Coyni, Inc. - Quarter Report: 2008 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
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[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30,
2008
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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
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(I.R.S.
Employer
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incorporation
or organization)
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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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voice: 713-686-1100
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fax: 713-682-7402
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Issuer's
telephone number
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Indicate
by check mark whether the registrant :(1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filings requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE
ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding of each the issuer's classes of common stock,
as of the latest practicable date: 24,783,565 common shares outstanding as of October
14,
2008.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions in of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer
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[
]
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Accelerated
filer
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[
]
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Non-accelerated
filer
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[
]
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Small
reporting company
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[X]
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TABLE
OF CONTENTS
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ITEM
1. FINANCIAL STATEMENTS
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F-1
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F-1
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F-2
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F-3
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F-4
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F-5
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I-1
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I-6
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II-1
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II-1
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II-1
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II-1
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II-2
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CERTIFICATIONS
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II-3
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BLUEGATE CORPORATION
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||||||||
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CONSOLIDATED
BALANCE SHEETS
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||||||||
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UNAUDITED
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||||||||
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September
30,
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December
31,
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|||||||
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2008
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2007
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|||||||
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ASSETS
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|||||||
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$ | 22,071 | $ | 43,703 | ||||
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Accounts
receivable, net
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356,663 | 400,023 | ||||||
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Prepaid
expenses and other
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13,782 | 23,917 | ||||||
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Total
current assets
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392,516 | 467,643 | ||||||
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Property
and equipment, net
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40,772 | 63,525 | ||||||
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Intangibles,
net
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- | 6,775 | ||||||
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Total
assets
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$ | 433,288 | $ | 537,943 | ||||
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LIABILITIES AND STOCKHOLDERS’
DEFICIT
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Current
liabilities:
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Accounts
payable
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$ | 286,552 | $ | 289,583 | ||||
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Accounts
payable to related party
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40,071 | 40,089 | ||||||
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Accrued
liabilities
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61,300 | 149,221 | ||||||
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Notes
payable
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12,800 | 12,800 | ||||||
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Notes
payable to related parties
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970,246 | 612,738 | ||||||
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Accrued
liabilities to related parties
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175,524 | 344,598 | ||||||
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Deferred
revenue
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175,900 | 153,579 | ||||||
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Total
current liabilities
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1,722,393 | 1,602,608 | ||||||
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Stockholders’
deficit:
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Undesignated
preferred stock, $.001 par value, 9,999,952 shares authorized, none issued
and outstanding
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- | - | ||||||
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Series
C Convertible Non-Redeemable Preferred stock, $.001 par value,
48 shares authorized, issued and outstanding at September 30, 2008 and
December 31, 2007; $12,500 per share liquidation preference ($600,000
aggregate liquidation preference at September 30, 2008)
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- | - | ||||||
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Common
stock, $.001 par value, 50,000,000 shares authorized, 24,783,565 and
15,163,565 shares issued and outstanding at September 30, 2008 and
December 31, 2007, respectively
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24,784 | 15,164 | ||||||
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Additional
paid-in capital
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26,124,597 | 24,746,778 | ||||||
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Accumulated
deficit
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(27,438,486 | ) | (25,826,607 | ) | ||||
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Total
stockholders’ deficit
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(1,289,105 | ) | (1,064,665 | ) | ||||
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Total
liabilities and stockholders’ deficit
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$ | 433,288 | $ | 537,943 | ||||
See
accompanying notes to consolidated financial statements
F-1
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BLUEGATE CORPORATION
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CONSOLIDATED
STATEMENTS OF OPERATIONS
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UNAUDITED
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Three
Months Ended
September
30,
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Nine
Months Ended
September
30,
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2008
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2007
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2008
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2007
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Service
revenue
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$ | 1,131,719 | $ | 1,280,525 | $ | 3,196,651 | $ | 4,448,847 | ||||||||
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Cost
of services
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751,437 | 938,600 | 2,354,462 | 2,940,899 | ||||||||||||
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Gross
profit
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380,282 | 341,925 | 842,189 | 1,507,948 | ||||||||||||
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Selling,
general and administrative expenses
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154,361 | 144,502 | 566,781 | 1,389,095 | ||||||||||||
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Compensation
expense
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325,028 | 1,437,448 | 1,739,583 | 4,474,604 | ||||||||||||
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Loss
from operations
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(99,107 | ) | (1,240,025 | ) | (1,464,175 | ) | (4,355,751 | ) | ||||||||
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Interest
expense
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(88,276 | ) | (11,267 | ) | (147,704 | ) | (58,781 | ) | ||||||||
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Net
loss
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(187,383 | ) | (1,251,292 | ) | (1,611,879 | ) | (4,414,532 | ) | ||||||||
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Deemed
dividend on preferred stock
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- | - | - | (600,000 | ) | |||||||||||
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Net
loss attributable to common shareholders
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$ | (187,383 | ) | $ | (1,251,292 | ) | $ | (1,611,879 | ) | $ | (5,014,532 | ) | ||||
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Net
loss attributable to common shareholders per common share - basic and
diluted
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$ | (0.01 | ) | $ | (0.09 | ) | $ | (0.07 | ) | $ | (0.37 | ) | ||||
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Basic
and diluted weighted average shares outstanding
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24,783,565 | 14,333,705 | 23,700,755 | 13,567,314 | ||||||||||||
See
accompanying notes to consolidated financial statements
F-2
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BLUEGATE CORPORATION
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CONSOLIDATED
STATEMENT OF STOCKHOLDERS' DEFICIT
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NINE
MONTHS ENDED SEPTEMBER 30, 2008
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UNAUDITED
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ADDITIONAL
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COMMON
STOCK
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PREFERRED
STOCK
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PAID-IN
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ACCUMULATED
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SHARES
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CAPITAL
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SHARES
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CAPITAL
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CAPITAL
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DEFICIT
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TOTAL
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Balance
at December 31, 2007
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15,163,565 | $ | 15,164 | 48 | $ | - | $ | 24,746,778 | $ | (25,826,607 | ) | $ | (1,064,665 | ) | ||||||||||||||
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Issuance
of common stock and warrants for cash
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170,000 | 170 | 84,830 | 85,000 | ||||||||||||||||||||||||
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Issuance
of common stock to related party for:
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-
cash
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111,111 | 111 | 9,889 | 10,000 | ||||||||||||||||||||||||
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-
compensation
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188,889 | 189 | 16,811 | 17,000 | ||||||||||||||||||||||||
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Issuance
of common stock for:
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-
related party debt
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3,388,889 | 3,389 | 301,611 | 305,000 | ||||||||||||||||||||||||
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-
compensation
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5,761,111 | 5,761 | 512,739 | 518,500 | ||||||||||||||||||||||||
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Issuance
of common stock warrants as additional consideration to borrow funds from
related party
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109,028 | 109,028 | ||||||||||||||||||||||||||
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Common
stock options issued for employee services
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342,911 | 342,911 | ||||||||||||||||||||||||||
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Net
loss
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(1,611,879 | ) | (1,611,879 | ) | ||||||||||||||||||||||||
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Balance
at September 30, 2008
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24,783,565 | $ | 24,784 | 48 | $ | - | $ | 26,124,597 | $ | (27,438,486 | ) | $ | (1,289,105 | ) | ||||||||||||||
See
accompanying notes to consolidated financial statements
F-3
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BLUEGATE CORPORATION
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CONSOLIDATED
STATEMENTS OF CASH FLOWS
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UNAUDITED
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Nine
Months Ended
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September
30,
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2008
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2007
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Cash
flows from operating activities:
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Net
loss
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$ | (1,611,879 | ) | $ | (4,414,532 | ) | ||
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Adjustments
to reconcile net loss to net cash used in operating
activities:
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Depreciation
and amortization
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42,398 | 50,331 | ||||||
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Common
stock issued for outside services
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- | 329,525 | ||||||
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Common
stock options issued for employee services
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342,911 | 2,678,827 | ||||||
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Common
stock issued for delay in filing a registration statement
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- | 98,655 | ||||||
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Common
stock warrants issued to borrow funds from related party
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109,028 | - | ||||||
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Contingent
shares issued for Trilliant acquisition accounted for as
compensation
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- | 33,580 | ||||||
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Common
stock issued for employee compensation
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- | 142,500 | ||||||
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Common
stock issued for compensation
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535,500 | - | ||||||
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Common
stock and warrants issued for services
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- | 172,850 | ||||||
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Changes
in operating assets and liabilities:
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Accounts
receivable
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43,360 | (78,449 | ) | |||||
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Prepaid
expenses and other current assets
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10,135 | 34,814 | ||||||
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Accounts
payable and accrued liabilities
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(90,952 | ) | 48,539 | |||||
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Accounts
payable to related party
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(18 | ) | 127,118 | |||||
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Accrued
liabilities to related party
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135,926 | - | ||||||
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Deferred
revenue
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22,321 | (715,831 | ) | |||||
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Net
cash used in operating activities
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(461,270 | ) | (1,492,073 | ) | ||||
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Cash
flows from investing activities:
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Purchase
of property and equipment
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(12,870 | ) | (29,102 | ) | ||||
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Net
cash used in investing activities
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(12,870 | ) | (29,102 | ) | ||||
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Cash
flows from financing activities:
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Proceeds
from related party short term debt
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515,000 | 595,117 | ||||||
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Payments
on related party short term debt
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(157,492 | ) | (555,455 | ) | ||||
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Net
change in bank line of credit
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- | (44,590 | ) | |||||
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Proceeds
from note payable from individual
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- | 315,000 | ||||||
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Repayment
of note payable from individual
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- | (315,000 | ) | |||||
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Common
stock and warrants issued for cash
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95,000 | 700,000 | ||||||
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Preferred
stock and common stock warrants issued for cash
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- | 600,000 | ||||||
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Net
cash provided by financing activities
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452,508 | 1,295,072 | ||||||
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Net
decrease in cash and cash equivalents
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(21,632 | ) | (226,103 | ) | ||||
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Cash
and cash equivalents at beginning of period
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43,703 | 256,121 | ||||||
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Cash
and cash equivalents at end of period
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$ | 22,071 | $ | 30,018 | ||||
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Non
Cash Transactions:
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Deemed
dividend from beneficial conversion feature on preferred
stock
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$ | - | $ | 600,000 | ||||
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Issuance
of common stock for conversion of related party accounts payable, accrued
expenses and accrued interest
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305,000 | - | ||||||
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Issuance
of common stock and warrants for conversion of accounts
payable
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- | 40,002 | ||||||
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Supplemental
information:
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Cash
paid for interest
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106,204 | 58,781 | ||||||
See
accompanying notes to consolidated financial statements
F-4
BLUEGATE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF
PRESENTATION
The
accompanying unaudited interim financial statements of Bluegate Corporation,
have been prepared in accordance with accounting principles generally accepted
in the United States of America and the rules of the Securities and Exchange
Commission, and should be read in conjunction with the audited financial
statements and notes thereto contained in Bluegate's Annual Report filed with
the SEC on Form 10-KSB. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations for the interim
periods presented have been reflected herein. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for the full year. Notes to the financial statements
which substantially duplicate the disclosure contained in the audited financial
statements for fiscal 2007 as reported in the Form 10-KSB have been
omitted.
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.
RECLASSIFICATIONS
We have
reclassified certain prior-year amounts to conform to the current year’s
presentation.
2. GOING CONCERN
CONSIDERATIONS
During
the nine months ended September 30, 2008 and 2007, Bluegate has been unable to
generate cash flows sufficient to support its operations and has been dependent
on debt and equity raised from qualified individual investors. In addition to
negative cash flow from operations, Bluegate has experienced recurring net
losses, and has a negative working capital and shareholders’
deficit.
These
factors raise substantial doubt about the Company’s ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might be necessary if Bluegate is unable to continue as a going
concern.
F-5
3. NOTES
PAYABLE
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Notes
payable at September 30, 2008 and December 31, 2007 are summarized
below:
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9/30/2008
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12/31/2007
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Unsecured notes
payable:
10%
note payable due upon demand
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$
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12,800
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$
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12,800
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Note
payable to related parties:
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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 $5,000 fee on September 11, 2008. See
footnote 5, Subsequent Events.
Note
payable to SAI Corporation due on demand
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$
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900,000
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$
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500,000
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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 September 30, 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 nine months ended
September 30, 2008, we made payments of $42,492 on these related party
notes.
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Notes
payable to William Koehler due on demand
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35,748
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36,569
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Notes
payable to Manfred Sternberg due on demand
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34,498
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76,169
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$
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970,246
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$
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612,738
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4. EQUITY
TRANSACTIONS
During
the nine months ended September 30, 2008, Bluegate completed the following
equity transactions:
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.
F-6
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 3, 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.
As of
September 30, 2008, the company has outstanding: (i) 24,783,565 shares of common
stock; (ii) 17,529,590 warrants; (iii) 11,134,030 options; and, (iv) preferred
stock that are convertible into 1,200,000 shares of common stock, resulting in
on a fully diluted basis, 54,647,185 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 4,647,185 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).
Stock options issued for
services:
(5)
During the nine months ended September 30, 2008, Bluegate expensed $336,726
related to previously issued stock options that vested during the
period.
(6) The
following table summarizes stock options issued to employees during the nine
months ended September 30, 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
|
351
|
||||||||
|
50,000
|
0.25
|
3,743
|
2/1/2011
|
Immediately
|
3,743
|
||||||||
| 73,332 | $ | 6,299 | $ | 6,185 | |||||||||
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.
F-7
5. SUBSEQUENT
EVENTS
As
disclosed in footnote 3, 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. 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.
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 debts
owed to Mr. Sperco amounting to $38,334 and $3,334, respectively upon the
exercise of these stock options.
F-8
FORWARD
LOOKING STATEMENT
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations as of September 30, 2008 and for the nine months then
ended, should be read in conjunction with the audited financial statements and
notes thereto set forth in our annual report on Form 10-KSB for
2007.
Certain
statements contained in this report, including, without limitation, statements
containing the words, "likely", "forecast", "project", "believe", "anticipate",
"expect", and other words of similar meaning, constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Exchange Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance,
or achievements expressed or implied by such forward-looking statements. Given
these uncertainties, readers are cautioned not to place undue reliance on such
factors or to announce publicly the results of any revision of the
forward-looking statements contained or incorporated by reference herein to
reflect future events or developments. In addition to the forward-looking
statements contained in this Form 10-Q, the following forward-looking factors
could cause our future results to differ materially from our forward-looking
statements: competition, capital resources, credit resources, funding,
government compliance and market acceptance of our products and
services.
OUR
BUSINESS
Bluegate
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 and telecommunications
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.
I-1
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.
BLUEGATE
STRATEGY
Healthcare
Our
current short term strategies are to: (1) increase our market penetration and
dominance of the Houston hospital, centralized Healthcare, and physician
markets; (2) increase our market penetration of the Chicago hospital,
centralized Healthcare, and physician markets; (3) commence deployment of
services in other Texas cities; and, (4) 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:
|
-
|
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.
Our web
site is www.bluegate.com.
I-2
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. Services
are billed in advance and, accordingly, revenues are deferred until the period
in which the services are provided.
STOCK-BASED
COMPENSATION
Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123R") 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, we implemented SFAS No. 123R, and
accordingly, Bluegate accounts for compensation cost for stock option plans in
accordance with SFAS No. 123R.
GOING
CONCERN
We remain
dependent on outside sources of funding for continuation of our operations. Our
independent auditors included a going concern qualification in their report
dated March 5, 2008 (included in our annual report on Form 10-KSB for the year
ended December 31, 2007), which raises substantial doubt about our ability to
continue as a going concern.
During
the nine months ended September 30, 2008, and the year ended December 31, 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.
During
the nine months ended September 30, 2008 and 2007, we experienced negative
financial results as follows:
|
Nine Months Ended September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Net
loss attributable to common shareholders
|
$ | (1,611,879 | ) | $ | (5,014,532 | ) | ||
|
Negative
cash flow from operations
|
(461,270 | ) | (1,492,073 | ) | ||||
|
Negative
working capital
|
(1,329,877 | ) | (762,935 | ) | ||||
|
Stockholders'
deficit
|
(1,289,105 | ) | (679,831 | ) | ||||
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.
I-3
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.
|
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED SEPTEMBER 30, 2008 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER
30, 2007
During
the three months ended September 30, 2008 our Revenue was $1,131,719 versus
$1,280,525 for the three month period ended September 30, 2007. This represents
a decrease of $148,806 and is primarily attributable to: (i) a reduction of
$315,000 related to the completion of certain large application development
engagements; (ii) a reduction of $180,000 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 serve for that
system; (iii) a reduction of $45,000 related to the reduction of EMR related
projects and (iv) offset by an increase of $308,000 related to the
implementation project management and consulting services.
Our Cost
of Services for the three months ended September 30, 2008 was $751,437 compared
to $938,600 for the three months ended September 30, 2007. The net decrease in
Cost of Services of $187,163 is primarily attributable to $57,000 related to the
completion of certain large application development engagements throughout 2007
and $75,000 due to the reduction of EMR related projects.
Our Gross
Profit for the three months ended September 30, 2008 was $380,282 compared to
$341,925 for the three months ended September 30, 2007. Our Gross Profit as a
percentage of sales increased to 34% for the three months ended September 30,
2008 from 27% for the three months ended September 30, 2007 primarily as a
result of the changes in the Revenue and Cost of Services as described
above.
We
incurred Selling, General and Administrative Expenses (SG&A) of $154,361 for
the three months ended September 30, 2008 compared to $144,502 for the three
months ended September 30, 2007. The increase in SG&A of $9,859
is insignificant.
We
incurred Compensation Expense of $325,028 for the three months ended September
30, 2008 compared to $1,437,448 for the three months ended September 30, 2007.
The decrease in Compensation Expense of $1,112,420 is principally comprised of
the following:
|
$
|
(823,000)
|
decrease
related to options issued for employee services
|
|
(400,000)
|
decrease
related to the reduction in personnel
|
|
We
incurred a Net Loss of $187,383 for the three months ended September 30, 2008
compared to $1,251,292 for the three months ended September 30, 2007. The
decrease of $1,063,909 in the Net Loss is due primarily to the decrease in
compensation expense as detailed above, as well as the changes in the Revenue
and Cost of Services as described above.
NINE
MONTHS ENDED SEPTEMBER 30, 2008 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2007
During
the nine months ended September 30, 2008 our Revenue was $3,196,651 versus
$4,448,847 for the nine month period ended September 30, 2007. This represents a
decrease of $1,252,196 and is primarily attributable to: (i) a reduction of
$1,019,000 related to the completion of certain large application development
engagements; (ii) a reduction of $541,000 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 serve for that
system; (iii) a reduction of $478,000 related to the reduction of EMR related
projects and (iv) offset by an increase of $663,000 related to the
implementation project management and consulting services.
I-4
Our Cost
of Services for the nine months ended September 30, 2008 was $2,354,462 compared
to $2,940,899 for the nine months ended September 30, 2007. The net decrease in
Cost of Services of $586,437 is primarily attributable to $325,000 related
to the completion of certain large application development engagements
throughout 2007 and $320,000 due to the reduction of EMR related
projects.
Our Gross
Profit for the nine months ended September 30, 2008 was $842,189 compared to
$1,507,948 for the nine months ended September 30, 2007. Our Gross Profit as a
percentage of sales decreased to 26% for the nine months ended September 30,
2008 from 34% for the nine months ended September 30, 2007 primarily as a result
of the changes in the Revenue and Cost of Services as described
above.
We
incurred Selling, General and Administrative Expenses (SG&A) of $566,781 for
the nine months ended September 30, 2008 compared to $1,389,095 for the nine
months ended September 30, 2007. The decrease in SG&A of $822,314 is due
primarily to a decrease of $600,000 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.
We
incurred Compensation Expense of $1,739,583 for the nine months ended September
30, 2008 compared to $4,474,604 for the nine months ended September 30, 2007.
The decrease in Compensation Expense of $2,735,021 is principally comprised of
the following:
| $ | (2,336,000 | ) |
decrease
related to options issued for employee services
|
| (900,000 | ) |
decrease
related to the reduction in personnel
|
|
| (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
|
We
incurred a Net Loss of $1,611,879 for the nine months ended September 30, 2008
compared to a Net Loss of $4,414,532 for the nine months ended September 30,
2007. The decrease of $2,802,653 in the Net Loss is due primarily to the
decrease in compensation expense as detailed above, as well as the changes in
the Revenue and Cost of Services as described above.
There was
no deemed dividend on preferred shares and common stock warrants issued for the
nine months ended September 30, 2008 as compared to $600,000 for the nine months
ended September 30, 2007.
The net
loss attributable to common shareholders was $1,611,879 for the nine months
ended September 30, 2008 compared to $5,014,532 for the nine months ended
September 30, 2007 due to the items described above.
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
September 30, 2008, we had approximately 500 Medical Grade Network®
customers which we forecast will increase moderately for the remainder of
the year. During the second half of 2008, we continued greater focus to more
complex projects and applications, which should result 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 nine months ended September 30, 2008, we
experienced an increase in revenue from this line of business and anticipate a
continuing relationship with this Healthcare system throughout 2008. 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 nine
months ended September 30, 2008. We are currently pursuing multiple
opportunities to expand this practice area.
I-5
LIQUIDITY
AND CAPITAL RESOURCES
Operations
for the nine months ended September 30, 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
September 30, 2008, our cash and cash equivalents were $22,071; total current
assets were $392,516, total current liabilities were $1,722,393 and total
stockholders’ deficit was $1,284,255. 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 September 30, 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 $175,524 on the balance
sheet.
We intend
to use debt to cover the anticipated negative cash flow into the fourth quarter
of 2008, 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.
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
|
ITEM 4. CONTROLS AND PROCEDURES
|
|
(a)
Evaluation of disclosure controls and
procedures.
|
The
Company’s Chief Executive Officer and Principal Accounting Officer participated
in an evaluation by management of the effectiveness of the Company’s disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of September 30, 2008. Based on their participation in
that evaluation, the Company’s Chief Executive Officer and Principal Accounting
Officer concluded that the Company’s disclosure controls and procedures were
effective as of September 30, 2008 to ensure that required information is
disclosed on a timely basis in its reports filed or furnished under the Exchange
Act.
(b)
Changes in internal control over financial reporting.
There was
no change in the Company’s internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the quarter
ended September 30, 2008 that has materially affected, or is reasonably likely
to materially affect, the Company’s internal control over financial
reporting.
I-6
PART II. OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
NONE.
We issued
unregistered securities in the following transaction.
In
October 2008, we issued 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 a related party debt owed to Mr. Sperco amounting to
$3,334 upon the exercise of these stock options. 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. This transaction did not involve a public offering. The investor was
knowledgeable about our operations and financial condition. The investor was an
accredited investor as defined in Regulation D and had knowledge and experience
in financial and business matters that allowed them to evaluate the merits and
risk of receipt of these securities.
ITEM
5. OTHER
INFORMATION
NONE
ITEM
6. EXHIBITS
|
Exhibit
|
|
|
Number
|
Name
|
|
31.1
|
CERTIFICATION
REQUIRED BY RULE 13a - 14(a) OR RULE 15d - 14(a) OF THE SECURITIES
EXCHANGE ACT
OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
OF 2002 OF THE CHIEF EXECUTIVE OFFICER
|
|
31.2
|
CERTIFICATION
REQUIRED BY RULE 13a - 14(a) OR RULE 15d - 14(a) OF THE SECURITIES
EXCHANGE ACT
OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
OF 2002 OF THE CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING
OFFICER
|
|
32.1
|
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C.
SECTION 1350), OF THE CHIEF EXECUTIVE OFFICER
|
|
32.2
|
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C.
SECTION 1350), OF THE CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING
OFFICER
|
II-1
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
|||
|
Bluegate
Corporation
|
|||
|
Date:
|
October
23, 2008
|
/s/
|
Stephen
J. Sperco
|
|
Stephen
J. Sperco,
|
|||
|
Chief
Executive Officer
|
|||
|
Bluegate
Corporation
|
|||
|
Date:
|
October
23, 2008
|
/s/
|
Charles
E. Leibold
|
|
Charles
E. Leibold,
|
|||
|
Chief
Financial Officer and Principal Accounting Officer
|
|||
II-2