Coyni, Inc. - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended: December 31, 2008
OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from ____ to
____
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Commission
file number: 000-22711
BLUEGATE
CORPORATION
(Exact
name of Registrant as Specified in Its Charter)
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Nevada
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76-0640970
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(IRS
Employer
Identification
No.)
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701
North Post Oak Road, Suite 600, Houston, Texas
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77024
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(Address of
Principal Executive Offices)
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(Zip
Code)
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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 x
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 x
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 x 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.
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller
reporting
company. See the definitions 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
Act). Yes
No x
As
of April 8, 2009, 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 $219,365.
On April
8, 2009, the registrant had outstanding 26,033,565 shares of Common Stock,
$0.001 par value per share.
Documents
Incorporated by Reference
None
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TABLE
OF CONTENTS
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PAGE
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Item
1. Business
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3
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Item
1A. Risk Factors
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5
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7
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Item
3. Legal Proceedings
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Item
4. Submission of Matters to a Vote of Security
Holders
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7
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Item 5. Market For Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases
of Equity Securities
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8
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Item
6. Selected Financial Data
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9
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Item
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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9
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Item
8. Financial Statements
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F-1
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Item
9. Changes In and Disagreements with Accountants On Accounting and
Financial Disclosure
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14
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Item
9A. Controls and Procedures
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14
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Item
9B. Other Information
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14
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Item
10. Directors, Executive Officers and Corporate Governance
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15
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Item
11. Executive Compensation
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17
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Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related
Stockholder Matters
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19
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Item
13. Certain Relationships and Related Transactions, and Director
Independence
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20
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Item
14. Principal Accountant Fees and Services
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22
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Item
15. Exhibits and Financial Statement Schedules
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22
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SIGNATURES
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23
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EXHIBITS
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24
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2
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 provides the nation's only Medical Grade Network®
that facilitates physician and clinical integration between hospitals and
physicians in a secure private environment. As a leader in providing
the healthcare industry outsourced Information Technology (IT) solutions and
remote IT management services, Bluegate provides hospitals and physicians with a
single source solution for all of their clinical integration and IT
needs. Additionally Bluegate provides IT, telecommunication,
implementation project management and consulting through its professional
services organization.
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 600, 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 April 8, 2009, 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.
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.
3
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. Continuing as Directors are Manfred Sternberg and William
Koehler. We have increased the size of our Board of Directors to
consist of five Directors, one of which positions is now vacant.
OUR
BUSINESS
Bluegate
provides the nation's only Medical Grade Network® that facilitates physician and
clinical integration between hospitals and physicians in a secure private
environment. As a leader in providing the Healthcare industry
outsourced Information Technology (IT) solutions and remote IT management
services, Bluegate provides hospitals and physicians with a single source
solution for all of their clinical integration and IT
needs. Additionally Bluegate provides IT, telecommunication,
implementation project management and consulting through its professional
services organization.
CONSULTING
PRACTICE
Healthcare
institutions have very unique requirements not found in a typical commercial
environment. Our Healthcare consulting practice works with medical
facilities and systems on evaluation, procurement and implementation of
healthcare related voice, data, video, infrastructure and applications for the
Healthcare environment with a particular emphasis on the deployment of
Electronic Medical Record applications. Our IT/Telecommunications consulting
practice works in various industry verticals providing evaluation, procurement
and implementation of IT/Telecommunications solutions for our
clients. Our Applications consulting practice provides specific
applications development, enhancement, coding, and integration work for various
industry verticals.
OUTSOURCING
Our
outsourcing offering includes help desk support and break-fix operations as well
as acquisition and special financing of equipment and services. It
also can include provisions for technology refresh, change management, and level
of service agreements. Our target market for such services consists
of private-practice physicians whose office staffs typically lack the in-house
technical expertise to support mission-critical computer systems and associated
hardware. In many cases, these private-practice physicians are
affiliated with our larger medical facility clients, creating a logical
foundation for Bluegate to establish and maintain long-term business
relationships.
SYSTEMS
INTEGRATION AND MANAGED SECURITY SOLUTIONS
Our
systems integration and managed security group enables secure, HIPAA-compliant
data communication between hospitals, medical facilities and physician practices
from all locations via the services of our Bluegate Medical Grade Network® -
ultimately enhancing patient care. We also provide affordable access to
compatible medical-focused content and applications over a secure IT
infrastructure to improve practice efficiency and service. We extend IT Best
Practices to the edge of the healthcare network ensuring every access point for
the physician and healthcare location is as secure as the hospital
itself.
MARKET
OPPORTUNITY IN HEALTHCARE
Electronic
data communication networks have vast potential for enhancing the quality of
patient care, mitigating the soaring costs of healthcare, and protecting patient
privacy. To harness this potential, the current administration,
Congress, and administrative agencies are advocating that all physicians get
connected to the proposed national health information network (NHIN)
system. A NHIN is expected to enable physicians to write electronic
prescriptions (eRx) and securely share patient electronic health records (EHR),
including medical images, with other healthcare providers at hospitals, clinics,
and individual physician offices.
In order
to access and use the NHIN, individual physicians must have the appropriate IT
environment at their offices, and the hospitals where they admit
patients. Further, the hospitals’ credentialed physicians must be on
a common HIPAA compliant network. Once the hospital has installed the
necessary secure electronic connectivity behind their firewall, the "last mile"
of connectivity, the figurative distance from the telecommunication provider's
switch to an end user (i.e. the physician), still presents a major
challenge. In addition to being HIPAA-compliant, the networks also
need to be interoperable, which requires assessing and augmenting physicians'
existing IT equipment and resources. Adequate training and technical
support is necessary to ensure the highest possible network availability and
security and the ability to move and manage information back and
forth.
The
Administrative Simplification provisions of Title II of HIPAA require the United
States Department of Health and Human Services to establish national standards
for electronic healthcare transactions and national identifiers for providers,
health plans, and employers. It also addresses the security and privacy of
health data. Adopting these standards will improve the efficiency and
effectiveness of the nation's Healthcare system by encouraging the widespread
use of electronic data interchange in Healthcare. As the result of
increasing pressure for healthcare providers to adopt electronic health records
and the favorable healthcare IT environment created by the Stark Law
exceptions there is rapidly increasing demand for Bluegate’s networks,
technologies, remote management, and professional IT services.
4
BLUEGATE
STRATEGY
Healthcare
Our
current short term strategies are to: (1) increase our market penetration of the
Houston hospitals, centralized Healthcare, and physician markets; (2) commence
deployment of services in other Texas cities; and, (3) commence deployment of
services in other cities in the U.S. Our long term strategy is
fivefold: (1) fill as much of the national HIPAA-compliant secured
communications void that exists between the physician and the hospital as we
can; (2) sell our services to the physicians that utilize our Medical
Grade Network®, enabling them to choose Bluegate as their electronic health
solutions firm and as the IT outsource firm of choice for all of their
technology needs; (3) to be "THE" IT solutions resource to medical
institutions, Healthcare facilities, regional health information
organizations (RHIOs), and centralized Healthcare organizations (HCOs) for all
their IT needs; (4) partner with a wide array of third party providers of
software, managed systems, pharmacy benefits, and many other applications that
must run on electronic networks and be installed in hospitals, HCOs and medical
practices; and (5) become the premier “boutique” consulting practice supporting
the deployment of Electronic Medical Record systems and services.
Professional
Services
In
addition to the Professional Services initiatives in Healthcare, Bluegate
intends to continue to grow in the following three areas through its Trilliant
Technology Group organization: (1) Further establish its reputation
as one of the top Telecommunications consulting organizations in the U.S.; (2)
expand its IT Infrastructure consulting base; and (3) increase the scope and
depth of its Applications Development practice.
COMPETITION
We are
not aware of any completely direct competitors at this time. However,
competition may include vendors of HIPAA software and Internet Protocol ("IP")
networks whose security may or may not comply with the terms of the HIPAA
confidentiality compliance requirements.
The IT
services market is extremely competitive, highly fragmented and has grown
dramatically in recent years. The market is characterized by the absence of
significant barriers to entry and rapidly changing applications and
technology. Other competitors may be:
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-
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Access
and content providers, such as AOL, Microsoft, EarthLink and Time
Warner;
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-
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Professional
Service organizations, such as IBM, CSC, Perot Systems, and
EDS;
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-
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Regional,
national and international telecommunications companies, such as AT&T,
Verizon, Qwest, and Sprint;
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On-line
services offered by incumbent cable providers such as Comcast and
Cox;
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-
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DSL
providers such as the RBOC’s and
CLEC’s.
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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 2008, 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 2008, our top five vendors accounted for 74% of our purchases
and no single vendor accounted for more than 21% of purchases.
EMPLOYEES
We
currently have 29 employees of whom 28 are full time employees.
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 significant
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.
5
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
We are
not aware of any completely direct competitors at this time. However,
competition may include vendors of HIPAA software and Internet Protocol ("IP")
networks whose security may or may not comply with the terms of the HIPAA
confidentiality compliance requirements.
The IT
services market is extremely competitive, highly fragmented and has grown
dramatically in recent years. The market is characterized by the absence of
significant barriers to entry and rapidly changing applications and
technology. Other competitors may be:
- Access
and content providers, such as AOL, Microsoft, EarthLink and Time
Warner;
-
Professional Service organizations, such as IBM, CSC, Perot Systems, and
EDS;
- Regional, national and international telecommunications companies,
such as AT&T, Verizon, Qwest, and Sprint;
- On-line
services offered by incumbent cable providers such as Comcast and
Cox;
- DSL
providers such as the RBOC’s and CLEC’s.
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 TECHNOLOGICAL 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 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 our computer
and communications hardware systems and infrastructure. Although we have taken
precautions against system failure, interruptions could result from natural
disasters as well as 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 its 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:
LACK OF
AUTHORIZED STOCK TO COVER ALL OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE
SECURITIES
As of
December 31, 2008, the company has outstanding: (i) 26,033,565 shares of common
stock; (ii) 17,521,550 warrants; (iii) 9,783,597 options; and, (iv) preferred
stock that are convertible into 1,200,000 shares of common stock, resulting in
on a fully diluted basis, 54,538,712 shares of common stock. However, the
company currently has only 50,000,000 shares of common stock authorized by our
Articles of Incorporation. If all of the holders of warrants, options,
convertible debt and preferred stock requested to exercise or convert all of the
warrants, options, convertible debt and preferred stock, we would be unable to
accommodate 4,538,712 shares of common stock in those requests. The company
could have liability in the future if an option holder, warrant holder,
preferred stock holder or holder of convertible debt desires to exercise or
convert but cannot because we do not have enough unissued common stock available
for issuance. However, the following individuals or entities have waived their
reservation of common stock underlying options and warrants until such time that
the board of directors deems the waiver is not necessary as follows: Stephen
Sperco and related entity (3,000,000 shares); Manfred Sternberg and related
entities (2,000,000 shares); and William Koehler (2,000,000
shares).
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.
6
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.
We lease
approximately 7,290 square feet of office space located at 701 North Post Oak
Road, Suite 600, Houston, Texas 77024, for a monthly lease payment of
approximately $9,000. The lease expires in November 2013. We believe
this space is adequate for our current needs, and that additional space is
available to us at a reasonable cost, if needed.
Item 3.
Legal Proceedings.
None.
Item 4.
Submission of Matters to a Vote of Security Holders.
No
matters were submitted to the shareholders for a vote in 2008.
7
Our stock
is traded on the OTCBB and our trading symbol is "BGAT." The
following table sets forth the quarterly high and low bid price per share for
our common stock. These bid and asked price quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual prices. Our fiscal year ends December
31.
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COMMON STOCK PRICE RANGE
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2008
|
2007
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|||||
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HIGH
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LOW
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HIGH
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LOW
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||||
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First
Quarter
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$
0.15
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$
0.06
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$
1.05
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$
0.70
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|||
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Second
Quarter
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0.09
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0.03
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0.92
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0.40
|
|||
|
Third
Quarter
|
0.15
|
0.03
|
0.55
|
0.08
|
|||
|
Fourth
Quarter
|
0.04
|
0.005
|
0.24
|
0.06
|
|||
COMMON
STOCK
On April
8, 2009, we had outstanding 26,033,565 shares of Common Stock, $0.001 par value
per share.
On April
8, 2009, the closing bid price of our stock was $0.02 per share.
On April
8, 2009, we had approximately 486 shareholders of record.
One of
our record stockholders is a nominee located offshore with record ownership (not
beneficial ownership) of approximately 5% 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
In March
2009, we issued an option to purchase 50,000 shares of our common stock at an
exercise price of $0.10 per share to an employee. The option had a market value
of $1,769 on the date of grant, vested immediately and expires in March 2012. We
expensed $1,769 in March 2009 related to this option. This transaction was made
in reliance upon exemptions from registration under Section 4(2) of the
Securities Act. Each certificate issued for unregistered securities contained a
legend stating that the securities have not been registered under the Securities
Act and setting forth the restrictions on the transferability and the sale of
the securities.
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
|
9,783,597
|
$
|
0.40
|
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
While
we have been successful in attracting and retaining qualified personnel,
we believe that our future success will depend in part on our continued
ability to attract and retain highly qualified personnel. We
pay wages and salaries that we believe are competitive. We also
believe that equity ownership is an important factor in our ability to
attract and retain skilled personnel. In 2002, we adopted the
2002 Stock and Stock Option Plan (the "2002 Plan"). The purpose
of the 2002 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 2002 Plan
also assists us and our subsidiaries in attracting and retaining key
employees and Directors. The 2002 Plan is administered by the
Board of Directors. The Board of Directors has the exclusive
power to select the participants in the 2002 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 2002 Plan. The maximum aggregate number of shares of common stock that
may be granted or optioned and sold under the 2002 Plan is 450,000 shares.
As of December 31, 2007, 450,000 shares of common stock have been granted
pursuant to the 2002 Plan and the 2002 Plan is no longer
active.
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, 2008, 1,132,685 shares of common stock have been granted
pursuant to the 2005 Plan.
|
|||||
8
Item 6.
Selected Financial Data.
Disclosure
is not required as a result of our Company’s status as a smaller reporting
company.
The
following discussion and analysis of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
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
provides the nation's only Medical Grade Network® that facilitates physician and
clinical integration between hospitals and physicians in a secure private
environment. As a leader in providing the healthcare industry
outsourced Information Technology (IT) solutions and remote IT management
services, Bluegate provides hospitals and physicians with a single source
solution for all of their clinical integration and IT
needs. Additionally Bluegate provides IT, telecommunication,
implementation project management and consulting through its professional
services organization.
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 April 9, 2009, which raises
substantial doubt about our ability to continue as a going concern.
During
the years ended December 31, 2008 and 2007, 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. We experienced
negative financial results as follows:
|
2008
|
2007
|
|||
|
Net
loss attributable to common shareholders
|
$
|
(1,794,546)
|
$
|
(5,726,080)
|
|
Negative
cash flow from operations
|
(660,290)
|
(1,923,684)
|
||
|
Negative
working capital
|
(1,398,715)
|
(1,134,965)
|
||
|
Stockholders’
deficit
|
(1,354,334)
|
(1,064,665)
|
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, 2008 have been funded by the issuance of common
stock and options for cash in private transactions and loans from related
parties. Bluegate has continued to take steps to reduce its monthly operating
expenses relating to its core business and has expanded its efforts in creating
a market for its Professional Services organization.
As of
December 31, 2008, our cash and cash equivalents were $11,283; total current
assets were $536,412, total current liabilities were $1,935,127 and total
stockholders’ deficit was $1,354,334. Effective January 1, 2008, three of the
company’s executive officers reduced their annual base salaries to $100,000 each
(which were further reduced to $24,000 effective May 1, 2008) until the company
achieves a net positive cash flow from operations. Additionally,
effective February 1, 2008, the three executives converted a combined
total of $300,000 of their related debt into equity. Two of the company’s
executive officers agreed not to cash some of their payroll or expense
reimbursement checks issued to them in 2007. As of December 31, 2008,
approximately $87,000 of payroll and expense reimbursement checks have not been
cashed and are included under the caption accrued liabilities to related parties
totaling $178,655 on the balance sheet.
We intend
to use debt to cover the anticipated negative cash flow into the second
quarter of 2009, at which time we project to be operating at a break-even cash
flow mode. We are seeking additional capital to fund potential costs
associated with 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.
9
Our
ability to achieve profitability will depend upon our ability to execute and
deliver high quality, reliable connectivity services, expand participation in
our Medical Grade Network® and grow our Professional Service
organization. Our growth is dependent on attaining profit from our
operations and our raising additional capital either through the sale of stock
or borrowing. There is no assurance that we will be able to raise any
equity financing or sell any of our products at a profit.
Our
future capital requirements will depend upon many factors, including the
following:
|
-
|
The
cost of operating delivering the Medical Grade Network®
services
|
|
-
|
The
cost of sales and marketing
|
|
-
|
The
rate at which we expand our
operations
|
|
-
|
Attractive
acquisition opportunities
|
|
-
|
The
response of competitors
|
|
-
|
Capital
expenditures
|
RESULTS
OF OPERATIONS
|
Year
Ended December 31,
|
Increase
(Decrease)
|
|||||||||||||||||||
|
2008
|
2007
|
2006
|
2008
from 2007
|
2007
from 2006
|
||||||||||||||||
|
Service
revenue
|
$ | 4,442,465 | $ | 5,835,075 | $ | 3,707,908 | $ | (1,392,610 | ) | $ | 2,127,167 | |||||||||
|
Cost
of services
|
2,960,169 | 3,193,096 | 1,742,420 | (232,927 | ) | 1,450,676 | ||||||||||||||
|
Gross
profit
|
1,482,296 | 2,641,979 | 1,965,488 | (1,159,683 | ) | 676,491 | ||||||||||||||
|
Selling,
general and administrative expenses
|
796,245 | 1,717,161 | 1,748,298 | (920,916 | ) | (31,137 | ) | |||||||||||||
|
Compensation
expense
|
2,268,113 | 5,976,232 | 8,050,860 | (3,708,119 | ) | (2,074,628 | ) | |||||||||||||
|
Goodwill
impairment
|
- | - | 113,021 | - | (113,021 | ) | ||||||||||||||
|
Loss
from operations
|
(1,582,062 | ) | (5,051,414 | ) | (7,946,691 | ) | (3,469,352 | ) | (2,895,277 | ) | ||||||||||
|
Loss
on debt extinguishment
|
- | - | (472,952 | ) | - | 472,952 | ||||||||||||||
|
Interest
expense
|
(212,484 | ) | (74,666 | ) | (771,916 | ) | 137,818 | (697,250 | ) | |||||||||||
|
Net
loss
|
(1,794,546 | ) | (5,126,080 | ) | (9,191,559 | ) | (3,331,534 | ) | (4,065,479 | ) | ||||||||||
|
Deemed
dividend on preferred stock
|
- | (600,000 | ) | - | (600,000 | ) | 600,000 | |||||||||||||
|
Net
loss attributable to common shareholders
|
$ | (1,794,546 | ) | $ | (5,726,080 | ) | $ | (9,191,559 | ) | $ | (3,931,534 | ) | $ | (3,465,479 | ) | |||||
Service
Revenue.
The
$2,127,167 increase in Service Revenue from 2006 to 2007 was primarily
attributable to our professional service business and our efforts to market our
Medical Grade Network® business. During 2006 we commenced our national marketing
efforts to hospital systems and were successful in securing two initial projects
for hospitals outside of Texas. The decrease in Service Revenue of $1,392,610
from 2007 to 2008 is primarily attributable to: (i) a reduction of $1,058,000
related to the completion of certain large application development engagements;
(ii) a reduction of $661,000 related to the fourth quarter 2007 decision by one
of the healthcare systems that we contracted with to provide managed security
services to their physicians, notified their physicians that effective January
1, 2008 they would no longer subsidize those costs, which resulted in the
reduction of the number of physician practices we served for that system; (iii)
a reduction of $549,000 related to the reduction of EMR related projects and
(iv) offset by an increase of $944,000 related to the implementation project
management and consulting services.
Cost of
Services.
The
$1,450,676 increase in Cost of Services from 2006 to 2007 is attributable to the
costs associated with the increase in our professional service business and the
expansion of our Medical Grade Network® services. The net decrease in Cost of
Services of $232,927 from 2007 to 2008 is primarily attributable to: (i) a
$282,000 decrease related to the completion of certain large application
development engagements throughout 2007; (ii) a $358,000 decrease due to
the reduction of EMR related projects; and (iii) partially offset by an increase
of $440,000 related to personnel costs for the implementation project management
and consulting services reclassified from Compensation Expense.
Gross
Profit.
Our Gross
Profit increased $676,491 from 2006 to 2007 and decreased $1,159,683 from 2007
to 2008. Our Gross Profit as a percentage of Service Revenue decreased from 53%
in 2006 to 45% in 2007 to 33% in 2008 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
$31,137 decrease in SG&A from 2006 to 2007 was due primarily to the
expansion of our sales and marketing efforts partially offset by the
implementation of our cost reduction measures beginning in the third quarter of
2007. The decrease in SG&A of $920,916 from 2007 to 2008 is due primarily to
the elimination of $590,000 related to business consulting and investment
banking fees, as well as the effects of additional cost control measures
instituted during the first quarter of 2008.
10
|
Compensation
Expense.
|
|||
|
The
decrease in Compensation Expense of $2,074,628 from 2006 to 2007 is
principally comprised of the following:
|
|||
| $ | (1,479,000 | ) |
decrease
primarily related to options issued for employee
services
|
| (832,000 | ) |
decrease
related to conversion of related party debt for common
stock
|
|
| (351,000 | ) |
decrease
related to issuance of common stock warrants for extension of
repayment
|
|
| (238,000 | ) |
decrease
related to contingent shares issued for Trilliant
acquisition
|
|
| 790,000 |
increase
related to personnel costs of our professional service business and our
efforts to market our Medical Grade Network® business
|
||
| 143,000 |
increase
related to issuance of shares for employee compensation
|
||
|
The
decrease in Compensation Expense of $3,708,119 from 2007 to 2008 is
principally comprised of the following:
|
|||
| $ | (2,737,000 | ) |
decrease
primarily related to options issued for employee
services
|
| (1,027,000 | ) |
decrease
related to the reduction in personnel or salaries
|
|
| (440,000 | ) |
decrease
related to reclassification of personnel to Cost of
Services
|
|
| (143,000 | ) |
decrease
related to issuance of shares for employee compensation
|
|
| 519,000 |
increase
related to conversion of related party debt for common
stock
|
||
| 109,000 |
increase
related to warrants issued to borrow funds from a related
party
|
||
| 17,000 |
increase
related to related party purchase of common stock for
cash
|
||
Goodwill Impairment and Loss on Debt Extinguishment.
In 2006
we reported a Goodwill Impairment of $113,021 and Loss on Debt Extinguishment of
$472,952. There were no similar transactions for 2007 and 2008.
Interest
Expense.
The
$697,250 decrease in Interest Expense from 2006 to 2007 was a result of issuing
common stock warrants for the extension of repayments of the convertible notes
payable in 2006. The increase in Interest Expense of $137,818 from 2007 to 2008
was a result of the $600,000 increase in borrowings under the secured note
payable to related party.
Net
Loss.
The Net
Loss decreased $4,065,479 from 2006 to 2007 and decreased $3,331,534 from 2007
to 2008 primarily due to the decrease in Compensation Expense as detailed above,
as well as the changes in the Service Revenue and Cost of Services as described
above.
Deemed
Dividend on Preferred Stock.
There was
no Deemed Dividend on Preferred Stock and common stock warrants issued for the
years 2008 and 2006 as compared to $600,000 for the year 2007.
Net Loss
Attributable to Common Shareholders.
The Net
Loss Attributable to Common Shareholders decreased $3,465,479 from 2006 to 2007
and decreased $3,931,534 from 2007 to 2008 due to the items described
above.
FINANCIAL
CONDITION
|
Year
Ended December 31,
|
Increase
(Decrease)
|
|||||||||||||||||||
|
2008
|
2007
|
2006
|
2008
from 2007
|
2007
from 2006
|
||||||||||||||||
|
Net
cash (used in) operating activities
|
$ | (660,290 | ) | $ | (1,923,684 | ) | $ | (1,039,364 | ) | $ | (1,263,394 | ) | $ | 884,320 | ||||||
|
Net
cash (used in) investing activities
|
(23,470 | ) | (34,708 | ) | (26,409 | ) | (11,238 | ) | 8,299 | |||||||||||
|
Net
cash provided by financing activities
|
651,340 | 1,745,974 | 1,294,103 | (1,094,634 | ) | 451,871 | ||||||||||||||
|
Net
increase (decrease) in cash
|
$ | (32,420 | ) | $ | (212,418 | ) | $ | 228,330 | $ | (179,998 | ) | $ | (440,748 | ) | ||||||
|
Cash
balance at end of year
|
$ | 11,283 | $ | 43,703 | $ | 256,121 | ||||||||||||||
Operating
Activities.
The
increase of $884,320 in cash used in operations from 2006 to 2007 is primarily
due to the $790,000 increase related to personnel costs of our professional
service business and our efforts to market our Medical Grade Network®
business.
The
decrease of $1,263,394 in cash used in operations from 2007 to 2008 is primarily
due to the $1,027,000 decrease in personnel and related salaries as a result of:
(1) the completion of certain large application development engagements during
2007; (2) a decision by one of the healthcare systems that we contracted with to
provide managed security services to their physicians, notified their physicians
that effective January 1, 2008 they would no longer subsidize those costs, which
resulted in the reduction of the number of physician practices we served for
that system; (3) the reduction of EMR related projects; and (4) partially offset
by an increase of personnel and salaries related to the implementation project
management and consulting services.
Investing
Activities.
The
changes in the net cash used in investing activities from 2006 through 2008 are
insignificant.
11
Financing
Activities.
The
increase of $451,871 in net cash provided by financing activities from 2006 to
2007 is primarily due to: (1) a $770,000 decrease in investments in the
company’s common stock and warrants; (2) a $600,000 increase in an investment in
preferred stock by a related party; (3) a $467,000 decrease due to the payment
of convertible notes payable in 2006; and (4) a $244,000 net increase in related
party short term debt.
The net
decrease of $1,094,634 in cash provided by financing activities from 2007 to
2008 is primarily due to: (1) a $605,000 decrease in investments in the
company’s common stock and warrants; (2) a $600,000 decrease due to the
investment in preferred stock by a related party in 2007; and (3) a $65,000 net
increase in related party short term debt.
FORECAST
FOR OUR CUSTOMER BASE
The
increased reliance on IT and Telecommunications to manage costs and deploy
enhanced business solutions has created an ideal business environment for
Bluegate in 2008 and beyond. This trend is particularly evident in
Healthcare where the roll-out of Electronic Medical Records and cost control
initiatives are National priorities.
Bluegate
Services
At
December 31, 2008, we had approximately 500 Medical Grade Network®
customers which we forecast will increase moderately next year. During
the second half of 2008, we continued greater focus on more complex projects and
applications, which resulted in more efficient use of our resources and higher
profit margins on the project work.
Professional
Services
In
October 2007 we were awarded a contract with a healthcare system in Houston,
Texas to provide Implementation Project Management and consulting services into
the fourth quarter of 2008. For the year ended December 31, 2008, we experienced
an increase in revenue from this line of business and anticipate a continuing
relationship with this Healthcare system throughout 2009. During the second and
third quarters of 2008 we entered into contracts with healthcare related systems
in Texas, Illinois and California to provide similar services. We will continue
to put particular focus on the delivery of Implementation Project Management
services to the growing Healthcare industry.
Application
Development
Throughout
2007 we completed certain application development engagements which resulted in
a decrease in both revenue and corresponding contractor expenses during the year
ended December 31, 2008. We are currently pursuing multiple opportunities to
expand this practice area.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
discussion and analysis of our financial condition and results of operations are
based upon financial statements which have been prepared in accordance with
generally accepted accounting principles in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses, and
related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate these estimates. We base our estimates on
historical experience and on assumptions that are believed to be
reasonable. These estimates and assumptions provide a basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions, and these
differences may be material.
We
believe that the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
REVENUE
RECOGNITION
Revenue,
which includes licensing 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, 2008 and 2007, total
deferred service revenue was $194,472 and $153,579, respectively.
STOCK-BASED
COMPENSATION
Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123") established financial accounting and reporting standards for
stock-based employee compensation plans. It defines a fair value based method of
accounting for an employee stock option or similar equity instrument. In January
2006, Bluegate implemented SFAS No. 123R, and accordingly, Bluegate accounts for
compensation cost for stock option plans in accordance with SFAS No.
123R.
Bluegate
accounts for share based payments to non-employees in accordance with EITF 96-18
“Accounting for Equity Instruments Issued to Non-Employees for Acquiring, or in
Conjunction with Selling, Goods or Services”.
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 April 9, 2009, which raises
substantial doubt about our ability to continue as a going concern.
During
the years ended December 31, 2008 and 2007, 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. We experienced
negative financial results as follows:
|
2008
|
2007
|
|||||||
|
Net
loss attributable to common shareholders
|
$ | (1,794,546 | ) | $ | (5,726,080 | ) | ||
|
Negative
cash flow from operations
|
(660,290 | ) | (1,923,684 | ) | ||||
|
Negative
working capital
|
(1,398,715 | ) | (1,134,965 | ) | ||||
|
Stockholders’
deficit
|
(1,354,334 | ) | (1,064,665 | ) | ||||
12
These
factors raise substantial doubt about our ability to continue as a going
concern. The financial statements contained herein do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should we be unable to continue in existence. Our ability to continue
as a going concern is dependent upon our ability to generate sufficient cash
flows to meet our obligations on a timely basis, to obtain additional financing
as may be required, and ultimately to attain profitable
operations. However, there is no assurance that profitable operations
or sufficient cash flows will occur in the future.
We have
supported current operations by: (1) raising additional operating cash through
the private sale of our preferred and common stock, (2) selling convertible debt
and common stock to certain key stockholders and (3) issuing stock and options
as compensation to certain employees and vendors in lieu of cash
payments.
These
steps have provided us with the cash flows to continue our business plan, but
have not resulted in significant improvement in our financial position. We are
considering alternatives to address our cash flow situation that include: (1)
raising capital through additional sale of our common stock and/or debt
Securities and (2) 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.
|
13
__________
CONSOLIDATED
FINANCIAL STATEMENTS
WITH
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007
F-1
|
BLUEGATE
CORPORATION
|
|
|
TABLE
OF CONTENTS
|
|
|
__________
|
|
|
PAGE
|
|
|
____
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-3
|
|
Consolidated
Financial Statements:
|
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
F-4
|
|
Consolidated
Statements of Operations for the years ended December 31, 2008 and
2007
|
F-5
|
|
Consolidated
Statements of Stockholders' Deficit for the years ended December 31, 2008
and 2007
|
F-6
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008 and
2007
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Bluegate
Corporation
Houston,
Texas
We have
audited the accompanying consolidated balance sheets of Bluegate Corporation,
(“Bluegate”) as of December 31, 2008 and 2007 and the related consolidated
statements of operations, changes in stockholders’ deficit and cash flows for
the two years then ended. These consolidated financial statements are the
responsibility of Bluegate’s management. Our responsibility is to express an
opinion on these consolidated 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
consolidated 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 consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Bluegate as of
December 31, 2008 and 2007 and the consolidated results of its operations and
its cash flows for the two years then ended in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
Bluegate will continue as a going concern. As discussed in Note 2 to the
consolidated 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 consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
MALONE
& BAILEY, PC
www.malone-bailey.com
Houston,
Texas
April 9,
2009
F-3
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
|
|||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 11,283 | $ | 43,703 | ||||
|
Accounts
receivable, net
|
502,631 | 400,023 | ||||||
|
Prepaid
expenses and other
|
22,498 | 23,917 | ||||||
|
Total
current assets
|
536,412 | 467,643 | ||||||
|
Property
and equipment, net
|
44,381 | 63,525 | ||||||
|
Intangibles,
net
|
- | 6,775 | ||||||
|
Total
assets
|
$ | 580,793 | $ | 537,943 | ||||
|
LIABILITIES AND STOCKHOLDERS’
DEFICIT
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 230,325 | $ | 289,583 | ||||
|
Accounts
payable to related party
|
10,750 | 40,089 | ||||||
|
Accrued
liabilities
|
139,046 | 149,221 | ||||||
|
Notes
payable
|
12,800 | 12,800 | ||||||
|
Notes
payable to related parties
|
1,169,079 | 612,738 | ||||||
|
Accrued
liabilities to related parties
|
178,655 | 344,598 | ||||||
|
Deferred
revenue
|
194,472 | 153,579 | ||||||
|
Total
current liabilities
|
1,935,127 | 1,602,608 | ||||||
|
Commitments
and contingencies - Note 10
|
||||||||
|
Stockholders’
deficit:
|
||||||||
|
Undesignated
preferred stock, $.001 par value, 9,999,952 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, 2008 and
2007; $12,500 per share liquidation preference ($600,000 aggregate
liquidation preference at December 31, 2008)
|
- | - | ||||||
|
Common
stock, $.001 par value, 50,000,000 shares authorized, 26,033,565 and
15,163,565 shares issued and outstanding at December 31, 2008 and 2007,
respectively
|
26,034 | 15,164 | ||||||
|
Additional
paid-in capital
|
26,240,785 | 24,746,778 | ||||||
|
Accumulated
deficit
|
(27,621,153 | ) | (25,826,607 | ) | ||||
|
Total
stockholders’ deficit
|
(1,354,334 | ) | (1,064,665 | ) | ||||
|
Total
liabilities and stockholders’ deficit
|
$ | 580,793 | $ | 537,943 | ||||
The
accompanying notes are an integral
part of
these consolidated financial statements.
F-4
|
BLUEGATE
CORPORATION
|
||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||
|
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
|
||||||||
|
2008
|
2007
|
|||||||
|
Service
revenue
|
$ | 4,442,465 | $ | 5,835,075 | ||||
|
Cost
of services
|
2,960,169 | 3,193,096 | ||||||
|
Gross
profit
|
1,482,296 | 2,641,979 | ||||||
|
Selling,
general and administrative expenses
|
796,245 | 1,717,161 | ||||||
|
Compensation
expense
|
2,268,113 | 5,976,232 | ||||||
|
Loss
from operations
|
(1,582,062 | ) | (5,051,414 | ) | ||||
|
Interest
expense
|
(212,484 | ) | (74,666 | ) | ||||
|
Net
loss
|
(1,794,546 | ) | (5,126,080 | ) | ||||
|
Deemed
dividend on preferred stock
|
- | (600,000 | ) | |||||
|
Net
loss attributable to common shareholders
|
$ | (1,794,546 | ) | $ | (5,726,080 | ) | ||
|
Net
loss attributable to common shareholders per common share - basic and
diluted
|
$ | (0.07 | ) | $ | (0.41 | ) | ||
|
Basic
and diluted weighted average shares outstanding
|
24,229,084 | 13,929,109 | ||||||
The
accompanying notes are an integral
part of
these consolidated financial statements.
F-5
|
BLUEGATE
CORPORATION
|
||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT
|
||||||||||||||||||||||||||||
|
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
|
||||||||||||||||||||||||||||
|
ADDITIONAL
|
||||||||||||||||||||||||||||
|
COMMON
STOCK
|
PREFERRED
STOCK
|
PAID-IN
|
ACCUMULATED
|
|||||||||||||||||||||||||
|
SHARES
|
CAPITAL
|
SHARES
|
CAPITAL
|
CAPITAL
|
DEFICIT
|
TOTAL
|
||||||||||||||||||||||
|
Balance
at December 31, 2006
|
12,130,311 | $ | 12,130 | - | $ | - | $ | 19,627,159 | $ | (20,700,527 | ) | $ | (1,061,238 | ) | ||||||||||||||
|
Issuance
of common stock and warrants for cash
|
1,400,000 | 1,400 | 698,600 | 700,000 | ||||||||||||||||||||||||
|
Issuance
of common stock for employee compensation
|
150,000 | 150 | 142,350 | 142,500 | ||||||||||||||||||||||||
|
Issuance
of common stock for outside services
|
621,773 | 622 | 354,903 | 355,525 | ||||||||||||||||||||||||
|
Issuance
of preferred stock and common stock warrants for cash
|
48 | - | 600,000 | 600,000 | ||||||||||||||||||||||||
|
Beneficial
conversion feature embedded in preferred stock
|
600,000 | 600,000 | ||||||||||||||||||||||||||
|
Deemed
dividend on preferred stock
|
(600,000 | ) | (600,000 | ) | ||||||||||||||||||||||||
|
Common
stock options issued for employee services
|
2,932,147 | 2,932,147 | ||||||||||||||||||||||||||
|
Employee
common stock options re-priced
|
47,394 | 47,394 | ||||||||||||||||||||||||||
|
Issuance
of common stock for delay in filing a registration
statement
|
191,728 | 192 | 98,463 | 98,655 | ||||||||||||||||||||||||
|
Issuance
of common stock and warrants for:
|
||||||||||||||||||||||||||||
|
-
accounts payable
|
130,000 | 130 | 39,872 | 40,002 | ||||||||||||||||||||||||
|
-
services
|
120,000 | 120 | 172,730 | 172,850 | ||||||||||||||||||||||||
|
Contingent
shares issued for Trilliant acquisition accounted for as
compensation
|
419,753 | 420 | 33,160 | 33,580 | ||||||||||||||||||||||||
|
Net
loss
|
(5,126,080 | ) | (5,126,080 | ) | ||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
15,163,565 | 15,164 | 48 | - | 24,746,778 | (25,826,607 | ) | (1,064,665 | ) | |||||||||||||||||||
|
Issuance
of common stock and warrants for cash
|
170,000 | 170 | 84,830 | 85,000 | ||||||||||||||||||||||||
|
Issuance
of common stock to related party for:
|
||||||||||||||||||||||||||||
|
-
cash
|
111,111 | 111 | 9,889 | 10,000 | ||||||||||||||||||||||||
|
-
compensation
|
188,889 | 189 | 16,811 | 17,000 | ||||||||||||||||||||||||
|
Issuance
of common stock for:
|
||||||||||||||||||||||||||||
|
-
related party debt
|
3,388,889 | 3,389 | 301,611 | 305,000 | ||||||||||||||||||||||||
|
-
compensation
|
5,761,111 | 5,761 | 512,739 | 518,500 | ||||||||||||||||||||||||
|
Issuance
of common stock warrants as additional consideration to borrow funds from
related party
|
109,028 | 109,028 | ||||||||||||||||||||||||||
|
Common
stock options issued for employee services
|
418,681 | 418,681 | ||||||||||||||||||||||||||
|
Issuance
of common stock for options exercised for conversion of related party
debt
|
1,250,000 | 1,250 | 40,418 | 41,668 | ||||||||||||||||||||||||
|
Net
loss
|
(1,794,546 | ) | (1,794,546 | ) | ||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
26,033,565 | $ | 26,034 | 48 | $ | - | $ | 26,240,785 | $ | (27,621,153 | ) | $ | (1,354,334 | ) | ||||||||||||||
The
accompanying notes are an integral
part of
these consolidated financial statements.
F-6
|
BLUEGATE
CORPORATION
|
||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
|
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (1,794,546 | ) | $ | (5,126,080 | ) | ||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
49,390 | 68,741 | ||||||
|
Common
stock issued for outside services
|
- | 355,525 | ||||||
|
Common
stock options issued for employee services
|
418,681 | 2,932,147 | ||||||
|
Employee
common stock options re-priced
|
- | 47,394 | ||||||
|
Common
stock issued for delay in filing a registration statement
|
- | 98,655 | ||||||
|
Common
stock warrants issued to borrow funds from related party
|
109,028 | - | ||||||
|
Contingent
shares issued for Trilliant acquisition accounted for as
compensation
|
- | 33,580 | ||||||
|
Common
stock issued for employee compensation
|
- | 142,500 | ||||||
|
Common
stock issued for compensation
|
535,500 | - | ||||||
|
Common
stock and warrants issued for services
|
- | 172,850 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(102,608 | ) | (119,669 | ) | ||||
|
Prepaid
expenses and other current assets
|
1,419 | 25,030 | ||||||
|
Accounts
payable and accrued liabilities
|
(69,433 | ) | 80,364 | |||||
|
Accounts
payable to related party
|
(29,339 | ) | 40,089 | |||||
|
Accrued
liabilities to related party
|
180,725 | 360,848 | ||||||
|
Deferred
revenue
|
40,893 | (1,035,658 | ) | |||||
|
Net
cash used in operating activities
|
(660,290 | ) | (1,923,684 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of property and equipment
|
(23,470 | ) | (34,708 | ) | ||||
|
Net
cash used in investing activities
|
(23,470 | ) | (34,708 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from related party short term debt
|
715,000 | 1,111,427 | ||||||
|
Payments
on related party short term debt
|
(158,660 | ) | (620,863 | ) | ||||
|
Net
change in bank line of credit
|
- | (44,590 | ) | |||||
|
Proceeds
from note payable from individual
|
- | 315,000 | ||||||
|
Repayment
of note payable from individual
|
- | (315,000 | ) | |||||
|
Common
stock and warrants issued for cash
|
95,000 | 700,000 | ||||||
|
Preferred
stock and common stock warrants issued for cash
|
- | 600,000 | ||||||
|
Net
cash provided by financing activities
|
651,340 | 1,745,974 | ||||||
|
Net
decrease in cash and cash equivalents
|
(32,420 | ) | (212,418 | ) | ||||
|
Cash
and cash equivalents at beginning of period
|
43,703 | 256,121 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 11,283 | $ | 43,703 | ||||
|
Non
Cash Transactions:
|
||||||||
|
Issuance
of common stock for conversion of related party accounts
payable,
accrued
expenses and accrued interest
|
$ | 305,000 | $ | - | ||||
|
Issuance
of common stock for options exercised for conversion of related
party
accrued
expenses and accrued interest
|
41,668 | - | ||||||
|
Deemed
dividend from beneficial conversion feature on preferred
stock
|
- | 600,000 | ||||||
|
Issuance
of common stock and warrants for conversion of accounts
payable
|
- | 40,002 | ||||||
|
Supplemental
information:
|
||||||||
|
Cash
paid for interest
|
148,706 | 72,226 | ||||||
F-7
BLUEGATE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
__________
1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Bluegate Corporation (the “Company") is a Nevada Corporation that provides the nation's only Medical Grade Network® that facilitates physician and clinical integration between hospitals and physicians in a secure private environment. As a leader in providing the healthcare industry outsourced Information Technology (IT) solutions and remote IT management services, Bluegate provides hospitals and physicians with a single source solution for all of their clinical integration and IT needs. Additionally Bluegate provides Implementation Project Management and IT and telecommunications consulting through its professional services organization.
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 consolidated financial statements in
conformity with
accounting principles generally accepted in the
United States of America
requires management to make estimates and assumptions
that affect the
reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the dates of the consolidated financial
statements and the reported amounts
of revenues and expenses during the periods. Actual results could
differ from estimates making it reasonably possible that a change in the
estimates could occur in the near term.
PRINCIPLES OF
CONSOLIDATION
The
consolidated financial statements include the accounts of the Company and its
100% owned subsidiary, Trilliant Technology Group, Inc., after elimination of
all significant inter-company accounts and transactions.
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 collectibility 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. Accounts receivable are not
secured. In February 2008, as a result of the transaction described in footnote
7 – notes payable and footnote 9 – 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.
PROPERTY AND
EQUIPMENT
Property and equipment is recorded at cost and depreciated on the
straight-line method over the estimated useful lives of the various classes
of depreciable property as follows:
|
Furniture
and equipment
|
5-7
years
|
|
Telecommunications
networks
|
5
years
|
|
Computer
equipment
|
3
years
|
Expenditures
for normal repairs and maintenance are charged to expense as
incurred. The cost and related accumulated depreciation of assets
sold or otherwise disposed of are removed from the accounts, and any gain or
loss is included in operations.
F-8
BLUEGATE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS,
CONTINUED
__________
INTANGIBLES
Intangibles
are recorded at cost and amortized on the straight-line method over an estimated
useful life of three years.
IMPAIRMENT OF LONG-LIVED
ASSETS
In the event facts and circumstances indicate
the carrying value of a long-lived
asset, including associated intangibles, may be
impaired, an evaluation of recoverability is performed by comparing the
estimated future undiscounted cash flows associated with the asset to
the asset's carrying amount to determine if a write-down to market value or
discounted cash flow is required.
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
Financial
Accounting Standard No. 123, “Accounting for Stock-Based Compensation"
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 SFAS No. 123R, and accordingly, Bluegate accounts for
compensation cost for stock option plans in accordance with SFAS No.
123R.
Bluegate
accounts for share based payments to non-employees in accordance with EITF 96-18
“Accounting for Equity Instruments Issued to Non-Employees for Acquiring, or in
Conjunction with Selling, Goods or Services”.
EMBEDDED CONVERSION
FEATURES
Bluegate
evaluates embedded conversion features within convertible debt and convertible
preferred stock under paragraph 12 of SFAS 133 and EITF 00-19 to determine
whether the embedded conversion feature should be bifurcated from the host
instrument and accounted for as a derivative at fair value with changes in fair
value recorded in earnings. If the conversion feature does not
require derivative treatment under SFAS 133 and EITF 00-19, the instrument is
evaluated under EITF 98-5 and EITF 00-27 for consideration of any beneficial
conversion feature.
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,
which includes licensing 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, 2008 and 2007, deferred service
revenue was $194,472 and $153,579, 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 2008 and
2007 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, 2008 and 2007.
RECLASSIFICATIONS
We have
reclassified certain prior-year amounts to conform to the current year’s
presentation.
RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
In June
2008, the FASB finalized EITF 07-5, "Determining Whether an Instrument (or
Embedded Feature) is indexed to an Entity's Own Stock". The EITF lays out a
procedure to determine if an equity-linked financial instrument (or embedded
feature) is indexed to its own common stock. The EITF is effective for fiscal
years beginning after December 15, 2008. Some of Bluegate’s outstanding
warrants that were previously classified in equity will be reclassified to
liabilities on January 1, 2009 as a result of this EITF. Bluegate
estimates the fair value of these liabilities as of January 1, 2009 to be
approximately $84,000. The fair value of these liabilities will be
re-measured at the end of every reporting period based on the market value of
our common stock and the change in fair value will be reported in our
consolidated statement of operations as a gain or loss on derivative
liabilities.
F-9
BLUEGATE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
|
2. GOING CONCERN
CONSIDERATIONS
|
During
2008 and 2007, the Company was unable to generate cash flows sufficient to
support its operations and has been dependent on debt and equity raised from
qualified individual investors. The Company experienced negative
financial results as follows:
|
2008
|
2007
|
|||||||
|
Net
loss attributable to common shareholders
|
$ | (1,794,546 | ) | $ | (5,726,080 | ) | ||
|
Negative
cash flow from operations
|
(660,290 | ) | (1,923,684 | ) | ||||
|
Negative
working capital
|
(1,398,715 | ) | (1,134,965 | ) | ||||
|
Stockholders’
deficit
|
(1,354,334 | ) | (1,064,665 | ) | ||||
These
factors raise substantial doubt about our ability to continue as a going
concern. The financial statements contained herein do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should we be unable to continue in existence. Our
ability to continue as a going concern is dependent upon our ability to generate
sufficient cash flows to meet our obligations on a timely basis, to obtain
additional financing as may be required, and ultimately to attain
profitable operations. However, there is no assurance that profitable
operations or sufficient cash flows will occur in the future.
We have
supported current operations by: (1) raising additional operating cash through
the private sale of our preferred and common stock, (2) selling convertible debt
and common stock to certain key stockholders and (3) issuing stock and options
as compensation to certain employees and vendors in lieu of cash
payments.
These
steps have provided us with the cash flows to continue our business plan, but
have not resulted in significant improvement in our financial position. We are
considering alternatives to address our 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-10
BLUEGATE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
3. ACQUISITION OF TRILLIANT
CORPORATION ASSETS
On
September 15, 2005, Bluegate 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.
Effective
September 30, 2007, in accordance with the asset sale and purchase agreement,
419,753 shares of Bluegate’s common stock valued at $33,580 was issued as
additional consideration based upon the acquired business’ revenue after the
second year. According to EITF 95-8, “Accounting for Contingent Consideration
Paid to the Shareholders of an Acquired Enterprise in a Purchase Business
Combination,” whether the contingent shares are accounted for as an adjustment
to the purchase price or as compensation for services depends on the agreement.
As a result of this transaction, $33,580 was recorded as an
expense.
4. ACCOUNTS RECEIVABLE,
NET
Accounts
receivable, net consists of the following at December 31, 2008 and
2007:
|
2008
|
2007
|
|
|||||||
|
Accounts
receivable
|
$ | 520,493 | $ | 462,003 | |||||
|
Less
allowance for bad debts
|
(17,862 | ) | (61,980 | ) | |||||
| $ | 502,631 | $ | 400,023 | ||||||
5. PROPERTY AND EQUIPMENT,
NET
Property
and equipment, net consists of the following at December 31, 2008 and
2007:
|
2008
|
2007
|
|||||||
|
Computer
equipment
|
$ | 197,437 | $ | 176,124 | ||||
|
Software
|
193,690 | 191,534 | ||||||
|
Office
furniture
|
60,734 | 60,734 | ||||||
| 451,861 | 428,392 | |||||||
|
Less
accumulated depreciation
|
(407,480 | ) | (364,867 | ) | ||||
| $ | 44,381 | $ | 63,525 | |||||
Depreciation
expense for the years ended December 31, 2008 and 2007 was $42,613 and $63,217,
respectively and is presented in the accompanying consolidated statements of
operations as cost of services.
6. INTANGIBLE ASSETS,
NET
Intangible
assets, net consists of the following at December 31, 2008 and
2007:
|
2008
|
2007
|
|||||||
|
Customer
list
|
$ | 28,702 | $ | 28,702 | ||||
|
LTMS
& eCast software
|
32,350 | 32,350 | ||||||
| 61,052 | 61,052 | |||||||
|
Less
accumulated amortization
|
(61,052 | ) | (54,277 | ) | ||||
| $ | - | $ | 6,775 | |||||
Amortization
expense for the years ended December 31, 2008 and 2007 was $6,775 and $5,524,
respectively and is presented in the accompanying consolidated statements of
operations as cost of services.
F-11
BLUEGATE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
7. NOTES
PAYABLE
|
Notes
payable at December 31, 2008 and 2007 are summarized
below:
|
2008
|
2007
|
||||||
|
|
|
|||||||
|
Unsecured notes payable:
10% note payable due upon demand
|
$ | 12,800 | $ | 12,800 | ||||
|
Secured note payable to related
party: During 2007, the Company entered into a line of credit
agreement with SAI Corporation ("SAIC"), a corporation controlled by our
CEO, Stephen Sperco, 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 our CEO, Stephen Sperco, all past due amounts
totaling $104,972. On August 14, 2008, the Company entered into a short
term unsecured loan with SAIC to meet its working capital needs to borrow
$65,000. Upon borrowing the $65,000, the Company agreed to pay SAIC a
$6,500 origination fee and to repay SAIC with the first available funds
once the August 15, 2008 payroll and medical insurance premium was paid.
The Company paid the $65,000 loan and $6,500 fee on August 15, 2008. On
August 28, 2008, the Company borrowed $50,000 from SAIC and agreed to pay
SAIC a $5,000 origination fee. The Company paid the $50,000 funds borrowed
and $5,000 fee on September 11, 2008. On October 16, 2008, the line of
credit agreement with SAIC was amended to increase the borrowing to
$1,100,000 and on October 21, 2008, Bluegate borrowed the additional
$200,000 from SAIC for working capital purposes. Upon Bluegate borrowing
the additional $200,000, the Company agreed to pay (1) SAIC a $20,000
origination fee and (2) Sperco Technology Group, Inc. all past due amounts
totaling $56,837. See footnote 13, Subsequent Events.
Note
payable to SAI Corporation due on demand
|
$ | 1,100,000 | $ | 500,000 | ||||
|
Unsecured notes payable to
related parties: During 2006, the Company entered into a line of
credit agreement with Manfred Sternberg ("MS"), Chief Strategy Officer and
William Koehler ("WK"), President and COO, for Bluegate to borrow up to
$500,000 from each of them. As of December 31, 2008, the interest rates on
the underlying credit cards pertaining to funds borrowed from MS and WK
were 17.24% and 17.23%, respectively. During the year ended December 31,
2008, we made payments of $43,659 on these related party
notes.
|
||||||||
|
Notes
payable to William Koehler due on demand at an interest rate of
17.23%
|
34,628 | 36,569 | ||||||
|
Notes
payable to Manfred Sternberg due on demand at an interest rate of
17.24%
|
34,451 | 76,169 | ||||||
| $ | 1,169,079 | $ | 612,738 | |||||
8. INCOME
TAXES
The
composition of deferred tax assets at December 31, 2008 and 2007 were as
follows:
|
Deferred tax assets
|
2008
|
2007
|
||||||
|
Benefit
from carryforward of net operating loss
|
$ | 2,135,000 | $ | 1,980,000 | ||||
|
Less
valuation allowance
|
(2,135,000 | ) | (1,980,000 | ) | ||||
|
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 the years ended December 31, 2008 and 2007 is attributable to the
valuation allowance.
At
December 31, 2008, for federal income tax and alternative minimum tax reporting
purposes, the Company has $6,280,000 in unused net operating losses available
for carryforward to future years which will expire in various years through
2028. 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 9 - Series C Preferred Stock).
9. STOCKHOLDERS’
DEFICIT
SERIES A PREFERRED
STOCK
During
2001, Bluegate issued 110 shares of Series A voting convertible non-redeemable
preferred stock with a par value of $0.001 per share and a liquidation value of
$5,000 per share. In February 2006, the preferred stock was converted into
1,418,681 common shares, leaving no shares outstanding.
F-12
BLUEGATE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
SERIES B PREFERRED
STOCK
During
2001, Bluegate authorized 100 shares of Series B convertible non-redeemable
preferred stock with a par value of $0.001 per share and a liquidation value of
$200 per share. On October 11, 2002, Bluegate issued 23 shares of such stock to
retire certain liabilities totaling $72,768 and
to obtain indemnification from certain
contingencies assumed in the reverse acquisition of Berens
Industries, Inc. All Series B Preferred Stock was converted to common stock in
2003, leaving no shares outstanding.
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.
Effective
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 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 Sperco. We also granted to 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. Mr. Sperco is our CEO and a director. Effective 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 shares of our common stock 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 SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities and EITF 00-19 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 SFAS 133
and EITF 00-19.
In
accordance with EITF 00-27, 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 is 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 8 – Income Taxes).
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, 2008, 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.
F-13
BLUEGATE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
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, 2008, 1,132,685 shares of common stock
have been granted.
During
2008 and 2007, Bluegate used the Black-Scholes option pricing model to value
stock options and warrants using the following assumptions: number of options as
set forth in the option agreements; no expected dividend yield; expected
volatility ranging from 202% to 260%; risk-free interest rates of 5.0%; and
expected terms based on the period of time expected to elapse until exercise.
When applicable, Bluegate uses the simplified method of calculating expected
term as described in SAB 107.
F-14
BLUEGATE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
SUMMARY OF STOCK
OPTIONS
|
Non-statutory
Stock Options
|
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (Years)
|
|||||||||||
|
Outstanding
at January 1, 2007
|
10,660,613
|
$ 0.88
|
||||||||||||
|
Granted
|
1,232,000
|
0.41
|
||||||||||||
|
Forfeited
|
(797,749
|
) |
0.87
|
|||||||||||
|
Outstanding
at January 1, 2008
|
11,094,864
|
0.42
|
||||||||||||
|
Granted
|
125,000
|
0.25
|
||||||||||||
|
Forfeited
|
(186,267
|
)
|
1.72
|
|||||||||||
|
Exercised
|
(1,250,000
|
) |
0.03
|
|||||||||||
|
Outstanding
at December 31, 2008
|
9,783,597
|
0.40
|
2.38
|
|||||||||||
|
|
||||||||||||||
|
Options
exercisable at December 31, 2008
|
9,779,435
|
0.40
|
2.38
|
|||||||||||
|
The
weighted average grant date fair value of options granted during the years
2008 and 2007 was $0.10 and $0.37, respectively. There was no aggregate
intrinsic value of options outstanding or exercisable at December 31,
2008.
|
||||||||||||||
|
Options
Outstanding
|
Options
Currently Exercisable
|
Remaining
Contractual Term (Years)
|
Exercise
Price ($)
|
Vesting
Date
|
||||||||||
|
425,000
|
425,000
|
1
|
0.34
- 0.50
|
February
2005
|
||||||||||
|
50,000
|
50,000
|
|
1
|
0.34
|
March
2005
|
|||||||||
|
50,000
|
50,000
|
1
|
0.34
|
April
2005
|
||||||||||
|
50,000
|
50,000
|
1
|
0.34
|
May
2005
|
||||||||||
|
200,000
|
200,000
|
1 -
2
|
0.34
|
June
2005
|
||||||||||
|
130,417
|
130,417
|
1 -
2
|
0.34
- 1.50
|
July
2005
|
||||||||||
|
60,417
|
60,417
|
1 -
2
|
0.34
|
August
2005
|
||||||||||
|
120,834
|
120,834
|
1 -
2
|
0.34
|
September
2005
|
||||||||||
|
435,417
|
435,417
|
1 -
2
|
0.34
- 1.00
|
October
2005
|
||||||||||
|
85,417
|
85,417
|
1 -
2
|
0.34
- 1.00
|
November
2005
|
||||||||||
|
111,917
|
111,917
|
1 -
2
|
0.34
- 1.00
|
December
2005
|
||||||||||
|
85,417
|
85,417
|
1 -
2
|
0.34
- 1.00
|
January
2006
|
||||||||||
|
85,417
|
85,417
|
1 -
2
|
0.34
- 1.00
|
February
2006
|
||||||||||
|
135,417
|
135,417
|
1 -
2
|
0.34
- 1.00
|
March
2006
|
||||||||||
|
85,417
|
85,417
|
1 -
2
|
0.34
- 1.00
|
April
2006
|
||||||||||
|
90,417
|
90,417
|
1 -
3
|
0.34
- 1.00
|
May
2006
|
||||||||||
|
120,834
|
120,834
|
1 -
3
|
0.34
|
June
2006
|
||||||||||
|
145,834
|
145,834
|
1 -
3
|
0.34
- 0.75
|
July
2006
|
||||||||||
|
995,834
|
995,834
|
1 -
3
|
0.34
- 0.62
|
August
2006
|
||||||||||
|
755,100
|
755,100
|
1 -
3
|
0.34
- 0.80
|
September
2006
|
||||||||||
|
190,417
|
190,417
|
1 -
3
|
0.34
- 0.80
|
October
2006
|
||||||||||
|
1,640,417
|
1,640,417
|
1 -
3
|
0.34
- 0.80
|
November
2006
|
||||||||||
|
240,417
|
240,417
|
1 -
3
|
0.34
- 0.80
|
December
2006
|
||||||||||
|
292,500
|
292,500
|
1 -
3
|
0.34
- 0.80
|
January
2007
|
||||||||||
|
388,750
|
388,750
|
|
1 -
4
|
0.34
- 0.80
|
February
2007
|
|||||||||
|
513,750
|
513,750
|
1 -
4
|
0.34
- 0.80
|
March
2007
|
||||||||||
|
363,750
|
363,750
|
1 -
4
|
0.34
- 0.80
|
April
2007
|
||||||||||
|
257,917
|
257,917
|
1 -
4
|
0.34
- 0.80
|
May
2007
|
||||||||||
|
322,909
|
322,909
|
1 -
4
|
0.34
- 0.80
|
June
2007
|
||||||||||
|
143,333
|
143,333
|
1 -
4
|
0.34
- 0.80
|
July
2007
|
||||||||||
|
131,242
|
131,242
|
1 -
4
|
0.34
- 0.74
|
August
2007
|
||||||||||
|
60,833
|
60,833
|
2 -
4
|
0.19
- 0.74
|
September
2007
|
||||||||||
|
46,666
|
46,666
|
2 -
4
|
0.34
|
October
2007
|
||||||||||
|
47,083
|
47,083
|
2 -
4
|
0.25
- 0.34
|
November
2007
|
||||||||||
|
589,083
|
589,083
|
2 -
4
|
0.17
- 0.34
|
December
2007
|
||||||||||
|
50,833
|
50,833
|
2 -
4
|
0.25
- 0.34
|
January
2008
|
||||||||||
|
89,583
|
89,583
|
2 -
4
|
0.25
- 0.34
|
February
2008
|
||||||||||
|
39,583
|
39,583
|
2 -
4
|
0.25
- 0.34
|
March
2008
|
||||||||||
|
39,583
|
39,583
|
2 -
4
|
0.25
- 0.34
|
April
2008
|
||||||||||
|
13,750
|
13,750
|
2 -
4
|
0.25
- 0.34
|
May
2008
|
||||||||||
|
13,750
|
13,750
|
2 -
4
|
0.25
- 0.34
|
June
2008
|
||||||||||
|
11,250
|
11,250
|
2 -
4
|
0.25
- 0.34
|
July
2008
|
||||||||||
|
11,258
|
11,258
|
2 -
4
|
0.25
- 0.34
|
August
2008
|
||||||||||
|
2,917
|
2,917
|
3 -
4
|
0.25
- 0.34
|
September
2008
|
||||||||||
|
2,917
|
2,917
|
3 -
4
|
0.25
- 0.34
|
October
2008
|
||||||||||
|
27,917
|
27,917
|
3 -
4
|
0.03
- 0.34
|
November
2008
|
||||||||||
|
27,921
|
27,921
|
3 -
4
|
0.03
- 0.35
|
December
2008
|
||||||||||
|
417
|
4
|
0.25
|
January
2009
|
|||||||||||
|
417
|
4
|
0.25
|
February
2009
|
|||||||||||
|
417
|
4
|
0.25
|
March
2009
|
|||||||||||
|
417
|
4
|
0.25
|
April
2009
|
|||||||||||
|
417
|
4
|
0.25
|
May
2009
|
|||||||||||
|
417
|
4
|
0.25
|
June
2009
|
|||||||||||
|
417
|
4
|
0.25
|
July
2009
|
|||||||||||
|
417
|
4
|
0.25
|
August
2009
|
|||||||||||
|
417
|
4
|
0.25
|
September
2009
|
|||||||||||
|
409
|
4
|
0.25
|
October
2009
|
|||||||||||
|
9,783,597
|
9,779,435
|
|||||||||||||
F-15
BLUEGATE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
SUMMARY OF STOCK
WARRANTS
|
NUMBER
OF SHARES UNDER WARRANTS
|
EXERCISE
PRICES ($)
|
WEIGHTED
AVERAGE EXERCISE PRICE ($)
|
Weighted
Average Remaining Contractual Term (Years)
|
|||||||||||||
|
Outstanding
at January 1, 2007
|
9,749,220
|
0.50
- 5.00
|
0.83
|
|||||||||||||
|
Granted
|
8,925,000
|
0.17
- 1.00
|
0.28
|
|||||||||||||
|
Forfeited
|
(116,000
|
)
|
0.50
- 2.00
|
0.71
|
||||||||||||
|
Outstanding
at January 1, 2008
|
18,558,220
|
0.50
- 5.00
|
0.54
|
|||||||||||||
|
Granted
|
1,170,000
|
0.03
- 1.00
|
0.08
|
|||||||||||||
|
Forfeited
|
(2,206,670
|
) |
0.20
- 5.00
|
1.10
|
||||||||||||
|
Outstanding
and Exercisable at December 31, 2008
|
17,521,550
|
0.30
|
3.09
|
|||||||||||||
|
The
weighted average grant date fair value of warrants granted during the
years 2008 and 2007 was $0.11 and $0.54, respectively. There was no
aggregate intrinsic value of the warrants at December 31,
2008.
|
||||||||||||||||
|
Warrant
Expiration Summary
|
||||||||||||||||
|
NUMBER OF COMMON STOCK
EQUIVALENTS
|
CURRENTLY
EXERCISABLE
|
EXPIRATION
DATE
|
REMAINING
CONTACTUAL LIFE (YEARS)
|
EXERCISE
PRICE ($)
|
||||||||||||
|
83,750
|
83,750
|
March
2009
|
1
|
1.00
|
||||||||||||
|
350,000
|
350,000
|
October
2010
|
2
|
0.50
|
||||||||||||
|
826,667
|
826,667
|
October
2010
|
2
|
0.03
|
||||||||||||
|
20,000
|
20,000
|
December
2010
|
2
|
1.00
|
||||||||||||
|
100,000
|
100,000
|
January
2011
|
3
|
0.17
|
||||||||||||
|
40,000
|
40,000
|
January
2011
|
3
|
1.00
|
||||||||||||
|
193,333
|
193,333
|
February
2011
|
3
|
0.75
|
||||||||||||
|
96,667
|
96,667
|
February
2011
|
3
|
1.00
|
||||||||||||
|
80,000
|
80,000
|
March
2011
|
3
|
0.75
|
||||||||||||
|
40,000
|
40,000
|
March
2011
|
3
|
1.00
|
||||||||||||
|
349,866
|
349,866
|
May
2011
|
3
|
0.03
|
||||||||||||
|
160,000
|
160,000
|
May
2011
|
3
|
0.75
|
||||||||||||
|
80,000
|
80,000
|
May
2011
|
3
|
1.00
|
||||||||||||
|
216,667
|
216,667
|
June
2011
|
3
|
0.75
|
||||||||||||
|
108,333
|
108,333
|
June
2011
|
3
|
1.00
|
||||||||||||
|
120,000
|
120,000
|
July
2011
|
3
|
0.75
|
||||||||||||
|
60,000
|
60,000
|
July
2011
|
3
|
1.00
|
||||||||||||
|
358,267
|
358,267
|
July
2011
|
3
|
0.03
|
||||||||||||
|
270,000
|
270,000
|
August
2011
|
3
|
0.75
|
||||||||||||
|
135,000
|
135,000
|
August
2011
|
3
|
1.00
|
||||||||||||
|
210,000
|
210,000
|
August
2011
|
3
|
0.17
|
||||||||||||
|
420,000
|
420,000
|
September
2011
|
3
|
0.75
|
||||||||||||
|
210,000
|
210,000
|
September
2011
|
3
|
1.00
|
||||||||||||
|
60,000
|
60,000
|
September
2011
|
3
|
0.17
|
||||||||||||
|
340,000
|
340,000
|
October
2011
|
3
|
0.75
|
||||||||||||
|
170,000
|
170,000
|
October
2011
|
3
|
1.00
|
||||||||||||
|
120,000
|
120,000
|
October
2011
|
3
|
0.17
|
||||||||||||
|
1,174,000
|
1,174,000
|
November
2011
|
3
|
0.75
|
||||||||||||
|
594,000
|
594,000
|
November
2011
|
3
|
1.00
|
||||||||||||
|
300,000
|
300,000
|
November
2011
|
3
|
0.03
|
||||||||||||
|
120,000
|
120,000
|
December
2011
|
3
|
0.75
|
||||||||||||
|
60,000
|
60,000
|
December
2011
|
3
|
1.00
|
||||||||||||
|
290,000
|
290,000
|
February
2012
|
4
|
0.75
|
||||||||||||
|
145,000
|
145,000
|
February
2012
|
4
|
1.00
|
||||||||||||
|
300,000
|
300,000
|
February
2012
|
4
|
0.03
|
||||||||||||
|
200,000
|
200,000
|
March
2012
|
4
|
0.75
|
||||||||||||
|
100,000
|
100,000
|
March
2012
|
4
|
1.00
|
||||||||||||
|
300,000
|
300,000
|
March
2012
|
4
|
0.03
|
||||||||||||
|
60,000
|
60,000
|
May
2012
|
4
|
0.75
|
||||||||||||
|
30,000
|
30,000
|
May
2012
|
4
|
1.00
|
||||||||||||
|
6,000,000
|
6,000,000
|
June
2012
|
4
|
0.03
|
||||||||||||
|
1,500,000
|
1,500,000
|
July
2012
|
4
|
0.03
|
||||||||||||
|
130,000
|
130,000
|
January
2013
|
5
|
0.17
|
||||||||||||
|
1,000,000
|
1,000,000
|
February
2013
|
5
|
0.03
|
||||||||||||
|
17,521,550
|
17,521,550
|
|||||||||||||||
F-16
BLUEGATE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
EQUITY
TRANSACTIONS
During
2008, Bluegate completed the following equity transactions:
COMMON
STOCK:
Issuance of common stock and
warrants for cash:
1) In
January 2008, we issued 170,000 shares of common stock, warrants for 130,000
shares of our common stock at an exercise price of $0.17 per share, warrants for
40,000 shares of our common stock at an exercise price of $1.00 per share for
$85,000 in connection with a private placement of our securities. The relative
fair value of the stock and warrants in these transactions were $70,223 and
$14,777, respectively. As part of the $85,000 consideration, 510,000 previously
issued warrants with exercise prices ranging from $0.75 to $1.25 were reduced to
$0.17. The expiration date for 100,000 previously issued warrants was extended
to January 22, 2011. All other terms of the warrant agreements remained the
same.
Issuance of common stock for
conversion of related party accounts payable, accrued liabilities and
interest:
(2) On
February 14, 2008, we finalized and consummated a transaction with a deemed
effective date of February 1, 2008 whereby we issued 9,150,000 shares of stock
for the conversion of related party debts of directors totaling $305,000. The
conversion and purchase price per share was $0.0333334. The excess of the fair
value of the stock over the debt converted and shares purchased totaled $518,500
and was recorded as compensation expense. The following individuals or related
entities converted debt and received the following shares: (i) Stephen Sperco,
Director and CEO, received 3,000,000 shares; (ii) SAI Corporation, an entity
controlled by Stephen Sperco, received 1,500,000 shares; (iii) Manfred
Sternberg, Director and Chief Strategy Officer, received 2,400,000 shares; (iv)
William Koehler, Director and President, received 2,100,000 shares; and, (v)
Dale Geary, Director, received, 150,000 shares.
Issuance of common stock to
related party for cash:
(3) On
February 14, 2008, we finalized and consummated a transaction with a deemed
effective date of February 1, 2008 whereby we issued 300,000 shares of stock to
two managers for $10,000. The purchase price per share was $0.0333334. The
excess of the fair value of the stock over the shares purchased totaled $17,000
and was recorded as compensation expense. The following members of management
purchased the following shares: Charles Leibold, CFO, purchased 150,000 shares;
and, Larry Walker, President of Trilliant Technology Group, Inc., our 100% owned
subsidiary, purchased 150,000 shares.
As a
result of the February 14, 2008 transaction described in (2) and (3) above: (i)
certain adjustment provisions in a previous convertible note agreements and
warrant agreements issued in September 2005 and subsequent, were triggered and
pursuant to the adjustment provisions, the exercise price of the previously
issued warrants to purchase 1,534,800 shares of our common stock at $0.17 per
share was reduced to $0.0333334 per share; and, (ii) certain adjustment
provisions in previous warrant agreements issued in June and July 2007, were
triggered and pursuant to the adjustment provisions, the exercise price of
previously issued warrants to purchase 7,500,000 shares of our common stock at
$0.17 per share was reduced to $0.0333334 per share.
Issuance of common stock
warrants as additional consideration to borrow funds from related
party:
(4) As
disclosed in the above footnote 7, Notes Payable, during 2007 the Company
entered into a line of credit agreement with SAI Corporation (“SAIC”), a
corporation controlled by our CEO, Stephen Sperco, to borrow up to $500,000 and,
as of December 31, 2007 the Company had borrowed $500,000 from SAIC. On February
28, 2008, the line of credit agreement 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 (i)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; (ii)
reduced the exercise price on 2,200,000 existing warrants and options issued to
SAIC and Stephen Sperco, and their assigns, from the current per share exercise
prices of $0.17, $0.34, $0.75 and $1.00 to $0.0333334 per share; and (iii)
granted 1,000,000 new warrants to SAIC with an exercise price of $0.0333334 per
share that expire February 28, 2013. The fair value of the 1,000,000 warrants
was $109,028 on the date of issuance. Because the warrants were granted to a
related party and the exercise price on the grant date was below the market
price of our stock, we expensed $109,028 in February 2008 related to this
transaction.
Issuance of common stock
for options
exercised for conversion of related party debt:
(5) In
October 2008, we issued 1,150,000 unrestricted shares and 100,000 restricted
shares of common stock to Stephen Sperco, our CEO as a result of his exercise of
stock options on October 17, 2008. The Company satisfied related party accrued
expenses and accrued interest owed to Mr. Sperco amounting to $38,334 and
$3,334, respectively upon the exercise of these stock options.
F-17
BLUEGATE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
Stock options issued for
services:
(6)
During the year ended December 31, 2008, Bluegate expensed $412,382 related to
previously issued stock options that vested during the period.
(7) The
following table summarizes stock options issued to employees during the year
ended December 31, 2008:
|
Exercise
|
Fair
|
Expiration
|
Vesting
|
2008
|
|||||||||
|
Options
|
Price
|
Value
|
Date
|
Period
|
Expense
|
||||||||
|
15,000
|
$
|
0.25
|
$
|
1,811
|
1/2/2013
|
Through
6/08
|
$
|
1,811
|
|||||
|
3,332
|
0.25
|
280
|
1/15/2013
|
Through
4/08
|
280
|
||||||||
|
5,000
|
0.25
|
465
|
1/21/2013
|
Through
12/08
|
465
|
||||||||
|
50,000
|
0.25
|
3,743
|
2/1/2011
|
Immediately
|
3,743
|
||||||||
|
73,332
|
$ 6,299
|
$ 6,299
|
|||||||||||
As of
December 31, 2008, the company has outstanding: (i) 26,033,565 shares of common
stock; (ii) 17,521,550 warrants; (iii) 9,783,597 options; and, (iv) preferred
stock that are convertible into 1,200,000 shares of common stock, resulting in
on a fully diluted basis, 54,538,712 shares of common stock. However, the
company currently has only 50,000,000 shares of common stock authorized by our
Articles of Incorporation. If all of the holders of warrants, options,
convertible debt and preferred stock requested to exercise or convert all of the
warrants, options, convertible debt and preferred stock, we would be unable to
accommodate 4,538,712 shares of common stock in those requests. The company
could have liability in the future if an option holder, warrant holder,
preferred stock holder or holder of convertible debt desires to exercise or
convert but cannot because we do not have enough unissued common stock available
for issuance. However, the following individuals or entities have waived their
reservation of common stock underlying options and warrants until such time that
the board of directors deems the waiver is not necessary as follows: Stephen
Sperco and related entity (3,000,000 shares); Manfred Sternberg and related
entities (2,000,000 shares); and William Koehler (2,000,000
shares).
During
2008, Bluegate used the Black-Scholes option pricing model to value stock
options and warrants using the following assumptions: number of options as set
forth in the option agreements; no expected dividend yield; expected volatility
ranging from 202% to 260%; risk-free interest rates of 5.0%; and expected terms
based on the period of time expected to elapse until exercise. When applicable,
Bluegate uses the simplified method of calculating expected term as described in
SAB 107.
During
2007, Bluegate completed the following equity transactions:
COMMON
STOCK:
Issuance of common stock and
warrants for cash:
(1) During
the quarter ended March 31, 2007, we issued 800,000 shares of common stock,
warrants for 800,000 shares of our common stock at an exercise price of $0.75
per share and warrants for 400,000 shares of our common stock at an exercise
price of $1.00 per share, for $400,000 in connection with a private placement of
our securities. The relative fair value of the stock and warrants in these
transactions were $108,576 and $291,424, respectively. In February 2008, as a
result of the transaction described above, the exercise prices of $0.75 and
$1.00 related to 400,000 and 200,000 warrants issued during this period,
respectively, were reduced to $0.0333334.
(2) In
July 2007, we issued 600,000 shares of common stock and warrants for 1,500,000
shares of our common stock at an exercise price of $0.17 per share for $300,000
in connection with a private sale of our securities to two officers of Bluegate,
Manfred Sternberg, Chief Strategy Officer and William Koehler, President and COO
and one other investor. The fair value of the warrants was $553,805 on the date
of issuance. Because the warrants were granted to related parties and the
exercise price on the grant date was below the market price of our stock, we
expensed $553,805 in July 2007 related to these transactions. In February 2008,
as a result of the transaction described above, certain adjustment provisions in
these warrant agreements were triggered. Pursuant to the adjustment provisions,
the exercise price of the previously issued warrants to purchase 1,500,000
shares of our common stock at $0.17 per share was reduced to $0.0333334 per
share.
(3) In
September 2007, as a result of the preferred stock transaction described above,
certain adjustment provisions in Bluegate’s previous convertible note agreements
and warrant agreements issued in September 2005 and subsequently, were
triggered. Pursuant to the adjustment provisions, the exercise price of the
previously issued warrants to purchase 1,534,800 shares of our common stock at
$0.50 per share was reduced to $0.17 per share and further reduced in February
2008 to $0.0333334 as a result of the transaction described above.
F-18
BLUEGATE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
Issuance of common stock for
employee compensation:
(4) In
January 2007, we issued 150,000 shares of common stock to an employee for
compensation. The common stock had a market value of $142,500 based on the
closing price of the stock on the date of grant. We expensed $142,500 in quarter
ending March 31, 2007 related to this transaction.
Issuance of common stock for
outside services:
(5) In
January 2007, we issued 300,000 shares of common stock to a consultant for
services rendered. The common stock had a market value of $225,000 based on the
closing price of the stock on the date of grant. We expensed $225,000 in the
quarter ending March 31, 2007 related to this transaction.
(6) In
February and March 2007, we issued 21,773 shares of common stock valued at
$19,525 based on the closing price of the stock on the date of grant as payment
to a consultant and two vendors for services rendered. We expensed $19,525 in
the quarter ending March 31, 2007 related to this transaction.
(7) In
March 2007, we issued 100,000 shares of common stock to a consultant for
services rendered. The common stock had a market value of $85,000 based on the
closing price of the stock on the date of grant. We expensed $85,000 in quarter
ending March 31, 2007 related to this transaction.
(8) In
December 2007, we issued 200,000 shares of common stock to consultants for
services rendered. The common stock had a market value of $26,000 based on the
closing price of the stock on the date of grant. We expensed $26,000 in 2007
related to this transaction.
Issuance of common stock for
delay in filing a registration statement:
(9) The
warrants issued in the transactions recorded in the period January 1, 2006
through June 30, 2006 were subject to registration rights agreements which
required Bluegate to register the underlying shares by November 30, 2006 or pay
liquidated damages of 1.5% of the purchase price of the investment each month
the shares were not registered. In May 2007, we paid liquidated damages of
$29,250 by issuing 36,585 restricted shares of common stock covering the period
from December 1, 2006 through May 31, 2007. In August 2007, we paid liquidated
damages of $4,875 by issuing 10,031 restricted shares of common stock covering
the period from June 1, 2006 through August 31, 2007. The amount of liquidated
damages totaling $34,125 was recorded as compensation expense.
(10) The
warrants issued in the transactions recorded in the period from July 1, 2006
through March 31, 2007 were subject to a registration rights agreement which
required Bluegate to register the underlying shares by June 30, 2007 or pay
liquidated damages of 1.5% of the purchase price of the investment each month
the shares were not registered. In August 2007, we paid liquidated damages of
$64,530 by issuing 145,112 restricted shares of common stock covering the period
from July 1, 2006 through August 31, 2007. Among those investors were four
affiliates who received the following amounts of stock as liquidated damages:
13,500 shares to SAI Corporation; 6,750 shares to Stephen Sperco; 7,493 shares
to Manfred Sternberg; 6,750 shares to William Koehler. The liquidated damages of
$64,530 were recorded as compensation expense.
We filed
with the Securities and Exchange Commission a Registration Statement which was
effective as of August 30, 2007 with respect to these securities. As of
September 30, 2007 there is no liability related to the registration rights
agreements.
Issuance of common stock and
warrants for services and accounts payable:
(11) In
February 2007, we issued 90,000 shares of our common stock, warrants to purchase
90,000 shares of our common stock at an exercise price of $0.75 per share and
warrants to purchase 45,000 shares of our common stock at an exercise price of
$1.00 per share. The fair value of the shares and warrants issued was $146,145
based upon the closing price of the stock on the date of grant and the
Black-Scholes valuation of the warrants. $15,000 of common stock and warrants
was issued to settle prior year accounts payable and $131,145 was expensed in
the current year. The warrants vest immediately and expire in February
2012.
(12) In
May 2007, we issued 60,000 shares of our common stock, warrants to purchase
60,000 shares of our common stock at an exercise price of $0.75 per share and
warrants to purchase 30,000 shares of our common stock at an exercise price of
$1.00 per share. The fair value of the shares and warrants issued was $41,705
based upon the closing price of the stock on the date of grant and the
Black-Scholes valuation of the warrants. The warrants vest immediately and
expire in May 2012.
(13) In
September 2007, we issued 100,000 shares of our common stock to a consultant to
settle a prior year accounts payable. The common stock had a market value of
$25,002 based on the closing price of the stock on the date of
grant.
Contingent shares issued for
Trilliant acquisition:
(14) Effective
September 30, 2007, we recorded the issuance of 419,753 shares of common stock
valued at $33,580 to Trilliant Corporation in accordance with the asset sale and
purchase agreement dated September 15, 2005, pertaining to the acquired
business’ revenue after the second year. As a result of this transaction,
$33,580 was recorded as an expense.
F-19
BLUEGATE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
Stock options issued for
services:
(15) During
the year ended December 31, 2007, Bluegate expensed $1,954,758 related to
previously issued stock options that vested during the period.
(16) The
following table summarizes stock options issued to employees during the year
ended December 31, 2007:
|
Exercise
|
Fair
|
Expiration
|
Vesting
|
2007
|
||||||
|
Options
|
Price
|
Value
|
Date
|
Period
|
Expense
|
|||||
|
50,000
|
$ |
0.80
(a)
|
$
35,858
|
1/15/2012
|
Through
12/08
|
$ 17,928 | ||||
|
75,000
|
0.75
(a)
|
50,426
|
2/2/2012
|
Through
1/08
|
46,222
|
|||||
|
100,000
|
0.75
(a)
|
67,234
|
2/5/2012
|
Immediately
|
67,234
|
|||||
|
50,000
|
0.86
(a)
|
38,548
|
2/19/2012
|
Immediately
|
38,548
|
|||||
|
50,000
|
0.82
(a)
|
36,755
|
3/19/2012
|
Immediately
|
36,755
|
|||||
|
50,000
|
0.80
(a)
|
35,858
|
4/16/2012
|
Through
1/08
|
32,274
|
|||||
|
10,000
|
0.50 (a) |
|
4,482
|
5/15/2012
|
Immediately
|
4,482
|
||||
|
150,000
|
0.50
|
67,234
|
6/25/2012
|
Immediately
|
67,234
|
|||||
|
25,000
|
0.50
(a)
|
11,206
|
6/29/2012
|
Immediately
|
11,206
|
|||||
|
10,000
|
0.39
(a)
|
3,496
|
7/15/2012
|
Immediately
|
3,496
|
|||||
|
10,000
|
0.19
|
1,703
|
9/17/2012
|
Immediately
|
1,703
|
|||||
|
5,000
|
0.25
|
837
|
9/24/2012
|
Through
12/07
|
837
|
|||||
|
10,000
|
0.25
|
1,208
|
11/26/2012
|
Through
10/09
|
100
|
|||||
|
37,000
|
0.25
|
4,125
|
12/14/2012
|
Immediately
|
4,125
|
|||||
|
100,000
|
0.17 (b) |
|
15,240
|
12/31/2012
|
Immediately
|
15,240
|
||||
|
100,000
|
0.17
|
15,240
|
12/31/2012
|
Immediately
|
15,240
|
|||||
|
100,000
|
0.17
|
15,240
|
12/31/2012
|
Immediately
|
15,240
|
|||||
|
100,000
|
0.17
|
15,240
|
12/31/2012
|
Immediately
|
15,240
|
|||||
|
100,000
|
0.17
|
15,240
|
12/31/2012
|
Immediately
|
15,240
|
|||||
|
100,000
|
0.17
|
15,240
|
12/31/2012
|
Immediately
|
15,240
|
|||||
|
1,232,000
|
$450,410
|
$
423,584
|
||||||||
|
(a)
In December 2007, the exercise price of these common stock options was
reduced to $0.34.
|
||||||||||
|
(b)
In February 2008, the exercise price of 100,000 options issued to Stephen
Sperco was reduced to
$0.0333334.
|
||||||||||
Employee stock options
repriced:
(17) 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, $47,394 was recorded as compensation
expense.
Bluegate
used the Black-Scholes option pricing model to value stock options and warrants
using the following assumptions: number of options as set forth in the option
agreements; no expected dividend yield; expected volatility of 202%; risk-free
interest rates of 5.0%; and expected terms based on the period of time expected
to elapse until exercise. When applicable, Bluegate uses the simplified method
of calculating expected term as described in SAB 107.
10. COMMITMENTS AND
CONTINGENCIES
Lease
Commitment
|
The
Company operates from leased office space under an operating lease that
expires in November 2013 however; the Company has the option to terminate
the lease on May 1, 2011 upon giving appropriate notice. The lease
includes provisions for increases to rental payments should certain costs
of the landlord increase. Future base annual lease payments due under the
lease are as follows:
|
|||
|
Year
|
Payments
|
||
|
2009
through 2012
|
$
105,705
|
||
|
2013
|
96,896
|
||
Rent
expense incurred under operating leases for years ended December 31, 2008 and
2007 was $105,705. During the years ended December 31, 2008 and 2007, the
Company received sublease income of -0- and $3,000, respectively.
F-20
BLUEGATE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Contingencies
The
Company from time to time is involved in actions or disputes by third parties
arising in the ordinary course of business. In the opinion of management, no
pending or known threatened claims or actions against the Company are expected
to have a material adverse effect on
Bluegate's consolidated financial position, results of operations or cash flows.
With respect to such matters, management believes that it has adequate legal
defenses that can be asserted and Bluegate intends to defend any pending or
known threatened claims or actions vigorously; however, the Company cannot
predict with certainty and there can be no assurance as to the ultimate outcome
or effect of any claims or disputes.
A dispute
arose during 2008 over the potential accrual of compensation for a combined
amount of $151,998 as of December 31, 2008. Bluegate assessed the likelihood
that this dispute would result in a future loss to the company under FAS 5 and
determined that the likelihood these salaries would be paid in the future to be
reasonably possible, or more than remote but less than likely. Accordingly,
under FAS 5 Bluegate has not accrued the amount of disputed salaries as of
December 31, 2008.
During
the years ended December 31, 2008 and 2007, 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, the
Company agreed to pay (1) SAIC a $20,000 origination fee and (2) STG all past
due amounts totaling $56,837. As of December 31, 2008 and 2007, the Company
had borrowed $1,100,000 and $500,000, respectively. See footnote 13,
Subsequent Events. The note is due upon demand and is described in footnote 7,
notes payable. During the years ended December 31, 2008 and 2007, the Company
incurred interest expense on the related party note payable debt of $116,712 and
$5,367, respectively. At December 31, 2008 $14,014 is payable to SAIC and
included under the caption accrued liabilities to related parties totaling
$178,655 on the balance sheet.
Unsecured notes
payable: During 2006, the Company entered into a line of credit agreement
with Manfred Sternberg ("MS"), Chief Strategy Officer and William Koehler
("WK"), President and COO, for Bluegate to borrow up to $500,000 from each of
them. As of December 31, 2008, the Company had borrowed $34,451 and $34,628 from
MS and WK, respectively. As of December 31, 2007, the Company had borrowed
$76,169 and $36,569 from MS and WK, respectively. The notes are due upon demand
and are described in footnote 7, notes payable. During the years ended December
31, 2008 and 2007, the Company incurred interest expense on the related party
notes payable debt of $11,067 and $34,335, respectively. At December 31,
2008 accrued interest of $2,970 and $4,033 is payable to MS and WK,
respectively and included under the caption accrued liabilities to related
parties totaling $178,655 on the balance sheet.
Accounts payable to related
party: 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. During the years ended December 31, 2008 and 2007 the
Company incurred $225,482 and $266,483, respectively of consulting services from
STG. At December 31, 2008 and 2007, $10,750 and $40,089, respectively are
payable to STG and included under the caption accounts payable to related party
on the balance sheet. During the years ended December 31, 2008 and 2007, the
Company incurred interest expense on the related party accounts payable debt of
$1,191 and $2,246, respectively.
Accrued liabilities to
related parties: Until the company achieves a net positive cash flow
from operations, MS, WK and SS have agreed not to cash some of their payroll or
expense reimbursement checks issued to them for the period from July 1, 2007
through December 31, 2008. As of December 31, 2008, $64,817 of payroll and
expense reimbursement checks has not been cashed and $3,154 of accrued interest
calculated thereon is included under the caption accrued liabilities to related
parties totaling $178,655 on the balance sheet. As of December 31, 2007,
$312,931 of payroll and expense reimbursement checks have not been cashed and
are included under the caption accrued liabilities to related parties totaling
$344,598 on the balance sheet.
As of
December 31, 2008, $71,667 of fees accrued to Board of Director members MS -
$20,000; WK - $20,000; SS - $15,000 and Dale Geary (“DG”) - $16,667 are included
under the caption accrued liabilities to related parties totaling $178,655 on
the balance sheet. As of December 31, 2007, $31,667 of fees accrued to Board of
Director members MS - $10,000; WK - $10,000; SS - $5,000 and DG - $6,667 are
included under the caption accrued liabilities to related parties totaling
$344,598 on the balance sheet. As of December 31, 2008, $18,000 of accrued
vehicle allowances to MS - $6,000; WK - $6,000 and SS - $6,000 are included
under the caption accrued liabilities to related parties totaling $178,655 on
the balance sheet.
Office space: In May
2006 (commencement of the current lease agreement) there was an agreement that
Manfred Sternberg & Associates may occupy space and use the services of our
offices for the term that the Company holds a lease on the
property.
F-21
12. MAJOR CUSTOMERS AND MAJOR
VENDORS
Major
Customers. During 2008, 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 2008, our top five vendors accounted for 74% of our purchases
and no single vendor accounted for more than 21% of purchases.
13. SUBSEQUENT EVENTS
|
(1)
|
As
disclosed in footnote 7, Notes Payable, during 2007, the Company entered
into a line of credit agreement with SAI Corporation ("SAIC"), a
corporation controlled by our CEO, Stephen Sperco, 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. 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. 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. On February 23, 2009, the line of credit agreement with SAIC was
amended to increase the borrowing to $1,300,000 and on February 26, 2009,
Bluegate borrowed the additional $200,000 from SAIC for working capital
purposes. Upon Bluegate borrowing the additional $200,000, the Company
agreed to pay SAIC a $20,000 origination
fee.
|
|
(2)
|
In
March 2009, we issued an option to purchase 50,000 shares of our common
stock at an exercise price of $0.10 per share to an employee. The option
had a market value of $1,769 on the date of grant, vested immediately and
expires in March 2012. We expensed $1,769 in March 2009 related to this
option.
|
F-22
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, 2008. 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, 2008.
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 temporary 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.
None.
14
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, 2008, 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
|
55
|
Director
and Chief Executive Officer
|
|
Manfred
Sternberg
|
49
|
Director
and Chief Strategy Officer
|
|
William
Koehler
|
43
|
Director
and President
|
|
Charles
Leibold
|
59
|
Chief
Financial Officer
|
|
Dale
Geary (a)
|
51
|
Director
|
(a) Mr.
Geary serves on our compensation committee.
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.
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.
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.
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.
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.
15
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.
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 600, 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 four members of our Board of Directors, who were
elected and hold office until their successors are elected and qualified. One
board position is vacant. The four members of the Board of Directors are Manfred
Sternberg, Stephen Sperco, William Koehler and Dale Geary. Manfred Sternberg is
the Chairman of the Board of Directors and the Company’s Chief Strategy Officer,
Stephen Sperco is the Company’s Chief Executive Officer and William Koehler is
the Company’s President. 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, 2008, the Board of Directors held
thirteen meetings which were attended by all four 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, Manfred Sternberg at Bluegate Corporation, 701 North Post
Oak Road, Suite 600, 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, and (2)
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 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 Sperco, Manfred Sternberg, William Koehler and Dale
Geary.
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. During the
fiscal year ended December 31, 2008, the Compensation Committee held one
meeting.
SHAREHOLDER
COMMUNICATIONS.
Shareholders
may send written communications to the company’s Board of Directors to the
attention of the Chairman of the Board, Manfred Sternberg. 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 600, Houston, Texas 77024. Electronic
submissions of shareholder correspondence will not be accepted.
16
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 ($)
|
Bonus ($)
|
Option
Awards (6) ($)
|
All
Other Compensation (7) ($)
|
Total ($)
|
||||||
|
Stephen
Sperco (1)
|
2008
|
49,334
|
19,000
|
68,334
|
||||||||
|
CEO
(PEO), Director
|
2007
|
150,000
|
100,000
|
15,240
|
14,000
|
279,240
|
||||||
|
Manfred
Sternberg (2)
|
2008
|
49,334
|
19,000
|
68,334
|
||||||||
|
Chief
Strategy Officer, Director
|
2007
|
180,000
|
142,500
|
15,240
|
28,000
|
365,740
|
||||||
|
William
Koehler (3)
|
2008
|
49,334
|
19,000
|
68,334
|
||||||||
|
President,
Director
|
2007
|
150,000
|
15,240
|
25,000
|
190,240
|
|||||||
|
Charles
Leibold (4)
|
2008
|
147,000
|
9,000
|
156,000
|
||||||||
|
CFO
(PFO), Secretary
|
2007
|
147,000
|
15,240
|
9,000
|
171,240
|
|||||||
|
Larry
Walker (5)
|
2008
|
125,000
|
125,000
|
|||||||||
|
President
of Trilliant Technology
|
2007
|
125,000
|
15,240
|
140,240
|
||||||||
|
Group,
Inc. (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 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 receives a vehicle transportation
allowance.
Effective
January 1, 2007, the Company approved a compensation plan for its Board of
Directors. Under the compensation plan all directors will be compensated at the
rate of $10,000 annually. Mr. Sperco has earned $10,000 and $5,000 for 2008 and
2007, respectively under this plan.
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
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.
(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 receives a vehicle transportation allowance.
Effective
January 1, 2007, the Company approved a compensation plan for its Board of
Directors. Under the compensation plan all directors will be compensated at the
rate of $10,000 annually. Mr. Sternberg has earned $10,000 for 2008 and 2007
under this plan.
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 receives a vehicle
transportation allowance.
Effective
January 1, 2007, the Company approved a compensation plan for its Board of
Directors. Under the compensation plan all directors will be compensated at the
rate of $10,000 annually. Mr. Koehler has earned $10,000 for 2008 and 2007 under
this plan.
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.
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.
(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.
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 $0.17 per share vesting immediately and expiring on December
31, 2012.
(6) The
amounts in this column reflect the expense recognized for financial statement
reporting purposes for the fiscal years ended December 31, 2008 and 2007, in
accordance with FAS 123(R), of outstanding stock options granted as part of the
stock option plan. The assumption used in calculating these amounts, as well as
a description of our stock option plan, are set forth in Note 9 to our Financial
Statements for the year ended December 31, 2008, which is located on page F-13
of our Annual Report on Form 10-K. Compensation cost is generally recognized
over the vesting period of the award.
(7)The
amounts in this column reflect the vehicle transportation allowance and fees
earned as directors for Stephen Sperco, Manfred Sternberg and William Koehler
and vehicle transportation allowance for Charles Leibold.
17
|
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END DECEMBER 31, 2008
|
||||||||||||||||
|
Option
Awards
|
||||||||||||||||
|
Name
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Option
Exercise Price ($)
|
Option
Expiration Date
|
|||||||||||||
|
Stephen
Sperco
|
50,000
|
(1)
|
0.03
|
12/31/2011
|
||||||||||||
|
Manfred
Sternberg
|
275,000
|
(2)
|
0.34
|
1/31/2010
|
||||||||||||
|
1,000,000
|
(3)
|
0.34
|
1/31/2010
|
|||||||||||||
|
1,500,000
|
(4)
|
0.34
|
11/28/2011
|
|||||||||||||
|
600,000
|
(5)
|
0.34
|
11/28/2011
|
|||||||||||||
|
100,000
|
(6)
|
0.17
|
12/31/2012
|
|||||||||||||
|
3,475,000
|
||||||||||||||||
|
William
Koehler
|
50,000
|
(7)
|
0.34
|
2/22/2010
|
||||||||||||
|
340,000
|
(8)
|
0.34
|
9/1/2010
|
|||||||||||||
|
1,200,000
|
(9)
|
0.34
|
8/1/2011
|
|||||||||||||
|
100,000
|
(6)
|
0.17
|
12/31/2012
|
|||||||||||||
|
1,690,000
|
||||||||||||||||
|
Charles
Leibold
|
600,000
|
(10)
|
0.34
|
6/1/2011
|
||||||||||||
|
100,000
|
(6)
|
0.17
|
12/31/2012
|
|||||||||||||
|
700,000
|
||||||||||||||||
|
Larry
Walker
|
250,000
|
(11)
|
0.34
|
9/1/2010
|
||||||||||||
|
340,000
|
(12)
|
0.34
|
6/1/2011
|
|||||||||||||
|
100,000
|
(6)
|
0.17
|
12/31/2012
|
|||||||||||||
|
690,000
|
||||||||||||||||
|
Note
|
Grant
Date
|
Incremental Vesting Dates |
|
|||||||||||||
|
(1)
|
12/31/2006
|
25,000
|
vested monthly from 11/08 through 12/08
|
|||||||||||||
|
(2)
|
2/1/2005
|
275,000
|
vested 2/1/05
|
|||||||||||||
|
(3)
|
2/1/2005
|
50,000
|
vested 2/1/05; 50,000 monthly from 3/05 through 9/06
|
|||||||||||||
|
(4)
|
11/28/2006
|
1,500,000
|
vested 11/28/06
|
|||||||||||||
|
(5)
|
11/28/2006
|
100,000
|
vested monthly from 12/06 through 5/07
|
|||||||||||||
|
(6)
|
12/31/2007
|
100,000
|
vested 12/31/07
|
|||||||||||||
|
(7)
|
2/23/2005
|
50,000
|
vested 2/23/05
|
|||||||||||||
|
(8)
|
9/1/2005
|
50,000
|
vested 9/1/05 and 290,000 vested on 9/1/06
|
|||||||||||||
|
(9)
|
8/1/2006
|
600,000
|
vested on 8/1/06; 50,000 monthly from 9/06 through 8/07
|
|||||||||||||
|
(10)
|
6/1/2006
|
50,000
|
vested 6/1/06; 25,000 monthly from 7/06 through 4/08
|
|||||||||||||
|
(11)
|
9/1/2005
|
10,417
|
vested monthly from 9/05 through 8/07
|
|||||||||||||
|
(12)
|
8/1/2006
|
100,000
|
vested 8/1/06; 20,000 monthly from 9/06 through
8/07
|
|||||||||||||
|
OPTION
EXERCISES AND STOCK VESTED
|
||||
|
Option
Awards
|
||||
|
Name
|
Number
of Shares Acquired on Exercise (#)
|
Value
Realized on Exercise ($)
|
||
|
Stephen
Sperco
|
1,250,000
|
(16,667)
|
||
The
following table represents a summary of the compensation earned to the members
of our Board of Directors during the fiscal year ended December 31,
2008.
DIRECTOR
COMPENSATION
|
Name
|
Fees
Earned or Paid in Cash ($)
|
|
|
Stephen
Sperco (1)
|
-
|
|
|
Manfred
Sternberg (1)
|
-
|
|
|
William
Koehler (1)
|
-
|
|
|
Dale
Geary (2)
|
15,000
|
Effective
January 1, 2007, the board approved to compensate each member of the Board of
Directors and each Committee Chair with an annual payment in the amount of
$10,000 and $5,000, respectively.
(1) The
compensation for these Directors is included in Executive
Compensation.
(2) Mr.
Geary, as a Director and Compensation Committee Chairman, earned $10,000 and
$5,000 respectively. As of December 31, 2008, Mr. Geary has 100,000 options
outstanding that were granted to him in 2007 that had a $15,240 fair value
computed in accordance with SFAS No. 123(R).
18
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
||||||||||
|
The
following table sets forth as of information concerning the number of
shares of common stock owned beneficially
as of April 8, 2009 which was
26,033,565 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
|
Manfred
Sternberg
|
8,513,868
|
(2)
|
27.8%
|
||||||
|
701
N. Post Oak, Suite 600
|
||||||||||
|
Houston,
Texas 77024
|
||||||||||
|
Common
Stock
|
William
Koehler
|
4,975,117
|
(3)
|
17.6%
|
||||||
|
701
N. Post Oak, Suite 600
|
||||||||||
|
Houston,
Texas 77024
|
||||||||||
|
Common
Stock
|
Stephen
Sperco
|
15,420,250
|
(4)
|
44.0%
|
||||||
|
701
N. Post Oak, Suite 600
|
||||||||||
|
Houston,
Texas 77024
|
||||||||||
|
Common
Stock
|
SAI
Corporation
|
4,713,500
|
(5)
|
16.3%
|
||||||
|
180
North Stetson Avenue, Suite 700
|
||||||||||
|
Chicago,
Illinois 60601
|
||||||||||
|
Common
Stock
|
Dale
Geary
|
275,000
|
(6)
|
1.1%
|
||||||
|
701
N. Post Oak, Suite 600
|
||||||||||
|
Houston,
Texas 77024
|
||||||||||
|
Common
Stock
|
Charles
Leibold
|
850,000
|
(7)
|
3.2%
|
||||||
|
701
N. Post Oak, Suite 600
|
||||||||||
|
Houston,
Texas 77024
|
||||||||||
|
Common
Stock
|
Robert
Davis
|
1,779,228
|
(8)
|
6.8%
|
||||||
|
701
N. Post Oak, Suite 600
|
||||||||||
|
Houston,
Texas 77024
|
||||||||||
| All executive officers and directors - 5 persons | 30,034,235 | (9) | 70.2% | |||||||
|
(1)
The percentage of beneficial ownership of Common Stock is based on
26,033,565 shares of Common Stock outstanding as
of April 8, 2009 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 8,513,868 shares beneficially owned by Mr. Sternberg: (i) 3,220,279
are common shares owned directly by Mr. Sternberg, (ii) 683,589 are common
shares owned indirectly by Mr. Sternberg, and (iii) 4,610,000 are common
shares issuable upon the exercise of options and
warrants.
|
||||||||||
|
(3)
Of the 4,975,117 shares beneficially owned by Mr. Koehler: (i) 2,735,117
are common shares owned directly by Mr. Koehler, and (ii) 2,240,000 are
common shares issuable upon the exercise of options and
warrants.
|
||||||||||
|
(4)
Of the 15,420,250 shares beneficially owned by Mr. Sperco: (i) 4,456,750
are common shares owned directly by Mr. Sperco, (ii) 1,913,500 are common
shares owned indirectly by Mr. Sperco, (iii) 7,850,000 are common shares
issuable upon the exercise of options and warrants, and (iv) 1,200,000 are
common shares issuable upon the conversion of preferred shares. Mr. Sperco
controls SAI Corporation which is listed in item 5 below. 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 SAI Corporation. 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 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 SAI Corporation on June 28, 2007. After the
$600,000 cash investment and assuming that Mr. Sperco and SAI Corporation
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). As a result of his purchase of Series C Preferred Stock described
above, and his previously and subsequently acquired stock, options and
warrants, 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.
|
||||||||||
|
(5)
Of the 4,713,500 shares beneficially owned by SAI Corporation: (i)
1,913,500 are common shares owned directly by SAI Corporation, (ii)
2,600,000 are common shares issuable upon the exercise of warrants, and
(iii) 200,000 are common shares issuable upon the conversion of preferred
shares. SAI Corporation is controlled by Mr. Sperco who is listed in item
4 above. 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 SAI Corporation. 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. 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 SAI Corporation's purchase of Series C Preferred
Stock described above, and the previously and subsequently acquired stock
and warrants, SAI Corporation beneficially owns 17% of our common stock
without taking into account the super voting power of the Preferred stock,
and 24% when taking into account the super voting power of the Preferred
Stock.
|
||||||||||
|
(6)
Of the 275,000 shares beneficially owned by Mr. Geary: (i) 150,000 are
common shares owned directly by Mr. Geary, and (ii) 125,000 are
common shares issuable upon the exercise of options and
warrants.
|
||||||||||
|
(7)
Of the 850,000 shares beneficially owned by Mr. Leibold: (i) 150,000 are
common shares owned directly by Mr. Leibold, and (ii) 700,000
are common shares issuable upon the exercise of
options.
|
||||||||||
|
(8)
Of the 1,779,228 shares beneficially owned by Mr. Davis: (i) 35,023 are
common shares owned directly by Mr. Davis, (ii) 1,546,205 are common
shares owned indirectly by Mr. Davis, and (iii) 198,000 are common shares
issuable upon the exercise of options and warrants.
|
||||||||||
|
(9)
Includes shares, options, warrants and preferred convertible shares owned
by these persons.
|
||||||||||
|
As
described in items 4 and 5 above, as a result of Mr. Sperco's and SAI
Corporation's purchase of Series C Preferred Stock, and Mr. Sperco's
previously and subsequently acquired stock, options and warrants, 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.
|
||||||||||
19
Item 13.
Certain Relationships and Related Transactions, and Director
Independence.
During
the years ended December 31, 2008 and 2007, 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, the
Company agreed to pay (1) SAIC a $20,000 origination fee and (2) STG all past
due amounts totaling $56,837. See footnote 13, Subsequent Events. As of December
31, 2008 and 2007, the Company had borrowed $1,100,000 and $500,000,
respectively. The note is due upon demand and is described in footnote 7,
notes payable. During the years ended December 31, 2008 and 2007, the Company
incurred interest expense on the related party note payable debt of $116,712 and
$5,367, respectively. At December 31, 2008 $14,014 is payable to SAIC and
included under the caption accrued liabilities to related parties totaling
$178,655 on the balance sheet.
Unsecured notes
payable: During 2006, the Company entered into a line of credit agreement
with Manfred Sternberg ("MS"), Chief Strategy Officer and William Koehler
("WK"), President and COO, for Bluegate to borrow up to $500,000 from each of
them. As of December 31, 2008, the Company had borrowed $34,451 and $34,628 from
MS and WK, respectively. As of December 31, 2007, the Company had borrowed
$76,169 and $36,569 from MS and WK, respectively. The notes are due upon demand
and are described in footnote 7, notes payable. During the years ended December
31, 2008 and 2007, the Company incurred interest expense on the related party
notes payable debt of $11,067 and $34,335, respectively. At December 31, 2008
accrued interest of $2,970 and $4,033 is payable to MS and WK, respectively and
included under the caption accrued liabilities to related parties totaling
$178,655 on the balance sheet.
Accounts payable to related
party: 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. During the years ended December 31, 2008 and 2007 the
Company incurred $225,482 and $266,483, respectively of consulting services from
STG. At December 31, 2008 and 2007, $10,750 and $40,089, respectively are
payable to STG and included under the caption accounts payable to related party
on the balance sheet. During the years ended December 31, 2008 and 2007,
the Company incurred interest expense on the related party accounts payable debt
of $1,191 and $2,246, respectively.
Accrued liabilities to
related parties: Until the company achieves a net positive cash flow
from operations, MS, WK and SS have agreed not to cash some of their payroll or
expense reimbursement checks issued to them for the period from July 1, 2007
through December 31, 2008. As of December 31, 2008, $64,817 of payroll and
expense reimbursement checks has not been cashed and $3,154 of accrued interest
calculated thereon is included under the caption accrued liabilities to related
parties totaling $178,655 on the balance sheet. As of December 31, 2007,
$312,931 of payroll and expense reimbursement checks have not been cashed and
are included under the caption accrued liabilities to related parties totaling
$344,598 on the balance sheet. As of December 31, 2008, $71,667 of fees
accrued to Board of Director members MS - $20,000; WK - $20,000; SS - $15,000
and Dale Geary (“DG”) - $16,667 are included under the caption accrued
liabilities to related parties totaling $178,655 on the balance sheet. As of
December 31, 2007, $31,667 of fees accrued to Board of Director members MS -
$10,000; WK - $10,000; SS - $5,000 and DG - $6,667 are included under the
caption accrued liabilities to related parties totaling $344,598 on the balance
sheet. As of December 31, 2008, $18,000 of accrued vehicle allowances to MS
- $6,000; WK - $6,000 and SS - $6,000 are included under the caption accrued
liabilities to related parties totaling $178,655 on the balance
sheet.
Office space: In May
2006 (commencement of the current lease agreement) there was an agreement that
Manfred Sternberg & Associates may occupy space and use the services of our
offices for the term that the Company holds a lease on the
property.
20
During the year ended
December 31, 2008, the Company engaged in equity transactions as
follows:
On
February 14, 2008, we finalized and consummated a transaction with a deemed
effective date of February 1, 2008 whereby we issued 9,150,000 shares of stock
for the conversion of related party debts of directors totaling $305,000 and we
issued 300,000 shares of stock to two managers for $10,000. The conversion and
purchase price per share was $0.0333334. The excess of the fair value of the
stock over the debt converted and shares purchased totaled $535,500 and was
recorded as compensation expense. The following individuals or related entities
converted debt and received the following shares: (i) Stephen Sperco, Director
and CEO, received 3,000,000 shares; (ii) SAI Corporation, an entity controlled
by Stephen Sperco, received 1,500,000 shares; (iii) Manfred Sternberg, Director
and Chief Strategy Officer, received 2,400,000 shares; (iv) William Koehler,
Director and President, received 2,100,000 shares; and, (v) Dale Geary,
Director, received, 150,000 shares. The following members of management
purchased the following shares: Charles Leibold, CFO, purchased 150,000 shares;
and, Larry Walker, President of Trilliant Technology Group, Inc., our 100% owned
subsidiary, purchased 150,000 shares.
As a
result of the February 14, 2008 transaction: (1) certain adjustment provisions
in a previous convertible note agreements and warrant agreements issued in
September 2005 and subsequent, were triggered and pursuant to the adjustment
provisions, the exercise price of the previously issued warrants to purchase
1,534,800 shares of our common stock at $0.17 per share was reduced to
$0.0333334 per share; and, (2) certain adjustment provisions in previous warrant
agreements issued in June and July 2007, were triggered and pursuant to the
adjustment provisions, the exercise price of previously issued warrants to
purchase 7,500,000 shares of our common stock at $0.17 per share was reduced to
$0.0333334 per share.
During
2007 the Company entered into a line of credit agreement with SAI Corporation
(“SAIC”), a corporation controlled by our CEO, Stephen Sperco, to borrow up to
$500,000 and on February 28, 2008, the line of credit agreement was amended to
increase the borrowing to $700,000. As condition to and as additional
consideration for SAIC’s agreement to lend the funds to the Company, the Company
(i)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; (ii) reduced the exercise price on 2,200,000 existing
warrants and options issued to SAIC and Stephen Sperco, and their assigns, from
the current per share exercise prices of $0.17, $0.34, $0.75 and $1.00 to
$0.0333334 per share; and (iii) granted 1,000,000 new warrants to SAIC with an
exercise price of $0.0333334 per share that expire February 28, 2013. The fair
value of the 1,000,000 warrants was $109,028 on the date of issuance. Because
the warrants were granted to a related party and the exercise price on the grant
date was below the market price of our stock, we expensed $109,028 in February
2008 related to this transaction.
In
October 2008, we issued 1,150,000 unrestricted shares and 100,000 restricted
shares of common stock to Stephen Sperco, our CEO as a result of his exercise of
stock options on October 17, 2008. The Company satisfied related party accrued
expenses and interest owed to Mr. Sperco amounting to $38,334 and $3,334,
respectively upon the exercise of these stock options.
The
company currently has outstanding: (i) 26,033,565 shares of common stock; (ii)
17,521,550 warrants; (iii) 9,783,597 options; and, (iv) preferred stock that are
convertible into 1,200,000 shares of common stock, resulting in on a fully
diluted basis, 54,538,712 shares of common stock. However, the company currently
has only 50,000,000 shares of common stock authorized by our Articles of
Incorporation. If all of the holders of warrants, options, convertible debt and
preferred stock requested to exercise or convert all of the warrants, options,
convertible debt and preferred stock, we would be unable to accommodate
4,538,712 shares of common stock in those requests. The company could have
liability in the future if an option holder, warrant holder, preferred stock
holder or holder of convertible debt desires to exercise or convert but cannot
because we do not have enough unissued common stock available for issuance.
However, the following individuals or entities have waived their reservation of
common stock underlying options and warrants until such time that the board of
directors deems the waiver is not necessary as follows: Stephen Sperco and
related entity (3,000,000 shares); Manfred Sternberg and related entities
(2,000,000 shares); and William Koehler (2,000,000 shares).
DIRECTOR
INDEPENDENCE.
In June
2007, we increased the size of our Board of Directors to consist of five
Directors. We currently have four members who were elected and hold office until
their successors are elected and qualified. One board position is vacant. The
four members of the Board of Directors are Manfred Sternberg, Stephen Sperco,
William Koehler and Dale Geary. Manfred Sternberg is the Chairman of the Board
of Directors and the Company’s Chief Strategy Officer, Stephen Sperco is the
Company’s Chief Executive Officer and William Koehler is the Company’s
President. There is no family relationship between any of our
directors.
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 with Dale Geary serving as
its sole member.
21
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, 2008 and
2007.
1. AUDIT
FEES.
Our audit
fees for the years ended December 31, 2008 and 2007 were as
follows:
|
2008
|
2007
|
|||||
| $ | 66,382 | $ | 75,425 | |||
2. TAX
FEES.
Our tax
return fees for the years ended December 31, 2008 and 2007 were as
follows:
|
2008
|
2007
|
|||||
| $ | 4,225 | $ | 3,518 | |||
3. ALL
OTHER FEES.
|
2008
|
2007
|
|||||
| $ | 3,440 | $ | 7,175 | |||
For the
year ended December 31, 2008, we were billed for work performed regarding the
review of our S-1 registration statement. For the year ended December 31, 2007,
we were billed for services provided regarding the review of our SB-2
registration statement and review of our response to a comment letter received
from the SEC.
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.
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
|
22
|
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
|
|
|
April
9, 2009
|
By:
/s/ Stephen J. Sperco
|
|
Stephen
J. Sperco
|
|
|
Director
and Chief Executive Officer
|
|
|
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.
|
|
|
April
9, 2009
|
By:
/s/ Stephen J. Sperco
|
|
Stephen
J. Sperco
|
|
|
Director
and Chief Executive Officer
|
|
|
_____________
|
/s/ _________________
|
|
Manfred
Sternberg
|
|
|
Director
and Chief Strategy Officer
|
|
|
April
9, 2009
|
By:
/s/ Charles E. Leibold
|
|
Charles
E. Leibold, CPA
|
|
|
Chief
Financial Officer and Principal Accounting Officer
|
|
|
April
9, 2009
|
By:
/s/ Dale Geary
|
|
Dale
Geary
|
|
|
Director
|
|
|
April
9, 2009
|
By:
/s/ William Koehler
|
|
William
Koehler
|
|
|
Director
and President
|
|
23
|
EXHIBIT
INDEX
|
|
|
Exhibit
|
Exhibit
|
|
Number
|
Description
|
|
31.1
|
Certification
pursuant to Rule 13a-14(1) of CEO
|
|
31.2
|
Certification
pursuant to Rule 13a-14(1) of CFO
|
|
32.1
|
Certification
pursuant to Rule 13a–14(b) of CEO
|
|
32.2
|
Certification
pursuant to Rule 13a–14(b) of
CFO
|