FAIRNESSOPINION Preparedin conjunction with ASale & Purchase of Assets by BluegateCorporation ("SELLER") And ASperco Entity, Trilliant Corporation and SAI Corporation ("PURCHASERS") November6, 2009

Exhibit 10.7

November 6, 2009

Mr. Charles Leibold

Chief Financial Officer

Bluegate Corporation

701 North Post Oak Road, Suite 600

Houston, Texas 77024

Dear Mr. Leibold:

Convergent Capital Appraisers, LLC (CCA) has been engaged by Bluegate Corporation (Company or Bluegate or BGAT) to render a Fairness Opinion in regard to the following described transactions.

Stephen Sperco (through a Sperco entity controlled by him) will purchase certain assets from Bluegate Corporation (“BGAT”) with payment made by a combination of cash and the conversion of debt. The assets to be purchased will be the BGAT Medical Grade Network (“MGN”) operation that supports clients with field engineers, consulting, and the sale of product. Trilliant Corporation will purchase certain assets from BGAT with a cash payment. The assets to be purchased will be the Trilliant Technology Groups (“TTG”) consulting operation. SAI Corporation (“SAIC”) will purchase certain assets from BGAT in exchange for a Mutual Release in Full of certain claims. The assets to be purchased will be the Healthcare Information Management Systems (“HIMS”) consulting operation.  The remaining Carrier/Circuit business will remain in Bluegate Corporation.

While we are not specifically bound by the pronouncements of the Financial Industry Regulatory Authority, Inc. (FINRA- formerly the National Association of Securities Dealers NASD), it is our assessment that since the guidelines have been endorsed by the United States Securities and Exchange Commission (SEC) as being consistent with current disclosure regulations, we believe it prudent to comply with the following disclosures.

If at the time a fairness opinion is issued to the board of directors of a company the member issuing the fairness opinion knows or has reason to know that the fairness opinion will be provided or described to the company's public shareholders, the member must disclose in the fairness opinion:

(1) if the member has acted as a financial advisor to any party to the transaction that is the subject of the fairness opinion, and, if applicable, that it will receive compensation that is contingent upon the successful completion of the transaction, for rendering the fairness opinion and/or serving as an advisor;

(2) if the member will receive any other significant payment or compensation contingent upon the successful completion of the transaction;

(3) any material relationships that existed during the past two years or that are mutually understood to be contemplated in which any compensation was received or is intended to be received as a result of the relationship between the member and any party to the transaction that is the subject of the fairness opinion;

(4) if any information that formed a substantial basis for the fairness opinion that was supplied to the member by the company requesting the opinion concerning the companies that are parties to the transaction has been independently verified by the member, and if so, a description of the information or categories of information that were verified;

(5) whether or not the fairness opinion was approved or issued by a fairness committee; and

(6) whether or not the fairness opinion expresses an opinion about the fairness of the amount or nature of the compensation to any of the company's officers, directors or employees, or class of such persons, relative to the compensation to the public shareholders of the company.

 

CCA has not had and does not anticipate any involvement in the foregoing transaction except to the extent of rendering this opinion regarding the fairness of the transaction.

CCA’s compensation in this matter is being paid by Bluegate Corporation and is based upon hourly rates and a total fee estimate that has been contractually agreed.

The only relationship with Bluegate and CCA is through the predecessor firm of McClure, Schumacher & Associates, LLP which provided valuation services relative to accounting issues and FASB 141 in conjunction with the purchase of Trilliant in 2006 and 2007.

We have not attempted to verify independently public or private information considered in our valuation.

We have expressed no opinions regarding the compensation of any parties to this transaction.

Based upon the criteria outlined in this report, and based upon our research and analysis, it is our opinion that: (i) the overall terms and conditions of the Purchase Transaction are fair from a financial point of view and (ii) pursuant to the Transaction Terms, the shareholders of Bluegate are receiving no less than adequate consideration.

The following business description is taken from the Company’s second quarter 10Q, filed in July 2009.  The Company has been trying to establish itself as a leader in the healthcare information technology business.  The efforts have not been successful as indicated by the subsequent financial information that shows continuous losses and the auditor’s opinion regarding questions of “going concern.”

 

 

Six Months Ended June 30,		2009				2008
Net loss		$	(41,102	)		$	(1,424,496	)
Negative cash flow from operations		$	(127,269	)		$	(208,669	)
Negative working capital		$	(1,505,020	)		$	(1,243,245	)
Stockholders' deficit		$	(1,477,367	)		$	(1,189,289	)

 

In preparing this report, we requested that Management through Mr. Charles Leibold prepare an updated assessment of the financial picture of the Company as of the middle of October 2009.  The response is as follows:

·	Bluegate Corporation is a public company traded on the OTCBB with 26 million shares outstanding (50% of the outstanding shares are owned by three directors who have differences among themselves).

·	Bluegate has had negative cash flow problems for several years and has never received a clean opinion from the external auditors which have consistently cited “going concern” issues.

·

Revenue is decreasing as two lines of business Trilliant Techology Group (TTG) and Healthcare Information Management Systems (HIMS) have not generated any substantial new business over the past year and will go dormant by end of November 2009.  (2009 first half of year had Revenue of ~$2M with P/L at around break-even, 2009 Q3 will have Revenue ~$760K with a loss from operations of ~$60K, and Forecast for 2009 Q4 is Revenue ~$460K with a loss from operations of ~$300K)

·

Current liabilities (there is no long term debt) of approximately $1,900,000 exceed current assets of approximately $300,000.  Of the $1,900,000 of liabilities, approximately $1,500,000 is owed to related parties - Single secured creditor for $1,300,000 with UCC filing on all of the Company’s assets and stock (from entity controlled by CEO/Director) and approximately $90,000 from two Directors who were formerly officers.

·	Operation will not have cash to sustain another 30-45 days

Public filings indicate that the Company has a negative net worth based on tangible assets.  The following analysis examines the items of value that may not be reported on the financial statements at fair value as defined below.

· The particular asset or liability that is the subject of the measurement (consistent with its unit of account);

· For an asset, the valuation premise appropriate for the measurement (consistent with its highest and best use);

· The principal (or most advantageous) market for the asset or liability (for an asset, consistent with its highest and best use);

· The valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use in pricing the asset or liability and the level in the fair value hierarchy within which the inputs fall.

At the end of the business description filed with the SEC (excerpted previously), there is a note regarding networking services.  This operation appears to be the only one that has on-going value because there is an expectation that it will generate a consistent flow of cash flow in excess of the cost of services.  It provides internet connectivity to corporate clients on a subscription basis; essentially operating as a broker.  It has several customers and expects to generate about $350,000 in revenue and net about $180,000 in gross margin or profit.  In addition, whenever there are technical issues or an opportunity to provide IT support, those tasks have traditionally been referred to other operations within the Company or to outside contractors.  This operation is NOT included in the contemplated transactions and it is to remain with Bluegate Corporation.

A Sperco entity is an entity owned by Mr. Stephen Sperco who is also the largest shareholder of Bluegate Corporation (BGAT) holding 4.5 million out of a total of 26 million shares outstanding.  The MGN tangible and intangible assets purchased from BGAT will be moved into a Sperco entity and the HIMS tangible assets purchased from BGAT will be moved into SAI Corporation (“SAIC”) which an entity is owned by Stephen Sperco.

Sperco entity’s purchase price for the MGN assets will consist of $100,000 cash and $100,000 in forgiveness of debt, plus an adjustment on a dollar for dollar basis for any working capital.  SAIC’s purchase price for the HIMS assets will consist of a Mutual Release in Full of certain claims. The only tangible assets to be transferred will be about $40,000 worth of furniture, fixtures and electronic equipment that are part of the MGN and HIMS operations.

The intangible assets include the following:

1.	Medical Grade Network

a.	a registered mark – “Medical Grade Network”

b.	a workforce of about 11 people

c.	approved vendor status for the following:

 

MHHNP	Memorial Hermann Health Ntwrk Prov-9401
Northwestern Memorial Hospital	Bone and Joint Clinic of Houston
Renaissance HealthCare Systems	Global Imaging
Memorial Hermann Health Sys-Radiology	Malcolm Bremer, MD
Houston Digestive Disease Consultants	Southwest Nephrology Associates, LLP
Advanced Orthopedics & Sports Medicine	Cindy Ivanhoe, MD, PA
Diabetes Centers of America	Northwest Oral Maxillofacial Surgery
G.I. Specialists of Houston, LLP	Women's Healthcare of Houston
Memorial MRI & Diagnostic	Neurology, Headache & Pain
Houston Allergy & Asthma Associates	Houston Fertility Institute
Urology Associates	Memorial Hermann Home Health
Pulmonary Critical Care & Sleep Medicine	Cardiology Associates of Houston
Texan Imaging Centers (formerly Okomed)	Center for Pain Recovery, PA
Gateway To Care	Dynamic Orthotics and Prosthetics
Leachman Cardiology Associates, PA	US Imaging

2.	Healthcare Information Management Systems

Since the HIMS operation has no on-going business it will go dormant by the end of November 2009, and it is our assessment that without on-going operations this operation has no intangible fair value.

 

3.	Trilliant Corporation’s (“Trilliant”) (a company owned by William Koehler, former Director/Corporate Officer of BGAT) purchase price for Trilliant Technology Group, Inc’s. (“TTG”) assets of $5,000 cash and will include:

a.	the Trilliant corporate name

b.	future revenues of about $20,000 (residual work on two ending contracts – which will require hiring contract labor which is expected to cost as much as the revenue)

In additional to the tangible and intangible assets, it is important to note the following circumstances and details regarding the transaction.

1.	Lease and Labor

a.	BGAT is obligated on a building lease for 7,290 square feet that runs until 2013 and costs about $9,000 per month.

b.	BGAT requires only five or six people to operate its carrier business

c.	The new Sperco entity will require less than 2,000 square feet for all its operations post transaction.  This would equate to about 27% of the space or about $2,500 per month.

d.	The new Sperco entity has agreed to supply BGAT with accounting and administrative staff, as well as technical support for the carrier business, at no charge in exchange for free rent.

e.	BGAT intends to sublease as much of the space as possible as soon as possible.

f.	Occupancy by the new Sperco entity will defer to BGAT’s needs and opportunities.

2.	Carrier or Connectivity Operation

a.	This operation is staying with BGAT

b.	This is the only operation of BGAT that has been adequately profitable.

c.	The new Sperco entity is acquiring the Medical Grade Network operation which provides maintenance support to BGAT’s Carrier customers.  As part of the transaction, Sperco agrees to continue providing that support.

3.	Medical Grade Network (MGN) Operation – Fair Value Assessment

a.

Revenues have been declining over the last three years as indicated by the following table.  They appear to have stabilized in 2009 at around $100,000 per month.  The increase in revenues in quarter 3 of 2009 is attributed to several larger dollar projects that are not expected to recur at the historic levels.

b.	For the nine months ended September 2009, this entity generated slightly more than $900,000 in revenues and produced a gross margin (profit after direct costs) of $130,000 or about 14%.  However, after including direct labors costs (reported as compensation) of $150,000, the operation lost $20,000.

c.	It must be noted that BGAT’s corporate overhead expense to maintain this business operation far exceeds an industry norm of 10%, which accounts in part for continuing ongoing losses.

d.

It is our assessment that while “Medical Grade Network” has been registered as a proprietary service mark, it does not appear (based on the trend of revenues and with no pending contracts) to have developed independent commercial recognition.  What value does exist is subsumed within the forecast cash flows as previously analyzed.

4.	Healthcare Information Management Systems (“HIMS”) Operation – Fair Value Assessment

a.	Revenues have been steadily declining during the nine months ended September 2009 and the remaining two contracts will end during November 2009.

b.	Since the HIMS operation has no on-going business it will go dormant by the end of November 2009, and it is our assessment that without on-going operations this operation has no intangible fair value.

5.	Trilliant – Fair Value Assessment

a.	This entity has no work force as of the end of September 2009 because of a lack of on-going projects.

b.	The remaining $20,000 in contract revenues will be earned through the use of outside contractors (former Trilliant employees).  The expectation is that the additional cost of using outside contractors rather than employees will consume any profit potential.

c.	The Trilliant name has not been established as a brand although it may be recognized among previous customers.

d.	Given there are no pending contracts and no pending bids, the value of the Trilliant name is considered to be minimal at best.

BGAT has not been profitable since inception and the business model has proven to be unsuccessful.  According to Yahoo Finance, the Company has not attracted any mutual fund or institutional investors.  About 13.0 million of the 26 million shares outstanding – about ½ are held by three individuals and one company.  The price of a share has declined from dollars to pennies over the last eight years and volume is negligible.

To resurrect the various operations will require expenditures for marketing and business development.  Given the poor stock performance, it is unlikely that funds could be raised through a stock offering.  The cash flow statement at right shows that over the past two calendar years, approximately $6.25 million ($4.85 mil + $1.40 mil) has been raised through the issuance of stock, options and warrants to fund operating losses which total approximately $6.9 million over the two years ($1.8 mil + $5.1 mil).

All of the Company’s assets are pledged against more than $1 million in debt, so it is unlikely that loans could be secured from traditional lending sources.

It is our assessment that BGAT has approached a financial impasse that has required drastic measures if bankruptcy is to be avoided.

 

Financial tension within the organization has been caused by reduced compensation and exchanging paychecks for stock as well as major internal restructuring.  This has lead to discord among the current and former Directors which has the potential to escalate to legal action.  If lawsuits are brought into this already dire financial situation, the cost and time delays will undoubtedly destroy what little value is left and bankruptcy will most surely be the inevitable conclusion to BGAT’s existence.

The proposed strategy is to minimize the loss and avoid bankruptcy.  Management believes that first and foremost, the potential litigation must go away if progress is to be made.  To that end, it is our understanding that about $90,000 of the $100,000 cash purchase price paid to BGAT for the MGN assets will be used to repay loans from Mr. Sternberg and Mr. Koehler (two former Directors/employees/corporate officers).  In exchange, they will provide full release and waivers of all claims.

 

As indicated by the balance sheet at right, even with an infusion of $100,000 and the forgiveness of $100,000 of debt, shareholders’ equity will still be negative.  We see from the previous financial statements that the Company has amassed large losses in the last two years and funded those losses with dilutive shares.  Approximately $1.4 million of cash was raised while $4.8 million of shares / options / warrants were issued to cover expenses.

While the rate of loss has decreased in the last year, there is every expectation that losses will continue if operations are allowed to continue.  To cover those losses, more and more shares will likely be issued as there is no collateral for loans.

Continuing to operate in this fashion will be detrimental to the common shareholders as their ownership value continues to be diluted.

Without the Sperco entity purchase, the common shareholders have little or no hope of realizing any return on their investment.

Given the dire financial condition of BGAT, it is unrealistic to suggest that MGN be placed with a business broker to sell because that would likely require between six months and a year to locate a buyer and close the transaction.  Moreover, given the revenue trends, and a lack of future contracts, it is uncertain whether a buyer could be found, particularly in a down economy with tight credit.

Sperco (through entities controlled by him) will be contributing the following values

·	Cash - $100,000

·	Forgiveness of Debt $100,000

·	Accounting and administrative services and technical support for the carrier business as needed in exchange for short term free rent.

The determination of fairness is a measurement of relative values.  Does one party to the transaction benefit disproportionately and to the detriment of another party.  In this case, the question is whether the Sperco entity, SAIC and Trilliant will benefit to the detriment of the common shareholders.

Our analysis of the fair value of the MGN assets included in this transaction indicates that if anything, the price of $200,000 is likely a high price. The total tangible collateral in this transaction is something less than $40,000 which means a loan value in the $30,000 range or less.  TTG has no on-going operations while MGN and HIMS’s operations have been trending downward.

We know that these three operations are insufficient to support BGAT’s overhead and if they are not sold in short order, they will likely cease to exist.

Without these sales, BGAT will continue to be in default on its loans and given the state of financial resources, will be forced to file for bankruptcy protection.  Between legal and trustee fees, what few resources are left will be consumed and the common shareholders will receive nothing.

Based upon the foregoing evidence and analysis, it is our opinion that this transaction is fair from a financial point of view as it provides the common shareholders with more value than any other likely scenario.  Moreover, the prices being paid to BGAT is assessed as meeting or exceeding what we have determined to be a fair value for the assets to be sold to the Sperco entity, SAIC and Trilliant.

In rendering our opinion, we have relied without independent verification upon the accuracy and completeness of the financial and other information provided by Bluegate Corporation and their agents.

We have assumed such information to be correct and complete in all material aspects.

We have not attempted to independently verify public or private information considered in our valuation.

We have held discussions with Management regarding the condition and outlook for its operations, and have made such other investigations and analyses, as we have deemed necessary.

We have assumed that there has been no material change in Bluegate Corporation’s financial condition, results of operations, business or prospects since the date of the last financial statements unless otherwise noted.

We believe that the analysis of management’s anticipated performance and resulting lack of cash flow is a reasonable estimation, based upon past performance and based on the information available to us at this time.  In addition, Bluegate Corporation’s management has represented that there are no pending contracts or work in progress that have not been disclosed.

The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant quantitative and qualitative methods of financial analyses and the application of those methods to the particular circumstances.  Therefore, such an opinion is not readily susceptible to the partial analysis or summary description.  Furthermore, in arriving at our opinion, we did not attribute any particular weight to any specific analysis or factor.  Rather, we have made qualitative judgments as to the significance and relevance of each.

Accordingly, Convergent Capital Appraisers believes that our analysis must be considered as a whole.

In our analyses, we made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Bluegate Corporation.  Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth therein.

Convergent Capital Appraisers or through a predecessor firm McClure, Schumacher and Associates, LLP have previously performed independent valuations of Bluegate Corporation or related entities.

Neither Convergent Capital Appraisers nor the individuals involved with this analysis have any present or contemplated future interest in the Plan or Bluegate Corporation or any other interest that might tend to prevent making a fair and unbiased appraisal.

These conclusions are based upon methodologies and financial fairness considerations that we deem appropriate.  In accordance with recognized professional ethics, our fees for this service are not contingent upon the opinions expressed herein.

This Opinion is furnished solely for the benefit of Management and the Board of Directors and may not be relied upon by any other person or for any other purpose without our express, prior, written consent.

This Opinion is delivered subject to the conditions, scope of the engagement, limitations and understandings set forth in this Opinion and our engagement letter.

Convergent Capital Appraisers shall not be subjected to any personal liability whatsoever to any person, or on behalf of you or your affiliates.  Convergent Capital Appraisers has been retained on behalf of and has delivered this Opinion solely to the Management and the Board of Directors.

Notwithstanding that, Convergent Capital Appraisers’ fees and expenses are being paid by Bluegate Corporation and certain covenants and representations have been made by Bluegate Corporation.

Sincerely,

 

Jeffrey A. Schumacher

Multiple teleconferences were held with Mr. Charles Leibold over the period of October 21 through November 6, 2009.  The report has been submitted in draft form to the Board of Directors for review and comment.

Upon receiving the Board’s comments and suggestions, the report was finalized and signature affixed.

·	Bluegate Corporation SEC filing 10Q for the quarters ended 2005 – 2008

·	Internally prepared financial statements and supporting as well as specially prepared related schedules for the nine months ended September 2009

·	Synopsis of the purchase and sale contract between the Sperco entity and Bluegate Corporation

Certified Public Accountant (CPA) State of Texas

Accredited in Business Valuation (ABV)

American Institute of Certified Public Accountants

Accredited Senior Appraiser / Business Valuation (ASA)

American Society of Appraisers

B.B.A.  (1976) Finance Major  Valparaiso University

American Institute of Certified Public Accountants

American Society of Appraisers – Accredited Senior Member

ASA Houston Chapter Treasurer 2003-2004

ASA Houston Chapter President 2004-2005

2007 - Present                                FOUNDER and MANAGING MEMBER

Convergent Capital Appraisers LLC

Houston, Texas

 

Business valuation, forensic analysis, special issue damages, business interruption claims, interim management, litigation support, family law issues, valuation and consulting in mergers and acquisitions, partnership dissolutions, dissenting stockholder disputes, ESOP appraisals, partnership disputes, insurance fraud, patent infringement and estate and gift taxation issues.  Jeff was a pioneer in the design of business valuation software beginning in the early 1980s.

 

1996 - 2007                                FOUNDER and PARTNER

McClure, Schumacher & Associates L.L.P.

Houston, Texas

 

Business appraisal, litigation support, financial consulting and mergers and acquisitions

 

1990 - 1996                                FOUNDER and PARTNER

Smith & Schumacher

Houston, Texas

 

Business appraisal, litigation support, financial consulting and mergers and acquisitions

 

 

 

1983 - 1990                                ANALYST

 

Served as a contract financial analyst for several valuation firms in Houston and Dallas, Texas.  These firms included Certified Business Brokers, Abraham & Associates, Highview Services, Aden-Smith, and American Business Group.

 

Texas Society of Certified Public Accountants

1995, 1996, 1997 Asset Protection through Family Limited Partnerships

 

1994 Litigation Support Conference – Commercial vs. Personal Goodwill

 

1997 Litigation Support Conference - Discounts – What’s Fair

1997 Galveston Family CPE Conference - Basics of Business Valuation

1998 Galveston Family CPE Conference - Use and Abuse of Discounts

1999 South Texas School of Law – Litigation Support Conference –Daubert Discussion Panelist

2000 Advanced Family Law Conference – Internet Research & Sites

2000 South Texas School of Law – Litigation Support Conference – Damage Models Discussion Panelist

AWSPA-ASWA 54th Annual Conference

1994  Basic Business Valuation Techniques and Issues

Houston Bar Association, Family Law Section

1995 Appraising the Appraiser: Family Law Valuations

2003 Section 1041 and Marital Property Divisions

American Society of Appraisers

1998 Daubert & Robinson

Northeast Harris County Bar Association

2000 Equitable Interest

University of Houston

2002 Business Valuation - Discounts

2003 Business Valuation - Discounts

2004 Business Valuation – Discounts

Financial Consulting Group

2004 A multiple Regression Model for Predicting Discounts

Materials Marketing Associates, Inc.

2008 Annual Meeting, Miami, FL – Business Valuation and Exit Strategies

So How Much Is My Closely Held Business Worth?

Small Business Owners May Face Big Challenges in Divorce Court

Estimating Minority Interest Discounts