Coyni, Inc. - Quarter Report: 2008 June (Form 10-Q)

bgat10q063008.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2008

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

Commission file number: 000-22711

BLUEGATE CORPORATION

(Exact name of registrant as specified in its charter)

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

701 North Post Oak Road, Suite 600, Houston,Texas	77024
(Address of principal executive offices)	(Zip Code)

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

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

Indicate by check mark whether the Registrant 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 July 28, 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):

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

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Unaudited Consolidated Financial Statements	F-1

Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007	F-1

Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007	F-2

Consolidated Statement of Stockholders’ Deficit for the six months ended June 30, 2008	F-3

Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007	F-4

Notes to Consolidated Financial Statements	F-5

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

ITEM 4. CONTROLS AND PROCEDURES	I-6

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS	II-1

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

ITEM 5. OTHER INFORMATION	II-1

ITEM 6. EXHIBITS	II-1

SIGNATURES	II-2

CERTIFICATIONS	II-3

Table of Contents

ITEM 1. FINANCIAL STATEMENTS

BLUEGATE CORPORATION
CONSOLIDATED BALANCE SHEETS
UNAUDITED


	June 30,			December 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	74,672		$	43,703
Accounts receivable, net		215,910			400,023
Prepaid expenses and other		17,044			23,917
Total current assets		307,626			467,643
Property and equipment, net		51,962			63,525
Intangibles, net		1,994			6,775
Total assets	$	361,582		$	537,943

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	164,780		$	289,583
Accounts payable to related party		103,996			40,089
Accrued liabilities		89,214			149,221
Notes payable		12,800			12,800
Notes payable to related parties		770,246			612,738
Accrued liabilities to related parties		154,310			344,598
Deferred revenue		255,525			153,579
Total current liabilities		1,550,871			1,602,608


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 June 30, 2008 and December 31, 2007; $12,500 per share liquidation preference ($600,000 aggregate liquidation preference at June 30, 2008)		-			-
Common stock, $.001 par value, 50,000,000 shares authorized, 24,783,565 and 15,163,565 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively		24,784			15,164
Additional paid-in capital		26,037,030			24,746,778
Accumulated deficit		(27,251,103	)		(25,826,607	)
Total stockholders’ deficit		(1,189,289	)		(1,064,665	)
Total liabilities and stockholders’ deficit	$	361,582		$	537,943

See accompanying notes to consolidated financial statements

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BLUEGATE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Service revenue	$	1,022,405		$	1,807,255		$	2,064,932		$	3,168,322
Cost of services		845,281			1,232,302			1,603,025			2,193,130
Gross profit		177,124			574,953			461,907			975,192
Selling, general and administrative expenses		174,328			413,619			412,420			1,263,217
Compensation expense		308,364			1,240,031			1,414,555			2,827,701
Loss from operations		(305,568	)		(1,078,697	)		(1,365,068	)		(3,115,726	)
Interest expense		(32,108	)		(8,337	)		(59,428	)		(47,514	)
Net loss		(337,676	)		(1,087,034	)		(1,424,496	)		(3,163,240	)
Deemed dividend on preferred stock		-			(600,000	)		-			(600,000	)
Net loss attributable to common shareholders	$	(337,676	)	$	(1,687,034	)	$	(1,424,496	)	$	(3,763,240	)

Net loss attributable to common shareholders per common share - basic and diluted	$	(0.01	)	$	(0.12	)	$	(0.06	)	$	(0.29	)

Basic and diluted weighted average shares outstanding		24,783,565			13,650,035			23,153,400			13,181,331

See accompanying notes to consolidated financial statements

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BLUEGATE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
SIX MONTHS ENDED JUNE 30, 2008
UNAUDITED
									ADDITIONAL
	COMMON STOCK				PREFERRED STOCK				PAID-IN		ACCUMULATED
	SHARES		CAPITAL		SHARES		CAPITAL		CAPITAL		DEFICIT			TOTAL

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										255,344					255,344
Net loss												(1,424,496	)		(1,424,496	)
Balance at June 30, 2008		24,783,565	$	24,784		48	$	-	$	26,037,030	$	(27,251,103	)	$	(1,189,289	)

See accompanying notes to consolidated financial statements

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BLUEGATE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
	Six Months Ended
	June 30,
	2008			2007
Cash flows from operating activities:
Net loss	$	(1,424,496	)	$	(3,163,240	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		29,214			32,019
Common stock issued for outside services		-			329,525
Common stock options issued for employee services		255,344			1,767,530
Common stock issued for delay in filing a registration statement		-			29,250
Common stock warrants issued to borrow funds from related party		109,028			-
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		184,113			(179,034	)
Prepaid expenses and other current assets		6,873			30,045
Accounts payable and accrued liabilities		(184,810	)		213,627
Accounts payable to related party		63,907			71,525
Accrued liabilities to related party		114,712			-
Deferred revenue		101,946			(520,055	)

Net cash used in operating activities		(208,669	)		(1,073,458	)

Cash flows from investing activities:
Purchase of property and equipment		(12,870	)		(29,101	)

Net cash used in investing activities		(12,870	)		(29,101	)

Cash flows from financing activities:
Proceeds from related party short term debt		200,000			428,934
Payments on related party short term debt		(42,492	)		(378,250	)
Net change in bank line of credit		-			132
Proceeds from note payable from individual		-			315,000
Common stock and warrants issued for cash		95,000			400,000
Preferred stock and common stock warrants issued for cash		-			100,000

Net cash provided by financing activities		252,508			865,816

Net increase (decrease) in cash and cash equivalents		30,969			(236,743	)

Cash and cash equivalents at beginning of period		43,703			256,121
Cash and cash equivalents at end of period	$	74,672		$	19,378

Non Cash Transactions:
Deemed dividend from beneficial conversion feature on preferred stock	$	-		$	600,000
Issuance of common stock for conversion of related party accounts payable, accrued expenses and accrued interest		305,000			-
Subscription receivable		-			500,000
Issuance of common stock and warrants for conversion of accounts payable		-			15,000
Supplemental information:
Cash paid for interest		59,478			47,514

See accompanying notes to consolidated financial statements

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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 six months ended June 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.

3. NOTES PAYABLE

Notes payable at June 30, 2008 and December 31, 2007 are summarized below:		6/30/2008		12/31/2007

Unsecured notes payable: 10% note payable due on demand	$	12,800	$	12,800
Note payable to related parties:
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. See footnote 5, Subsequent Event. Note payable to SAI Corporation due on demand	$	700,000	$	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 June 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 six months ended June 30, 2008, we made payments of $42,492 on these related party notes.
Notes payable to William Koehler due on demand		35,748		36,569
Notes payable to Manfred Sternberg due on demand		34,498		76,169

	$	770,246	$	612,738

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4. EQUITY TRANSACTIONS

During the six months ended June 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.

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 June 30, 2008, the company has outstanding: (i) 24,783,565 shares of common stock; (ii) 17,604,590 warrants; (iii) 11,142,363 options; and, (iv) preferred stock that are convertible into 1,200,000 shares of common stock, resulting in on a fully diluted basis, 54,730,518 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 4,730,518 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).

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Stock options issued for services:

(5) During the six months ended June 30, 2008, Bluegate expensed $249,276 related to previously issued stock options that vested during the period.

(6) The following table summarizes stock options issued to employees during the six months ended June 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		234
50,000		0.25		3,743	2/1/2011	Immediately		3,743

73,332			$ 6,299				$ 6,068

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.

5. SUBSEQUENT EVENT

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, in anticipation of the Company’s short term working capital requirements, the line of credit agreement with SAIC was amended to increase the borrowing to $900,000. Upon Bluegate borrowing the additional $200,000, the Company has agreed to pay to: (1) SAIC a $40,000 origination fee and (2) Sperco Technology Group all past due amounts.

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

FORWARD LOOKING STATEMENT

This Management's Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2008 and for the six 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.

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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.

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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 six months ended June 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 six months ended June 30, 2008 and 2007, we experienced negative financial results as follows:

		Six Months Ended
		June 30,
		2008		2007

Net loss attributable to common shareholders	$	(1,424,496)	$	(3,763,240)
Negative cash flow from operations		(208,669)		(1,073,458)
Negative working capital		(1,243,245)		(1,369,237)
Stockholders' deficit		(1,189,289)		(1,267,823)

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.

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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 JUNE 30, 2008 AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2007

During the three months ended June 30, 2008 our Revenue was $1,022,405 versus $1,807,255 for the three month period ended June 30, 2007. This represents a decrease of $784,850 and is primarily attributable to: (i) a reduction of $380,000 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 $330,000 related to the reduction of EMR related projects and (iv) offset by an increase of $150,000 related to the implementation project management and consulting services contract awarded to us by a healthcare system in Houston, Texas.

Our Cost of Services for the three months ended June 30, 2008 was $845,281 compared to $1,232,302 for the three months ended June 30, 2007. The net decrease in Cost of Services of $387,021 is primarily attributable to $160,000 related to the completion of certain large application development engagements throughout 2007 and $165,000 due to the reduction of EMR related projects.

Our Gross Profit for the three months ended June 30, 2008 was $177,124 compared to $574,953 for the three months ended June 30, 2007. Our Gross Profit as a percentage of sales decreased to 17% for the three months ended June 30, 2008 from 32% for the three months ended June 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 $174,328 for the three months ended June 30, 2008 compared to $413,619 for the three months ended June 30, 2007. The decrease in SG&A of $239,291 is due primarily to a decrease of $60,000 related to business consulting and investment banking fees incurred during the second quarter of 2007 compared to -0- during the second quarter of 2008 as well as the effects of additional cost control measures instituted during the first quarter of 2008.

We incurred Compensation Expense of $308,364 for the three months ended June 30, 2008 compared to $1,240,031 for the three months ended June 30, 2007. The decrease in Compensation Expense of $931,667 is principally comprised of the following:

$	(648,000)	decrease related to options issued for employee services
	(240,000)	decrease related to the reduction in personnel

We incurred a Net Loss of $337,676 for the three months ended June 30, 2008 compared to a Net Loss of $1,087,034 for the three months ended June 30, 2007. The decrease of $749,358 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 three months ended June 30, 2008 as compared to $600,000 for the three months ended June 30, 2007.

The net loss attributable to common shareholders was $337,676 for the three months ended June 30, 2008 compared to $1,687,034 for the three months ended June 30, 2007 due to the items described above.

SIX MONTHS ENDED JUNE 30, 2008 AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2007

During the six months ended June 30, 2008 our Revenue was $2,064,932 versus $3,168,322 for the six month period ended June 30, 2007. This represents a decrease of $1,103,390 and is primarily attributable to: (i) a reduction of $700,000 related to the completion of certain large application development engagements; (ii) a reduction of $360,000 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 $435,000 related to the reduction of EMR related projects and (iv) offset by an increase of $450,000 related to the implementation project management and consulting services contract awarded to us by a healthcare system in Houston, Texas.

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Our Cost of Services for the six months ended June 30, 2008 was $1,603,025 compared to $2,193,130 for the six months ended June 30, 2007. The net decrease in Cost of Services of $590,105 is primarily attributable to $270,000 related to the completion of certain large application development engagements throughout 2007 and $250,000 due to the reduction of EMR related projects.

Our Gross Profit for the six months ended June 30, 2008 was $461,907 compared to $975,192 for the six months ended June 30, 2007. Our Gross Profit as a percentage of sales decreased to 22% for the six months ended June 30, 2008 from 31% for the six months ended June 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 $412,420 for the six months ended June 30, 2008 compared to $1,263,217 for the six months ended June 30, 2007. The decrease in SG&A of $850,797 is due primarily to a decrease of $625,000 related to business consulting and investment banking fees incurred during the six months of 2007 compared to -0- during the six months of 2008, as well as the effects of additional cost control measures instituted during the first quarter of 2008.

We incurred Compensation Expense of $1,414,555 for the six months ended June 30, 2008 compared to $2,827,701 for the six months ended June 30, 2007. The decrease in Compensation Expense of $1,413,146 is principally comprised of the following:

$	(1,512,000	)	decrease related to options issued for employee services
	(500,000	)	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 $1,424,496 for the six months ended June 30, 2008 compared to a Net Loss of $3,163,240 for the six months ended June 30, 2007. The decrease of $1,738,744 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 six months ended June 30, 2008 as compared to $600,000 for the six months ended June 30, 2007.

The net loss attributable to common shareholders was $1,424,496 for the six months ended June 30, 2008 compared to $3,763,240 for the six months ended June 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 June 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, greater focus will be given 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 through the second quarter of 2008, which was extended into the third quarter of 2008. For the six months ended June 30, 2008, we experienced an increase in revenue from this line of business and anticipate a continuing relationship with this Healthcare system throughout 2008. We have provided several proposals to other Healthcare entities for similar services. In July 2008 we entered into a one year contract with a healthcare system in Dallas, Texas to provide similar services. We will continue to put particular focus on the delivery of Implementation Project Management services to the growing Healthcare industry. There has been much activity in the IT Infrastructure segment of our practice and the expectation is for the Revenue in our Trilliant Technology Group to grow through the remainder of 2008.

Application Development

Throughout 2007 we completed certain application development engagements which resulted in a decrease in both revenue and corresponding contractor expenses during the six months ended June 30, 2008. We are currently pursuing multiple opportunities to expand this practice area.

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LIQUIDITY AND CAPITAL RESOURCES

Operations for the six months ended June 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 June 30, 2008, our cash and cash equivalents were $74,672; total current assets were $307,626, total current liabilities were $1,550,871 and total stockholders’ deficit was $1,189,289. 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 June 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 $154,310 on the balance sheet.

We intend to use debt to cover the anticipated negative cash flow into the third 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 and 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 June 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 June 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 June 30, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

NONE.

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

NONE.

ITEM 5. OTHER INFORMATION

NONE

ITEM 6. EXHIBITS

Exhibit
Number	Name

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

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

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

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

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SIGNATURES

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

Bluegate Corporation

Date:	July 28, 2008	/s/	Stephen J. Sperco

			Stephen J. Sperco,
			Chief Executive Officer


Bluegate Corporation

Date:	July 28, 2008	/s/	Charles E. Leibold

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

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