weighted

Average

Exercise

Price

 

Outstanding at January 1, 2012

 

 

1,005,332

 

 

$

0.29

 

Forfeited

 

 

(982,000

)

 

 

0.29

 

Outstanding at January 1, 2013

 

 

23,332

 

 

 

0.25

 

Forfeited

 

 

(23,332

)

 

 

0.25

 

Outstanding and exercisable at December 31, 2013

 

 

-

 

 

 

 

 


There was no aggregate intrinsic value of the options at December 31, 2013.


SUMMARY OF STOCK WARRANTS


 

 

NUMBER OF

SHARES

UNDER

WARRANTS

 

 

EXERCISE

PRICES ($)

 

 

WEIGHTED

AVERAGE

EXERCISE

PRICE ($)

 

Outstanding at January 1, 2012

 

 

1,055,000

 

 

 

0.03 - 1.00

 

 

 

0.68

 

Forfeited or Canceled

 

 

(925,000

)

 

 

0.03 - 1.00

 

 

 

0.29

 

Outstanding at January 1, 2013

 

 

130,000

 

 

 

0.17

 

 

 

0.17

 

Forfeited or Canceled

 

 

(130,000

)

 

 

0.17

 

 

 

0.17

 

Outstanding and Exercisable at December 31, 2013

 

 

-

 

 

 

 

 

 

 

 

 


There was no aggregate intrinsic value of the warrants at December 31, 2013.




F-12



BLUEGATE CORPORATION

NOTES TO FINANCIAL STATEMENTS, CONTINUED

———————

 


EQUITY TRANSACTIONS


As of December 31, 2013, the company has outstanding: (i) 46,033,565 shares of common stock and, (ii) preferred stock that are convertible into 1,450,000 shares of common stock, resulting in on a fully diluted basis, 47,483,565 shares of common stock. The company has 50,000,000 shares of common stock authorized by our Articles of Incorporation.


When applicable, Bluegate uses the Black-Scholes option pricing model to value stock options and warrants and the simplified method of calculating expected term as described in ASC 718.


9. COMMITMENTS AND CONTINGENCIES


Lease Commitment


Commencing August 1, 2011, SLLC and Bluegate moved from Suite 600 to Suite 350 and Bluegate agreed to pay SLLC $1,000 rent on a month-to-month basis. For the years ended December 31, 2013 and 2012, Bluegate’s rent expense was $12,000 and $12,000, respectively.


10. CUSTOMERS AND VENDORS


Major Customers. During 2013, our top five customers accounted for 41% of our service revenue and no single customer accounted for more than 12% of service revenue.


Major Vendors. During 2013, our top five vendors accounted for 92% of our purchases and no single vendor accounted for more than 56% of purchases.







F-13



 


Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.


None.


Item 9A. Controls and Procedures.


Bluegate Corporation, under the supervision and with the participation of its management, including the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of its “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Act of 1934, (the “Exchange Act”), as of the end of the period covered by this annual report on Form 10-K. Based on that evaluation, our principal executive officer and principal financial officer have concluded that Bluegate Corporation’s disclosure controls and procedures are effective to ensure that information required to be disclosed by Bluegate Corporation 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, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.


Management’s Annual Report on Internal Control Over Financial Reporting.


Bluegate Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Bluegate Corporation’s internal control over financial reporting is a process designed 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.


Bluegate Corporation’s internal control over financial reporting included policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (2) provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of Bluegate Corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Bluegate Corporation’ assets that could have a material effect on our financial statements.


Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


Management assessed the effectiveness of Bluegate Corporation’s internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment and those criteria, management has concluded that Bluegate Corporation maintained effective internal control over financial reporting as of December 31, 2013.


This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to rules of the Securities Exchange Commission that permit the company to provide only management's report in this annual report.


Changes in Internal Controls Over Financial Reporting


There were no changes that occurred during the fourth quarter of the fiscal year covered by the Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


Item 9B. Other Information.


None.



12



 


PART III


Item 10. Directors, Executive Officers and Corporate Governance.


EXECUTIVE OFFICERS AND DIRECTORS


The following table sets forth the name, age, positions and offices or employments for the past five years as of December 31, 2013, of our executive officers and directors. Members of the Board of Directors are elected and hold office until their successors are elected and qualified. All of the officers serve at the pleasure of the Board of Directors of the Company.


NAME

     

AGE

 

POSITION

Stephen Sperco (a)

 

60

 

Director/Chief Executive Officer/President

Manfred Sternberg (b)

 

54

 

Former Director/Chief Strategy Officer

William Koehler (c)

 

48

 

Former Director/President

Charles Leibold (d)

 

64

 

Director/Chief Financial Officer

Dale Geary (e)

 

56

 

Former Director

———————

(a)

Effective July 30, 2009, the titles of CEO and President were combined, and Stephen Sperco was appointed President. Mr. Sperco is our CEO/President and Director. Stephen Sperco was appointed Chairman of the Board.

(b)

Effective July 30, 2009, the executive officer position of Chief Strategy Officer was eliminated and Mr. Sternberg’s employment was terminated. Effective October 28, 2009, Mr. Sternberg resigned as Director.

(c)

Effective May 31, 2009, Mr. Koehler resigned as President and effective October 27, 2009 resigned as Director.

(d)

Effective July 29, 2009, Charles Leibold became a Director as a result of: (A) the June 12, 2009 written consent of a majority of our shareholders; (B) the June 22, 2009 filing of a Preliminary Information Statement; (C) the July 8, 2009 filing of a Definitive Information Statement; and, (D) the July 9, 2009 mailing of the Definitive Information Statement to our shareholders. The Definitive Information Statement had a record date of June 25, 2009.

(e)

Mr. Geary served on our compensation committee and effective October 28, 2009 resigned as Director.


Stephen Sperco was appointed the Company’s Chief Operating Officer on December 31, 2006 and then was appointed Chief Executive Officer on April 2, 2007. Mr. Sperco is the founder and President of Sperco Associates, Inc. and Sperco Technology Group, L.L.C. Sperco Associates was founded in 1986 and is headquartered in Chicago, Illinois. Both organizations are privately held consulting firms that focus in the areas of Telecommunications and Information Technology (IT) systems. The organizations provide independent, third party consulting, planning, and facilities management services. The consulting personnel provide services in the area of Telecommunications to support the voice, data, and image requirements of clients. Support in the area of IT systems is provided for the Desktop Computing, Local Area Network (LAN), and Wide Area Network (WAN) requirements of clients. The organizations also provide Management Support, Staff Augmentation, Quality Assurance, and operational functions related to Facilities Management and Outsourcing engagements. The firm has conducted consulting engagements in North America, the United Kingdom, and Europe. The industry focus of Sperco Associates has been in the Private Sector with Financial Services, Insurance, Health Care, and Fortune 1000 organizations. The focus of Sperco Technology Group has been in the Public Sector with Education and Health Care organizations. For IT Infrastructure, Telecommunications, and IT Physical Infrastructure the firms have developed significant expertise in Strategic Planning, Optimization, Design, Procurement, Contract Negotiations, Quality Assurance, and Implementation Project Management. In the areas of Facilities Management and Outsourcing, the firms have developed significant expertise in Organization Management and Planning, Project Management, Strategic Planning, Contract Negotiations, and the management of day-to-day department operations. The firms have extensive experience in the specialty areas of Financial Trading Floors, Call Center Applications, Structured Wiring Systems, Voice Recording/Logging Applications, Interactive Voice Response (IVR) applications, IP Telephony, and Network Optimization. Mr. Sperco is responsible for both the executive management of the consulting firms and the direction of consulting engagements. Mr. Sperco has been a consultant since 1975 and in this capacity has extensive experience with the planning and management of complex engagements. Before founding Sperco Associates, Inc., Mr. Sperco was a principal and Regional Vice President for Marketing and Systems Development Corporation. Marketing and Systems Development Corporation was a telecommunications consulting firm that was subsequently purchased by EDS. Mr. Sperco was with Marketing and Systems Development Corporation for ten years. Mr. Sperco earned a Bachelor of Arts degree in Economics from Middlebury College, Middlebury, Vermont in 1975. Effective July 30, 2009, the titles of CEO and President were combined, and Stephen Sperco was appointed President. Mr. Sperco is our CEO/President and Director. Stephen Sperco was appointed Chairman of the Board.




13



 


Manfred Sternberg has been our Chief Executive Officer and a Director since 2001. Mr. Sternberg shifted from Chief Executive Officer to Chief Strategy Officer on April 2, 2007. Prior to 2001, Mr. Sternberg was an investor and board member of several broadband providers in Houston, Texas including our predecessor. He is a graduate of Tulane University and Louisiana State University School of Law. Mr. Sternberg is licensed to practice law in Texas and Louisiana and is Board Certified in Consumer and Commercial Law by the Texas Board of Legal Specialization. Effective July 30, 2009, the executive officer position of Chief Strategy Officer was eliminated and Mr. Sternberg’s employment was terminated. Effective October 28, 2009, Mr. Sternberg resigned as Director.


William Koehler has been a Director since May, 2003. Mr. Koehler was appointed President and Chief Operating Officer in September 2005 after Bluegate acquired substantially all of the assets of Trilliant Corporation, of which Mr. Koehler was a founder and served as President/CEO from 2000 until September 2005. From 1992 until 2000, Mr. Koehler was the Vice President of Business Development of an Electrical Engineering firm that specialized in the assessment, design and project implementation of technology efforts for their clients. Mr. Koehler has a BBA from Texas A&M in Business Analysis, with a specialization in Production Operation Management. Mr. Koehler has spent the last 15 years of his career working in the IT and Professional Services industry and has a broad range of skills. His experience ranges from the design and management of the implementation of multination voice and data networks to the needs assessment and the development of a Global technology strategy for large multinational corporations. The customers that Mr. Koehler has worked with include Pennzoil, American General Insurance, Texaco, British Petroleum, Brown and Root and many others. At the same time he has worked with dozens of school districts by assisting in the development of more cost effective and robust systems in an attempt to help these districts move technology into the classrooms and help children learn. Mr. Koehler has spoken at many state and local events about technology and continues to look for opportunities to continue this effort. Effective May 31, 2009, Mr. Koehler resigned as an employee from the company and effective October 27, 2009 resigned as Director.


Charles Leibold became Bluegate's Controller in January 2006 and effective June 1, 2006 he was appointed our Chief Financial Officer. Mr. Leibold began his career with the Big Four accounting firm of Deloitte and Touche. Subsequently, he became Director of International and Domestic Field Audit for the Avis Rent a Car System and Vice President of Finance and Treasurer of AIM Group, Inc., the holding company for certain Budget Rent a Car franchises. From January 1998 through May 1999, as Manager of AquaSource Inc., he was aggressively involved in the development of a start-up venture experiencing rapid growth through acquisitions. Specifically he was responsible for the successful transition of all of the seller's business into AquaSource. From June 1999 through May 2003, as Vice President and Director of Acquisition Partners, Inc., he directed the strategic planning and staffing of a start-up venture providing acquisitions and divestiture services to its clients. From June 2003 through mid-January 2006, Mr. Leibold provided consulting, accounting and tax services to clients in a wide variety of industries. In addition to having served in key financial management roles for both large and small companies, Mr. Leibold is a Certified Public Accountant and a Member of the Institute of Certified Public Accountants and Texas State Board of Public Accountancy. Mr. Leibold graduated from Pace University with a BBA in Accounting. Effective July 29, 2009, Charles Leibold became a Director as a result of: (A) the June 12, 2009 written consent of a majority of our shareholders; (B) the June 22, 2009 filing of a Preliminary Information Statement; (C) the July 8, 2009 filing of a Definitive Information Statement; and, (D) the July 9, 2009 mailing of the Definitive Information Statement to our shareholders. The Definitive Information Statement had a record date of June 25, 2009. Mr. Leibold remains our Chief Financial Officer and Principal Accounting Officer.


Dale Geary was appointed as a Director in June 2007. Mr. Geary is a Managing Director of SAI Corporation (“SAIC”) which is a control person of Bluegate Corporation. He has been with SAIC since its inception in 1996. SAIC is involved in both the investment in, and providing resources to Telecommunications and Information Technology organizations. At SAIC, Mr. Geary is responsible for client engagements and business development. Mr. Geary earned a Bachelor of Science degree in Computer Science and Business Administration in 1982 from Northern Illinois University in DeKalb, Illinois. Effective October 28, 2009, Mr. Geary resigned as Director.


COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.


Section 16(a) of the Exchange Act requires our officers, directors and persons who beneficially own more than 10% of our common stock to file reports of ownership and changes in ownership with the SEC. These reporting persons also are required to furnish us with copies of all Section 16(a) forms they file. We are not aware of any instances in which a person required to file reports under Section 16(a) of the Exchange Act have not done so.




14



 


CODE OF ETHICS.


We have a Code of Ethics that applies to our principal executive officers and our principal financial officers. We undertake to provide to any person, without charge, upon request, a copy of our Code of Ethics. You may request a copy of our Code of Ethics by mailing your written request to us. Your written request must contain the phrase "Request for a Copy of the Code of Ethics of Bluegate Corporation." A copy of our Code of Ethics is also posted on our website, www.bluegate.com. Our address is: Bluegate Corporation, 701 North Post Oak Road, Suite 350, Houston, Texas 77024.


DIRECTOR INDEPENDENCE.


In June 2007, we increased the size of our Board of Directors to consist of five Directors. We currently have two members of our Board of Directors, who were elected and hold office until their successors are elected and qualified. Three board positions are vacant. The two members of the Board of Directors are Stephen J. Sperco and Charles E. Leibold. Stephen J. Sperco is the Chairman of the Board of Directors and the Company’s Chief Executive Officer and President. Charles E. Leibold is the Company’s Chief Financial Officer and Principal Accounting Officer. Executive officers are appointed by the Board of Directors and serve until their successors have been duly elected and qualified. There is no family relationship between any of our directors and executive officers.


BOARD OF DIRECTORS MEETINGS.


During the fiscal year ended December 31, 2013, the Board of Directors held five meetings which were attended by all members.


NOMINATING COMMITTEE.


We do not have any nominating committee of the Board, or committee performing a similar function. Shareholders may recommend nominees for Director by sending written communications to the company’s Board of Directors to the attention of the Chairman of the Board, Stephen J. Sperco at Bluegate Corporation, 701 North Post Oak Road, Suite 350, Houston, Texas 77024. Every director will participate in the consideration of director nominees.


AUDIT COMMITTEE.


In March 2005, our Board adopted our Audit Committee Charter (the "Charter") which established our Audit Committee. There are no current members of the audit committee and our Board of Directors serves as the audit committee. We do not have an audit committee financial expert serving on its audit committee. We are currently pursuing the recruitment of an independent director who is also a financial expert to be the audit committee.


Members of the Board of Directors acting in the capacity of the Audit Committee have (1) reviewed and discussed the audited financial statements with management; (2) discussed with the independent auditors the matters required to be discussed by the statement on Auditing Standards No. 61, as amended, as adopted by the Public Accounting Oversight Board in Rule 3200T; (3) have received the written disclosures and the letter from the independent accountant required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence, and (4) have discussed with the independent accountant the independent accountant's independence; and based on the review and discussions referred to above, the audit committee recommended to the board of directors that the audited financial statements be included in the company’s annual report on Form 10-K for the last fiscal year for filing with the Commission. The entire Board of Directors acting in the capacity of the Audit Committee is Stephen J. Sperco and Charles E. Leibold.


COMPENSATION COMMITTEE.


In August 2007, our Board adopted our Compensation Committee with Dale Geary serving as its sole member. The Compensation Committee administers the Company’s incentive plans, sets policies that govern executives’ annual compensation and long-term incentives. Effective October 28, 2009, Mr. Geary resigned as Director and the compensation committee did not hold any meetings during 2013.


SHAREHOLDER COMMUNICATIONS.


Shareholders may send written communications to the company’s Board of Directors to the attention of the Chairman of the Board, Stephen J. Sperco. Persons wishing to write to the Board or to a specified director or committee of the Board should send correspondence to the Corporate Secretary at Bluegate Corporation, 701 North Post Oak Road, Suite 350, Houston, Texas 77024. Electronic submissions of shareholder correspondence will not be accepted.



15



 



Item 11. Executive Compensation.


The following table sets forth the aggregate compensation paid for services rendered to the Company during the last two fiscal years by the Named Executive Officers:


 SUMMARY COMPENSATION TABLE


Name and principal position

 

Year

 

Salary ($)

 

All Other
Compensation ($)

 

Total ($)

Stephen Sperco (1)

 

2013

 

-

 

-

 

-

CEO (PEO), President/Director

 

2012

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

Manfred Sternberg (2)

 

2013

 

-

 

-

 

-

Former Chief Strategy Officer/ Director

 

2012

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

William Koehler (3)

 

2013

 

-

 

-

 

-

Former President/Director

 

2012

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

Charles Leibold (4)

 

2013

 

-

 

-

 

-

CFO (PFO), Secretary/Director

 

2012

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

Larry Walker (5)

 

2013

 

-

 

-

 

-

Former President of Trilliant Technology Group, Inc.

 

2012

 

-

 

-

 

-

  (Formerly a 100% owned subsidiary)

 

 

 

 

 

 

 

 

———————

(1)

In December 2006, we entered into a two year employment agreement with Stephen Sperco at an annual base salary of $150,000 with a monthly vehicle transportation allowance of $750 to serve as our Chief Operating Officer. In April 2007, Mr. Sperco was appointed our Chief Executive Officer. In June 2007, one of the conditions of Mr. Sperco’s purchase of Series C Preferred Stock described in the attached consolidated financial statements, footnote 9 – stockholders’ deficit, was that Mr. Sperco be appointed a Director. In November 2007, Mr. Sperco was granted a $100,000 cash bonus by the board of directors as a result of his achievements attained during his first six months as the Company’s CEO. This bonus was paid in December 2007. In December 2008, Mr. Sperco’s employment agreement expired. In an effort to reduce the company’s cash flow constraints, effective January 1, 2008, Mr. Sperco’s base salary was reduced to $100,000. On May 1, 2008, Mr. Sperco’s annual base salary was further reduced to $24,000 until the company achieves a net positive cash flow from operations and beginning January 2009, Mr. Sperco no longer received a vehicle transportation allowance. Effective March 31, 2009, Mr. Sperco’s annual base salary was further reduced to -0-.


Effective January 1, 2007, the Company approved a compensation plan for its Board of Directors. Under the compensation plan all directors would be compensated at the rate of $10,000 annually. Mr. Sperco had earned $2,500, $10,000 and $5,000 for 2009, 2008 and 2007, respectively under this plan. Effective March 31, 2009 fees for directors were terminated.


In December 2007, 8,601,400 previously issued common stock options to certain employees with exercise prices ranging from $0.39 to $6.00 were reduced to $0.34. As a result of this transaction, 1,200,000 of Mr. Sperco’s options with an exercise price of $0.95 were reduced to $0.34. In December 2007, Mr. Sperco was granted 100,000 options to purchase common stock at an exercise price of $0.17 per share vesting immediately and expiring on December 31, 2012. In February 2008, as a result of the transaction described in the attached consolidated financial statements, footnote 9 – stockholders’ deficit, common stock, item (2), the exercise price of the previously issued options to Mr. Sperco to purchase 1,200,000 shares and 100,000 shares of our common stock at $0.34 and $0.17 per share, respectively, was reduced to $0.0333334 per share.




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(2)

In February 2005 we entered into an employment agreement with Mr. Sternberg for a period of two years at an annual base salary of $180,000, a monthly vehicle transportation allowance of $750 (which was increased to $1,500 during 2006) and bonus opportunity, to serve as our Chief Executive Officer. In November 2006, Mr. Sternberg was granted a bonus by the board of directors as a result of his past efforts to the Company and this bonus was paid in January 2007 through the issuance of 150,000 shares of common stock to Mr. Sternberg. In February 2007, Mr. Sternberg’s employment agreement expired and in April 2007, Mr. Sternberg shifted from Chief Executive Officer to Chief Strategy Officer. In an effort to reduce the company’s cash flow constraints, effective January 1, 2008, Mr. Sternberg’s base salary and monthly vehicle transportation allowance were reduced to $100,000 and $750, respectively. On May 1, 2008, Mr. Sternberg’s annual base salary was further reduced to $24,000 until the company achieves a net positive cash flow from operations and beginning January 2009, Mr. Sternberg no longer received a vehicle transportation allowance. Effective July 30, 2009, the executive officer position of Chief Strategy Officer was eliminated and Mr. Sternberg’s employment was terminated. Effective October 28, 2009, Mr. Sternberg resigned as Director.


Effective January 1, 2007, the Company approved a compensation plan for its Board of Directors. Under the compensation plan all directors would be compensated at the rate of $10,000 annually. Mr. Sternberg had earned $2,499, $10,000 and $10,000 for 2009, 2008 and 2007, respectively under this plan. Effective March 31, 2009 fees for directors were terminated.


As a result of the Company entering into a Separation Agreement and Mutual Release in Full of all claims with Mr. Sternberg effective November 7, 2009, accrued vehicle allowances of $6,000 and accrued directors’ fees of $22,499 were eliminated.


In December 2007, 8,601,400 previously issued common stock options to certain employees with exercise prices ranging from $0.39 to $6.00 were reduced to $0.34. As a result of this transaction, 3,375,000 of Mr. Sternberg’s options with exercise prices ranging from $0.50 to $2.00 were reduced to $0.34. In December 2007, Mr. Sternberg was granted 100,000 options to purchase common stock at an exercise price of $0.17 per share vesting immediately and expiring on December 31, 2012.


(3)

In September 2005 we entered into an employment agreement with William Koehler for a period of two years at an annual base salary of $150,000 with a monthly vehicle transportation allowance of $750 (which was increased to $1,250 during 2006) to serve as President and Chief Operating Officer. In September 2007, Mr. Koehler’s employment agreement expired. In an effort to reduce the company’s cash flow constraints, effective January 1, 2008, Mr. Koehler’s base salary and monthly vehicle transportation allowance were reduced to $100,000 and $750, respectively. On May 1, 2008, Mr. Koehler’s annual base salary was further reduced to $24,000 until the company achieves a net positive cash flow from operations and beginning January 2009, Mr. Koehler no longer received a vehicle transportation allowance. Effective March 31, 2009, Mr. Koehler’s annual base salary was further reduced to -0-. Effective May 31, 2009, Mr. Koehler resigned as an employee from the company and effective October 27, 2009 resigned as Director.


Effective January 1, 2007, the Company approved a compensation plan for its Board of Directors. Under the compensation plan all directors would be compensated at the rate of $10,000 annually. Mr. Koehler had earned $2,499, $10,000 and $10,000 for 2009, 2008 and 2007, respectively under this plan. Effective March 31, 2009 fees for directors were terminated.


As a result of the Company entering into a Separation Agreement and Mutual Release in Full of all claims with Mr. Koehler effective November 7, 2009, accrued vehicle allowances of $6,000 and accrued directors’ fees of $22,499 were eliminated.


In December 2007, 8,601,400 previously issued common stock options to certain employees with exercise prices ranging from $0.39 to $6.00 were reduced to $0.34. As a result of this transaction, 1,590,000 of Mr. Koehler’s options with exercise prices ranging from $0.50 to $1.08 were reduced to $0.34. In December 2007, Mr. Koehler was granted 100,000 options to purchase common stock at an exercise price of $0.17 per share vesting immediately and expiring on December 31, 2012.


(4)

In January 2006, Charles Leibold was hired as the Company’s Controller and in June 2006, we entered into a two year employment agreement with him to serve as our Chief Financial Officer at an annual base salary of $140,000 with a monthly vehicle transportation allowance of $750. In January 2007, Mr. Leibold’s annual salary was increased to $147,000 and in May 2008, his employment agreement expired. Effective April 16, 2009, Mr. Leibold’s annual base salary was reduced to $140,400 and he no longer received a vehicle transportation allowance. Effective January 1, 2010, Mr. Leibold’s annual base salary was further reduced to -0-.


In December 2007, 8,601,400 previously issued common stock options to certain employees with exercise prices ranging from $0.39 to $6.00 were reduced to $0.34. As a result of this transaction, 600,000 of Mr. Leibold’s options with an exercise price of $0.75 were reduced to $0.34. In December 2007, Mr. Leibold was granted 100,000 options to purchase common stock at an exercise price of $0.17 per share vesting immediately and expiring on December 31, 2012.



17



 



(5)

In September 2005 we entered into an employment agreement with Larry Walker for a period of two years at an annual base salary of $125,000 per year serve as President of Trilliant Technology Group, Inc. a subsidiary of Bluegate. In September 2007, Mr. Walker’s employment agreement expired and effective September 30, 2009, Mr. Walker’s employment was terminated.


In December 2007, 8,601,400 previously issued common stock options to certain employees with exercise prices ranging from $0.39 to $6.00 were reduced to $0.34. As a result of this transaction, 590,000 of Mr. Walker’s options with exercise prices ranging from $0.60 to $1.50 were reduced to $0.34. In December 2007, Mr. Walker was granted 100,000 options to purchase common stock at an exercise price of $0.17 per share vesting immediately and expiring on December 31, 2012.


OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END DECEMBER 31, 2013


None


DIRECTOR COMPENSATION


There was no compensation earned to the members of our Board of Directors and Former Board of Directors during the fiscal year ended December 31, 2013.


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.


The following table sets forth as of information concerning the number of shares of common stock owned beneficially as of January 21, 2014 which was 46,033,565 shares, by: (i) each person (including any group) known by us to own more than five (5%) of any class of our voting securities, (ii) each of our directors and executive officers, and (iii) our officers and directors as a group. Unless otherwise indicated, the shareholders listed possess sole voting and investment power with respect to the shares shown.


TITLE OR CLASS

 

NAME AND ADDRESS OF
BENEFICIAL OWNER

 

AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP

 

PERCENT
OF CLASS
(1)


Common Stock

 

SAI Corporation

 

 27,820,250

(2)

 58.6%

 

 

180 North Stetson Avenue, Suite 700

 

 

 

 

 

 

Chicago, Illinois 60601

 

 

 

 

Common Stock

 

Manfred Sternberg

 

 3,903,868

(3)

8.5%

 

 

1110 Guinea Drive

 

 

 

 

 

 

Houston, Texas 77055

 

 

 

 

Common Stock

 

William Koehler

 

 2,735,117

(4)

5.9%

 

 

1602 Lynnview Drive

 

 

 

 

 

 

Houston, Texas 77055

 

 

 

 

Common Stock

 

Charles Leibold

 

 150,000

(5)

0.3%

 

 

701 N. Post Oak Road, Suite 350

 

 

 

 

 

 

Houston, Texas 77024

 

 

 

 

 

 

All executive officers and directors - 2 persons

 

27,970,250

(6)

59.2%

———————

(1)

The percentage of beneficial ownership of Common Stock is based on 46,033,565 shares of Common Stock outstanding as of January 21, 2014 and includes all shares of Common Stock issuable upon the exercise of outstanding options, warrants or conversion of preferred shares to purchase Common Stock.


(2)

Of the 27,820,250 shares beneficially owned by SAI Corporation (“SAIC”), (SAIC is controlled by Mr. Stephen J. Sperco, our CEO and President): (i) 26,370,250 are common shares owned directly by SAIC, and (ii) 1,450,000 are common shares issuable upon the conversion of preferred shares.




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In June 2007 the board of directors approved the issuance of 48 shares of Series C voting convertible non-redeemable preferred stock with a par value of $0.001 per share and a liquidation value of $12,500 per share. Each share of Series C convertible preferred stock may be converted, at the option of the shareholder, into 25,000 shares of common stock or a total of 1,200,000 shares of common stock. Each share of preferred stock has 15 times the number of votes its conversion-equivalent number of shares of common stock, or 375,000 votes per share of preferred stock. The 48 shares of preferred stock will have an aggregate of 18 million votes. Effective June 28, 2007, we sold 8 shares of Series C preferred stock for $100,000 in cash to SAIC. We also granted to SAIC warrants to purchase up to 1,000,000 shares of our common stock at an exercise price of $0.17 per share expiring in June 2012. On the same day we sold 40 shares of Series C preferred stock for $500,000 in cash to Stephen Sperco. We also granted to Stephen Sperco warrants to purchase up to 5,000,000 shares of our common stock at an exercise price of $0.17 per share expiring in June 2012. The Preferred Stock votes along with the common stock on all matters requiring a vote of shareholders and the Preferred Stock is not redeemable by us. Bluegate’s net tangible book value (deficit) per share was ($0.13) prior to the investment in the preferred stock by Mr. Sperco and SAIC on June 28, 2007. After the $600,000 cash investment and assuming that Mr. Sperco and SAIC converted all of the 48 shares of preferred stock into 1,200,000 shares of common stock and exercised all of the 7,200,000 warrants at $0.17 per share resulting in $1,020,000 proceeds to Bluegate, Bluegate’s net tangible book value (deficit) per share would have been reduced to ($0.01).


In May 2010 the board of directors approved the issuance of 10 shares of Series D voting convertible non-redeemable preferred stock with a par value of $0.001 per share and a liquidation value of $8,725 per share. Each share of Series D convertible preferred stock may be converted, at the option of the shareholder, into 25,000 shares of common stock or a total of 250,000 shares of common stock. Each share of preferred stock has 150 times the number of votes its conversion-equivalent number of shares of common stock, or 3,750,000 votes per share of preferred stock. The 10 shares of preferred stock will have an aggregate of 37,500,000 votes. The Preferred Stock votes along with the common stock on all matters requiring a vote of shareholders and the Preferred Stock is not redeemable by us. 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: (1) SAIC's waiver of accrued interest of $84,740 for the period from February 1, 2010 through May 22, 2010, and (2) 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).


In February 2011, SAIC acquired all of Mr. Sperco’s stock, options, warrants and common shares issuable upon the conversion of preferred shares.


On December 29, 2011 we issued 20,000,000 shares of common stock for the cancellation of 7,500,000 Warrants and the partial settlement of the related party promissory note for $30,000 and the waiving of accrued interest payable of $230,000, or a total of $260,000. The conversion and effective purchase price per share was $0.013 when the market price was $0.003; therefore there was no excess of the fair value of the stock over the debt converted. SAIC received 20,000,000 shares.


As a result of SAIC’s purchase of Series C and Series D Preferred Stock, and SAIC’s previously and subsequently acquired stock, options and warrants, SAIC beneficially owns 59% of our common stock without taking into account the super voting power of the Preferred Stock, and 81% when taking into account the super voting power of the Preferred Stock.


(3)

Of the 3,903,868 shares beneficially owned by Mr. Sternberg: (i) 3,220,279 are common shares owned directly by Mr. Sternberg, and (ii) 683,589 are common shares owned indirectly by Mr. Sternberg.


(4)

The 2,735,117 shares beneficially owned by Mr. Koehler are common shares owned directly by Mr. Koehler.


(5)

The 150,000 shares beneficially owned by Mr. Leibold are common shares owned directly by Mr. Leibold.


(6)

Includes shares, options, warrants and preferred convertible shares owned by these persons.




19



 


Item 13. Certain Relationships and Related Transactions, and Director Independence.


During the years ended December 31, 2013 and 2012, the Company engaged in related party transactions as follows:


Secured note payable: 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, Bluegate 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, Bluegate 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).


On February 28, 2011, Bluegate borrowed $30,000 from SAIC to settle the lawsuit with Renaissance Healthcare Systems, Inc. through the Chapter 7 Trustee.


On December 29, 2011 we finalized and consummated a transaction with a deemed effective date of December 30, 2011 whereby we issued 20,000,000 shares of common stock for the partial settlement of a related party promissory note for $30,000 and accrued interest payable of $230,000, or a total of $260,000. The conversion and purchase price per share was $0.013 when the market price was $0.003; therefore there was no excess of the fair value of the stock over the debt converted. SAI Corporation, an entity controlled by Stephen Sperco, Director and CEO, received 20,000,000 shares.


During 2013 and 2012, Bluegate borrowed $65,600 and $45,000, respectively from SAIC for working capital purposes.


As of December 31, 2013 and December 31, 2012, the Company owed $1,310,600 and $1,245,000 respectively on the note payable.


During 2013 and 2012, the Company incurred interest expense on the related party note payable debt of $311,550 and $303,810, respectively. At December 31, 2013 and December 31, 2012, $705,681 and $394,132, respectively is payable to SAIC and included under the caption accrued liabilities to related parties on the balance sheet.




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Accounts payable to related parties: SS is the founder and President of STG. STG is a privately held consulting firm that focuses in the areas of Telecommunications and Information Technology systems. STG provides independent, third party consulting, planning, and facilities management services. At December 31, 2013 and December 31, 2012 there were no amounts owed to STG.


SS is the sole manager and member of Sperco, LLC, a Texas limited liability company. On 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, at December 31, 2013 and December 31, 2012, $98,766 and $98,741, respectively is payable to Sperco, LLC. 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 in August 2012 the monthly amount was $18,500 and beginning September 2012 the monthly amount was revised to $15,500 to reflect support for a new project engagement. As of December 31, 2013 and December 31, 2012 Bluegate owes $641,500 and $455,500, respectively for those services. The combined amount of $717,266 and $519,241 is included under the caption accounts payable to related party on the balance sheet as of December 31, 2013 and December 31, 2012, respectively.


SS is the sole manager and member of Structured Systems Design, LLC, (“SSD”) a Delaware limited liability company. Effective July 1, 2010, SSD in conjunction with other Sperco entities agreed to pay a monthly amount of $4,000 for office space and associated services to Bluegate for the Sperco entities. Effective August 1, 2011, Sperco, LLC, SSD and Bluegate moved from Suite 600 to Suite 350 and Bluegate agreed to pay the Sperco entities $1,000 rent on a month-to-month basis. As of December 31, 2013 and December 31, 2012, the Sperco entities owed $23,000 and $35,000, respectively in rent payments to Bluegate and the $23,000 and $35,000 is included as an offset and included under the caption accounts payable to related party on the balance sheet.


Accrued liabilities to related parties: As of December 31, 2013 and December 31, 2012: (1) $37,916 of fees accrued to Board of Director member Stephen Sperco ($17,499) and former Board of Director member Dale Geary ($20,417) and (2) $6,000 of accrued vehicle allowances to Stephen Sperco are included under the caption accrued liabilities to related parties totaling $749,600 and $438,051, respectively on the balance sheet. As of December 31, 2013 and December 31, 2012, accrued interest on the note payable to related party of $705,681 and $394,132, respectively are included under the caption accrued liabilities to related parties totaling $749,600 and $438,051, respectively on the balance sheet.


Equity Related: As of December 31, 2013, the company has outstanding: (i) 46,033,565 shares of common stock and, (ii) preferred stock that are convertible into 1,450,000 shares of common stock, resulting in on a fully diluted basis, 47,483,565 shares of common stock. The company has 50,000,000 shares of common stock authorized by our Articles of Incorporation.


DIRECTOR INDEPENDENCE.


In June 2007, we increased the size of our Board of Directors to consist of five Directors. We currently have two members of our Board of Directors, who were elected and hold office until their successors are elected and qualified. There are three vacancies. The two members of the Board of Directors are Stephen Sperco and Charles Leibold. Effective July 30, 2009, Stephen Sperco was appointed Chairman of the Board and the titles of CEO and President were combined, and Stephen Sperco was appointed President. Mr. Sperco is our CEO/President and Director. Effective July 29, 2009, Charles Leibold became a Director as a result of: (A) the June 12, 2009 written consent of a majority of our shareholders; (B) the June 22, 2009 filing of a Preliminary Information Statement; (C) the July 8, 2009 filing of a Definitive Information Statement; and, (D) the July 9, 2009 mailing of the Definitive Information Statement to our shareholders. The Definitive Information Statement had a record date of June 25, 2009. Mr. Leibold remains our Chief Financial Officer and Principal Accounting Officer. Effective July 30, 2009, the executive officer position of Chief Strategy Officer was eliminated and Mr. Sternberg’s employment was terminated. Effective October 28, 2009, Mr. Sternberg resigned as Director. Effective May 31, 2009, Mr. Koehler resigned as an employee from the company and effective October 27, 2009, Mr. Koehler resigned as Director. Effective October 28, 2009, Mr. Geary resigned as Director. Executive officers are appointed by the Board of Directors and serve until their successors have been duly elected and qualified. There is no family relationship between any of our directors and executive officers.

 

In March 2005, our Board adopted our Audit Committee Charter which established our Audit Committee. There are no current members of the audit committee and our Board of Directors serves as the audit committee.


In August 2007, our Board adopted our Compensation Committee. There are no current members of the compensation committee and our Board of Directors serves as the compensation committee.




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Item 14. Principal Accountant Fees and Services.


OUR INDEPENDENT ACCOUNTANT


In 2005, our Board of Directors selected as our independent accountant the CPA firm of Malone & Bailey, PC ("MB") of Houston, Texas. MB audited our financial statements for the years ended December 31, 2013 and 2012.


1. AUDIT FEES.


Our audit fees for the years ended December 31, 2013 and 2012 were as follows:


2013

 

 

2012

 

$

8,500

 

 

$

10,500

 


2. TAX FEES.


Our tax return fees for the years ended December 31, 2013 and 2012 were as follows:


2013

 

 

2012

 

$

-

 

 

$

1,975

 


3. ALL OTHER FEES.


2013

 

 

2012

 

$

-

 

 

$

475

 


For the year ended December 31, 2012, we were billed for work performed regarding the review of our S-1 registration statement.


5(I). PRE-APPROVAL POLICIES.


Our Audit Committee (or the members of the board of directors acting in the capacity of the Audit Committee) does not pre-approve any work of our independent registered public accounting firm, but rather approves independent auditor engagements before each engagement. The work of our Audit Committee commenced on June 1, 2005.


5(II). PERCENTAGE OF SERVICES APPROVED BY OUR AUDIT COMMITTEE.


There were no services performed by our independent registered public accounting firm of the type described in Item 9(e)(2) of Schedule 14A. Our Audit Committee (or the members of the board of directors acting in the capacity of the Audit Committee) considers that the work done for us by MB is compatible with maintaining MB's independence.




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PART IV


Item 15. Exhibits and Financial Statement Schedules.


Exhibit

 

Exhibit

Number

 

Description

 

 

 

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





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SIGNATURES


In accordance with Section 13 or 15(d) 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

 

 

 

January 22, 2014

By:

/s/ Stephen J. Sperco

 

 

Stephen J. Sperco

 

 

Director, Chief Executive Officer and President


In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


January 22, 2014

By:

/s/ Stephen J. Sperco

 

 

Stephen J. Sperco

 

 

Director, Chief Executive Officer and President

 

 

 

January 22, 2014

By:

/s/ Charles E. Leibold

 

 

Charles E. Leibold, CPA

 

 

Director, Chief Financial Officer and Principal Accounting Officer









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EXHIBIT INDEX


Exhibit

 

Exhibit

Number

 

Description

 

 

 

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