Coyni, Inc. - Quarter Report: 2012 September (Form 10-Q)

bgat10qq32012.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2012

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _ to _

Commission file number: 000-22711

BLUEGATE CORPORATION

(Exact name of registrant as specified in its charter)

Nevada	76-0640970
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

701 North Post Oak Road, Suite 350, Houston, Texas	77024
(Address of principal executive offices)	(Zip Code)

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

Indicate by check mark whether the registrant :(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings requirements for the past 90 days. Yes [X] No [ ]

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each the issuer's classes of common stock, as of the latest practicable date: 46,033,565 common shares outstanding as of October 4, 2012.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Unaudited Financial Statements	F-1

Balance Sheets as of September 30, 2012 and December 31, 2011	F-1

Statements of Operations for the three and nine months ended September 30, 2012 and 2011	F-2

Statement of Stockholders’ Deficit for the nine months ended September 30, 2012	F-3

Statements of Cash Flows for the nine months ended September 30, 2012 and 2011	F-4

Notes to Financial Statements	F-5

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

ITEM 4. CONTROLS AND PROCEDURES	I-5

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS	II-1

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

ITEM 5. OTHER INFORMATION	II-1

ITEM 6. EXHIBITS	II-1

SIGNATURES	II-2

CERTIFICATIONS	II-3

ITEM 1. FINANCIAL STATEMENTS

BLUEGATE CORPORATION
BALANCE SHEETS UNAUDITED


	September 30,			December 31,
	2012			2011
ASSETS
Current assets:
Cash and cash equivalents	$	5,134		$	5,937
Accounts receivable, net		2,836			2,568
Prepaid expenses and other		11,587			6,587
Total current assets	$	19,557		$	15,092
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	11,072		$	11,318
Accounts payable to related party		469,741			320,664
Accrued liabilities		17,373			30,212
Note payable to related party		1,235,000			1,200,000
Accrued liabilities to related parties		361,290			134,241
Deferred revenue		12,788			16,207
Total current liabilities		2,107,264			1,712,642



Stockholders’ deficit:
Undesignated preferred stock, $.001 par value, 9,999,942 shares authorized, none issued and outstanding		-			-
Series C Convertible Non-Redeemable preferred stock, $.001 par value, 48 shares authorized, issued and outstanding at September 30, 2012 and December 31, 2011; $12,500 per share liquidation preference ($600,000 aggregate liquidation preference at September 30, 2012)		-			-
Series D Convertible Non-Redeemable preferred stock, $.001 par value, 10 shares authorized, issued and outstanding at September 30, 2012 and December 31, 2011; $8,725 per share liquidation preference ($87,250 aggregate liquidation preference at September 30, 2012)		-			-
Common stock, $.001 par value, 50,000,000 shares authorized, 46,033,565 shares issued and outstanding at September 30, 2012 and December 31, 2011		46,034			46,034
Additional paid-in capital		22,400,286			22,400,286
Accumulated deficit		(24,534,027	)		(24,143,870	)
Total stockholders’ deficit		(2,087,707	)		(1,697,550	)
Total liabilities and stockholders’ deficit	$	19,557		$	15,092

See accompanying notes to financial statements

F-1

BLUEGATE CORPORATION
STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
UNAUDITED

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
		2012			2011			2012			2011
Service revenue	$	36,096		$	54,049		$	112,471		$	176,213
Cost of services		27,123			35,006			92,414			111,853
Gross profit		8,973			19,043			20,057			64,360
Selling, general and administrative expenses		59,487			81,378			183,165			216,322
Loss from operations		(50,514	)		(62,335	)		(163,108	)		(151,962	)
Interest expense		(76,336	)		(76,504	)		(227,049	)		(217,281	)
Gain on derivative financial instruments		-			34,000			-			18,000
Net loss	$	(126,850	)	$	(104,839	)	$	(390,157	)	$	(351,243	)


Net loss per share – basic and diluted	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	(0.01	)

Basic and diluted weighted average shares outstanding		46,033,565			26,033,565			46,033,565			26,033,565

See accompanying notes to financial statements

F-2

BLUEGATE CORPORATION
STATEMENT OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 2012 UNAUDITED



					PREFERRED STOCK								ADDITIONAL
	COMMON STOCK				SERIES C				SERIES D				PAID-IN		ACCUMULATED
	SHARES		CAPITAL		SHARES		CAPITAL		SHARES		CAPITAL		CAPITAL		DEFICIT			TOTAL
Balance at December 31, 2011		46,033,565	$	46,034		48	$	-		10	$	-	$	22,400,286	$	(24,143,870	)	$	(1,697,550	)
Net loss																(390,157	)		(390,157	)
Balance at September 30, 2012		46,033,565	$	46,034		48	$	-		10	$	-	$	22,400,286	$	(24,534,027	)	$	(2,087,707	)

See accompanying notes to financial statements

F-3

BLUEGATE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
UNAUDITED


	2012			2011
Cash flows from operating activities:
Net loss	$	(390,157	)	$	(351,243	)
Adjustments to reconcile net loss to net cash used in operating activities:


Derivative gain		-			(18,000	)

Changes in operating assets and liabilities:
Accounts receivable		(268	)		1,888
Prepaid expenses and other current assets		(5,000	)		6,275
Accounts payable and accrued liabilities		(13,085	)		(26,815	)
Accounts payable to related party		149,077			136,478
Accrued liabilities to related parties		227,049			217,280
Deferred revenue		(3,419	)		3,024
Net cash used in operating activities		(35,803	)		(31,113	)
Cash flows from financing activities:
Proceeds from related party short term debt		35,000			30,000
Net cash provided by financing activities		35,000			30,000
Net decrease in cash and cash equivalents		(803	)		(1,113	)
Cash and cash equivalents at beginning of period		5,937			10,213
Cash and cash equivalents at end of period	$	5,134		$	9,100



Supplemental information:
Cash paid for interest	$	-		$	-
Cash paid for income taxes		-			-

See accompanying notes to financial statements

F-4

BLUEGATE CORPORATION

NOTES TO FINANCIAL STATEMENTS

UNAUDITED

1. BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of Bluegate Corporation (“we”, “our”, “Bluegate” or the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in Bluegate's Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which substantially duplicate the disclosure contained in the audited financial statements for fiscal 2011 as reported in the Form 10-K have been omitted.

RECLASSIFICATIONS

Certain prior period amounts have been reclassified to conform to the current period presentation.

2. GOING CONCERN CONSIDERATIONS

During the nine months ended September 30, 2012, Bluegate has been unable to generate cash flows sufficient to support its operations and has been dependent on debt and equity raised from qualified individual investors and loans from a related party. In addition to negative cash flow from operations, Bluegate has experienced recurring net losses, and has a negative working capital and shareholders’ deficit.

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

3. 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:	9/30/2012			12/31/2011
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.	$	98,741		$	97,664
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.		409,000			270,000
From July 1, 2010 through July 31, 2011, SLLC agreed to pay Bluegate a monthly amount of $4,000 for office space and associated services for the Sperco entities		(52,000	)		(52,000	)
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		14,000			5,000
	$	469,741		$	320,664

4. NOTE PAYABLE TO RELATED PARTY

Note payable at September 30, 2012 and December 31, 2011 is summarized below:		9/30/2012				12/31/2011
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 $1,230,000. 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. On January 30, 2012, June 27, 2012 and September 26, 2012, Bluegate borrowed $15,000, $10,000 and $10,000, respectively for working capital purposes.		$	1,235,000			$	1,200,000

F-5

5. ACCRUED LIABILITIES TO RELATED PARTIES
The accrued liabilities to related parties is summarized below:	9/30/2012		12/31/2011
Accrued interest on the note payable to SAIC	$	317,371	$	90,322
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
	$	361,290	$	134,241

6. EQUITY TRANSACTIONS

As of September 30, 2012, the company has outstanding: (i) 46,033,565 shares of common stock; (ii) 130,000 warrants; (iii) 370,332 options; and, (iv) preferred stock that are convertible into 1,450,000 shares of common stock, resulting on a fully diluted basis, 47,983,897 shares of common stock. The company has 50,000,000 shares of common stock authorized by our Articles of Incorporation.

7. DERIVATIVE LIABILITY

Embedded feature of equity-linked financial instrument:

In June 2008, the FASB finalized ASC 815-15, "Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock". ASC 815-15 lays out a procedure to determine if an equity-linked financial instrument (or embedded feature) is indexed to its own common stock. ASC 815-15 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 ASC 815-15. Bluegate estimated the fair value of these liabilities as of January 1, 2009 to be $84,000 by recording a reduction of $4,600,000 to Additional Paid In Capital and $4,516,000 to Accumulated Deficit. The effect of this adjustment is recorded as a cumulative effect of change in accounting principle in our statement of stockholders’ deficit. The fair values of these liabilities were -0- and $4,000 at September 30, 2012 and 2011, respectively. On December 29, 2011 we received notification that the remaining warrants with an anti-dilutive provision issued to related party, SAI Corporation, were to be canceled. Due to the cancelation, there were no derivative financial instruments outstanding at December 31, 2011 and therefore, the fair value of these liabilities was -0- at December 31, 2011. The change in fair value of $18,000 in 2011 is reported in our statement of operations as a gain on derivative financial instruments for the nine months ended September 30, 2011. The fair value of these liabilities will be re-measured at the end of every reporting period and the change in fair value will be reported in our statement of operations as a gain or loss on derivative financial instruments.

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

8. 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.

F-6

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

FORWARD LOOKING STATEMENT

This Management's Discussion and Analysis of Financial Condition and Results of Operations as of September 30, 2012 and for the nine months then ended, should be read in conjunction with the audited consolidated financial statements and notes thereto set forth in our annual report on Form 10-K for 2011.

Certain statements contained in this report, including, without limitation, statements containing the words, "likely", "forecast", "project", "believe", "anticipate", "expect", and other words of similar meaning, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such factors or to announce publicly the results of any revision of the forward-looking statements contained or incorporated by reference herein to reflect future events or developments. In addition to the forward-looking statements contained in this Form 10-Q, the following forward-looking factors could cause our future results to differ materially from our forward-looking statements: competition, capital resources, credit resources, funding, government compliance and market acceptance of our products and services.

OUR BUSINESS

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.

COMPETITION

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

Our web site is www.bluegate.com.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon 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.

STOCK-BASED COMPENSATION

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

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

DERIVATIVE FINANCIAL INSTRUMENTS

Bluegate does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Bluegate evaluates all of it financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, Bluegate uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. On December 29, 2011 we received notification that the remaining warrants with an anti-dilutive provision issued to related party, SAI Corporation, were to be canceled; therefore there were no derivative financial instruments outstanding at December 31, 2011.

I-1

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 19, 2012 (included in our annual report on Form 10-K for the year ended December 31, 2011), which raises substantial doubt about our ability to continue as a going concern.

During the nine months ended September 30, 2012 and the year ended December 31, 2011, we have been unable to generate cash flows sufficient to support our operations and have been dependent on debt and equity raised from qualified individual investors and loans from a related party.

During the nine months ended September 30, 2012 and 2011, we experienced negative financial results as follows:

	Nine Months Ended September 30,
	2012			2011
Net loss	$	(390,157	)	$	(351,243	)
Negative cash flow from operations		(35,803	)		(31,113	)
Negative working capital		(2,087,707	)		(1,835,474	)
Stockholders’ deficit		(2,087,707	)		(1,835,474	)

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.

RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2012 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2011

	Three Months Ended September 30,									Increase (Decrease)
	2012			2011			2010			2012 from 2011			2011 from 2010
Service revenue	$	36,096		$	54,049		$	69,190		$	(17,953	)	$	(15,141	)
Cost of services		27,123			35,006			38,097			(7,883	)		(3,091	)
Gross profit		8,973			19,043			31,093			(10,070	)		(12,050	)
Selling, general and administrative expenses		59,487			81,378			82,473			(21,891	)		(1,095	)
Loss from operations		(50,514	)		(62,335	)		(51,380	)		(11,821	)		10,955
Interest expense		(76,336	)		(76,504	)		-			(168	)		76,504
Gain on derivative financial instruments		-			34,000			3,000			(34,000	)		31,000
Net loss	$	(126,850	)	$	(104,839	)	$	(48,380	)	$	22,011		$	56,459

Service Revenue.

The decrease in Service Revenue of $15,141 from 2010 to 2011 and $17,953 from 2011 to 2012 is due to a reduction in our networking service (carrier/circuit) business that provides internet connectivity to corporate clients on a subscription basis.

Cost of Services.

The net decrease in Cost of Services of $3,091 from 2010 to 2011 and $7,883 from 2011 to 2012 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 $12,050 from 2010 to 2011 and $10,070 from 2011 to 2012. Our Gross Profit as a percentage of Service Revenue decreased from 45% in 2010 to 35% in 2011 to 25% in 2012 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 $1,095 decrease in SG&A from 2010 to 2011 is insignificant. The decrease of $21,891 from 2011 to 2012 is primarily a result of a $16,000 reduction of Texas franchise taxes.

I-2

Interest Expense.

The increase in Interest Expense of $76,504 from 2010 to 2011 was a result of the $30,000 increase in borrowings under the secured note payable to related party and resumption of interest being charged for 90 days in 2011 as compared to -0- days in 2010. The decrease in Interest Expense of $168 from 2011 to 2012 is insignificant.

Gain (loss) on Derivative Financial Instruments.

In June 2008, the FASB finalized ASC 815-15, "Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock". The pronouncement lays out a procedure to determine if an equity-linked financial instrument (or embedded feature) is indexed to its own common stock. The pronouncement is effective for fiscal years beginning after December 15, 2008. Some of Bluegate’s outstanding warrants that were previously classified in equity were reclassified to derivative liabilities on January 1, 2009 as a result of this pronouncement. Bluegate estimated the fair value of these liabilities as of January 1, 2009 to be $84,000. The fair values of these liabilities were -0- and $4,000 at September 30, 2012 and 2011, respectively. The $34,000 change in fair value for the three months is reported in our statement of operations as a gain on derivative financial instruments as of September 30, 2011.

Net Loss.

The Net Loss increased $56,459 from 2010 to 2011 and $22,011 from 2011 to 2012 due to the items described above.

FINANCIAL CONDITION

	Three Months Ended September 30,								Increase (Decrease)
	2012			2011		2010			2012 from 2011			2011 from 2010
Net cash provided by (used in) operating activities	$	(8,252	)	$	1,391	$	(21,243	)	$	9,643		$	(22,634	)

Net cash provided by financing activities		10,000			-		-			(10,000	)		-
Net increase (decrease) in cash	$	1,748		$	1,391	$	(21,243	)	$	357		$	22,634
Cash balance at end of period	$	5,134		$	9,100	$	8,991

Operating Activities.

The decrease of $22,634 from 2010 to 2011 in cash used in operations is primarily due to the collection of approximately $13,000 of related party receivables and a net reduction of rent expense of $6,000. The increase of $9,643 from 2011 to 2012 is insignificant.

Financing Activities.

The increase of $10,000 from 2011 to 2012 in cash provided by financing activities is due to the increase in proceeds from related party short term debt.

RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30, 2012 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2011

	Nine Months Ended September 30,									Increase (Decrease)
	2012			2011			2010			2012 from 2011			2011 from 2010
Service revenue	$	112,471		$	176,213		$	218,613		$	(63,742	)	$	(42,400	)
Cost of services		92,414			111,853			123,660			(19,439	)		(11,807	)
Gross profit		20,057			64,360			94,953			(44,303	)		(30,593	)
Selling, general and administrative expenses		183,165			216,322			197,432			(33,157	)		18,890
Loss from operations		(163,108	)		(151,962	)		(102,479	)		11,146			49,483
Interest expense		(227,049	)		(217,281	)		(84,486	)		9,768			132,795
Gain on derivative financial instruments		-			18,000			8,000			(18,000	)		10,000
Net loss	$	(390,157	)	$	(351,243	)	$	(178,965	)	$	38,914		$	172,278

Service Revenue.

The decrease in Service Revenue of $42,400 from 2010 to 2011 and $63,742 from 2011 to 2012 is due to a reduction in our networking service (carrier/circuit) business that provides internet connectivity to corporate clients on a subscription basis.

Cost of Services.

The net decrease in Cost of Services of $11,807 from 2010 to 2011 and $19,439 from 2011 to 2012 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 $30,593 from 2010 to 2011 and $44,303 from 2011 to 2012. Our Gross Profit as a percentage of Service Revenue decreased from 43% in 2010 to 37% in 2011 to 18% in 2012 primarily as a result of the changes in the Service Revenue and Cost of Services as described above.

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

The $18,890 increase in SG&A from 2010 to 2011 is primarily related to the following: (1) Effective January 1, 2010 there were no Bluegate Corporation employees and 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 which totaled $135,000 for the nine months ended September 30, 2011 compared to $45,000 for the nine months ended September 30, 2010. The $135,000 increase was partially offset by (2) Effective July 1, 2010, the Sperco entities agreed to pay a monthly amount of $4,000 for office space and associated services to Bluegate for the Sperco entities which had the effect reducing Bluegate’s monthly rent to $2,000 for the nine months ended September 30, 2011 as compared to approximately $66,000 of rent expense recorded for the nine months ended September 30, 2010. The decrease of $33,157 from 2011 to 2012 is primarily a result of (1) a $16,037 reduction in the Director and Officer Liability insurance premium, and (2) a $16,000 reduction of Texas franchise taxes.

Interest Expense.

The increase in Interest Expense of $132,795 from 2010 to 2011 was a result of the $30,000 increase in borrowings under the secured note payable to related party and resumption of interest being charged for nine months in 2011 as compared to four months in 2010. The increase in Interest Expense of $9,768 from 2011 to 2012 was a result of one additional $10,000 late charge penalty in 2012.

Gain (loss) on Derivative Financial Instruments.

In June 2008, the FASB finalized ASC 815-15, "Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock". The pronouncement lays out a procedure to determine if an equity-linked financial instrument (or embedded feature) is indexed to its own common stock. The pronouncement is effective for fiscal years beginning after December 15, 2008. Some of Bluegate’s outstanding warrants that were previously classified in equity were reclassified to derivative liabilities on January 1, 2009 as a result of this pronouncement. Bluegate estimated the fair value of these liabilities as of January 1, 2009 to be $84,000. The fair values of these liabilities were -0- and $4,000 at September 30, 2012 and 2011, respectively. The $18,000 change in fair value for the nine months is reported in our statement of operations as a gain on derivative financial instruments as of September 30, 2011.

Net Loss.

The Net Loss increased $172,278 from 2010 to 2011 and $38,914 from 2011 to 2012 due to the items described above.

FINANCIAL CONDITION

	Nine Months Ended September 30,									Increase (Decrease)
	2012			2011			2010			2012 from 2011		2011 from 2010
Net cash used in operating activities	$	(35,803	)	$	(31,113	)	$	(18,093	)	$	4,690	$	13,020

Net cash provided by financing activities		35,000			30,000			-			5,000		30,000
Net decrease in cash	$	(803	)	$	(1,113	)	$	(18,093	)	$	310	$	16,980

Cash balance at end of period	$	5,134		$	9,100		$	8,991

Operating Activities.

The increase of $13,020 from 2010 to 2011 in cash used in operations is primarily due to the $30,000 paid to the Trustee in Renaissance Healthcare Systems, Inc. settlement. The increase of $4,690 from 2011 to 2012 is insignificant.

Financing Activities.

The increase of $30,000 from 2010 to 2011 and increase of $5,000 from 2011 to 2012 in cash provided by financing activities is due to the increase in proceeds from related party short term debt.

BLUEGATE STRATEGY

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

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2012, our cash and cash equivalents were $5,134; total current assets were $19,557, total current liabilities were $2,107,264 and total stockholders’ deficit was $2,087,707.

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.

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.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

The Company’s Chief Executive Officer and Principal Accounting Officer participated in an evaluation by management of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2012. Based on their participation in that evaluation, the Company’s Chief Executive Officer and Principal Accounting Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2012 to ensure that required information is disclosed on a timely basis in its reports filed or furnished under the Exchange Act.

Changes in internal control over financial reporting.

There was no change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

NONE.

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

NONE.

ITEM 5. OTHER INFORMATION

NONE

ITEM 6. EXHIBITS

Exhibit
Number	Name

31.1	CERTIFICATION REQUIRED BY RULE 13a - 14(a) OR RULE 15d - 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 OF THE CHIEF EXECUTIVE OFFICER

31.2	CERTIFICATION REQUIRED BY RULE 13a - 14(a) OR RULE 15d - 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 OF THE CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER

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

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

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SIGNATURES

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

Bluegate Corporation

Date:	October 5, 2012	/s/	Stephen J. Sperco

			Stephen J. Sperco,
			Chief Executive Officer


Bluegate Corporation

Date:	October 5, 2012	/s/	Charles E. Leibold

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

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