10QSB 1 form10qsb.htm BLUEGATE 10-QSB 6-30-2006 Bluegate 10-QSB 6-30-2006
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-QSB


x   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-22711

BLUEGATE CORPORATION
(Exact name of registrant as specified in its charter)

 
 
Nevada
  
76-0640970
  
 
(State or Other Jurisdiction of Incorporation or Organization)
  
(I.R.S. Employer Identification No.)
  


 
701 North Post Oak, Road, Suite 630, Houston, Texas
 
77024
  
 
(Address of Principal Executive Office)
 
    

(713) 686-1100
(Issuer’s Telephone Number, Including Area Code)


Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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

State the number of shares outstanding of each the issuer's classes of common equity, as of the latest practicable date: 8,743,940 common shares outstanding as of August 1, 2006.

Transitional Small Business Disclosure Format (Check One):   Yes   ¨   No    x
 
 

BLUEGATE CORPORATION
TABLE OF CONTENTS
__________

PART I. FINANCIAL INFORMATION
 

ITEM 1.
FINANCIAL STATEMENTS
  
     
 
F-1
     
 
F-1
     
 
F-2
     
 
F-3
     
 
F-5
     
ITEM 2.
I-1
     
ITEM 3.
I-6
     
 
PART II. OTHER INFORMATION
  
     
ITEM 1.
II-1
     
ITEM 2.
II-1
     
ITEM 5.
II-3
     
ITEM 6.
II-3
     
 
II-4
     
 
CERTIFICATIONS
II-5


ITEM 1.
FINANCIAL STATEMENTS

BLUEGATE CORPORATION
  
CONSOLIDATED BALANCE SHEETS
  
UNAUDITED
  
           
   
June 30,
  
December 31,
  
   
2006
  
2005
  
ASSETS
      
   
  
Current assets:
          
Cash and cash equivalents
  
$
21,586
  
$
27,791
  
Accounts receivable, net
   
306,266
   
365,131
 
Prepaid expenses and other
    
17,850
   
46,809
 
Total current assets
    
345,702
   
439,731
 
Property and equipment, net
   
70,219
   
106,157
 
Goodwill
    
83,202
   
83,202
 
Intangibles, net
    
27,868
   
25,912
 
               
Total assets
  
$
526,991
  
$
655,002
  
               
LIABILITIES AND STOCKHOLDERS’ DEFICIT
              
Current liabilities:
              
Convertible notes payable, net of unamortized discount of -0- at June 30, 2006 and $242,316 at December 31, 2005
  
$
500,000
  
$
257,684
  
Notes payable
    
12,800
   
12,800
 
Notes payable to related parties
    
482,840
   
25,000
 
Bank line of credit payable
    
45,507
   
-
 
Accounts payable
    
483,792
   
491,337
 
Accrued liabilities
    
137,243
   
174,674
 
Deferred revenue
    
388,594
   
404,553
 
Total current liabilities
    
2,050,776
   
1,366,048
 
               
Commitments and contingencies
    
-
   
-
 
               
Stockholders’ deficit:
             
               
Series A Convertible Non-Redeemable Preferred stock, $.001 par value, 20,000,000 shares authorized, 0 and 110.242 issued and outstanding at June 30, 2006 and December 31, 2005, respectively, $5,000 per share liquidation preference ($551,210 aggregate liquidation preference at December 31, 2005)
    
-
   
-
 
               
Series B Convertible Non-Redeemable Preferred stock, $.001 par value, 10,000,000 shares authorized; no shares issued and outstanding
    
-
   
-
 
               
Common stock, $.001 par value, 50,000,000 shares authorized, 8,623,930 and 6,332,376 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively
    
8,624
   
6,332
 
Additional paid-in capital
    
12,362,930
   
10,841,189
 
               
Subscription receivable
    
-
   
(15,007
)
               
Deferred compensation
    
-
   
(34,592
)
               
Accumulated deficit
    
(13,895,339
)
  
(11,508,968
)
                   
Total stockholders’ deficit
    
(1,523,785
)
  
(711,046
)
Total liabilities and stockholders’ deficit
 
$
526,991
  
$
655,002
  
 

BLUEGATE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
UNAUDITED

   
Three Months Ended
June 30, 
  
Six Months Ended
June 30, 
  
   
2006
  
2005
  
2006
  
2005
  
                   
Service revenue
  
$
814,846
  
$
409,936
  
$
1,750,495
  
$
875,767
  
 
                          
Cost of services
    
344,151
   
233,720
   
766,891
   
421,731
 
Gross margin
    
470,695
   
176,216
   
983,604
   
454,036
 
                           
Selling, general and administrative expenses
    
1,630,038
   
898,329
   
2,896,311
   
2,051,726
 
                           
Loss from operations
    
(1,159,343
)
  
(722,113
)
  
(1,912,707
)
  
(1,597,690
)
                           
Loss on conversion of notes payable to common stock
    
-
   
-
   
-
   
892,882
  
Interest expense
    
217,863
   
39,393
    
481,248
   
70,372
  
Other income, net
    
(3,369
)
  
(1,886
)
  
(7,582
)
  
(4,884
)
                           
Net loss
  
$
(1,373,837
)
$
(759,620
)
$
(2,386,373
)
$
(2,556,060
)
                           
Basic and diluted net loss per common share:
  
$
(0.17
)
$
(0.17
)
$
(0.32
)
$
(0.69
)
 
                          
Weighted average shares outstanding
    
8,226,115
   
4,572,590
   
7,561,039
   
3,710,123
 
 
 
BLUEGATE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
UNAUDITED

   
June 30,
  
June 30,
 
   
2006
  
2005
  
Cash flows from operating activities:
          
Net loss
  
$
(2,386,373
)
$
(2,556,060
)
Adjustments to reconcile net loss to net cash used in operating activities:
              
Accretion of debt discount
    
242,316
   
52,734
 
Depreciation and amortization
    
42,959
   
42,512
 
Bad debt expense
    
-
   
103,710
 
Common stock and warrants issued for registration rights extension
    
350,743
    
-
  
Common stock issued for services
    
84,220
   
491,312
 
Common stock options and warrants issued for services
    
570,927
   
275,186
 
Common stock warrants issued for extension of repayment
    
177,735
   
-
 
Impairment of subscription receivable
    
15,007
   
-
 
Loss on debt conversion
    
-
   
892,882
 
Changes in operating assets and liabilities:
              
Accounts receivable
    
58,865
   
(19,128
)
Inventory
    
-
   
(46,231
)
Prepaid and other current assets
    
(3,041
)
  
(8,988
)
Accounts payable and accrued expenses
    
(21,029
)
  
241,211
 
Deferred revenue
    
(15,959
)
  
(2,185
)
               
Net cash used in operating activities
    
(883,630
)
  
(533,045
)
               
Cash flows from investing activities:
              
               
Payments received on note receivable
    
32,000
   
20,768
 
Purchase of shares for long term investment
    
-
   
(30,000
)
Purchase of property and equipment
    
(8,978
)
  
(29,570
)
               
Net cash provided by (used in) investing activities
    
23,022
   
(38,802
)
               
Cash flows from financing activities:
              
Change in bank overdraft
    
35,177
   
(9,620
)
Proceeds from notes payable
    
730,330
   
110,000
 
Repayment of notes payable
    
(331,611
)
  
-
 
Net change in bank line of credit
    
45,507
   
-
 
Advances on purchases of equity securities
    
-
   
275,000
 
Issuance of common stock for cash
    
375,000
   
362,515
 
Net cash provided by financing activities
    
854,403
   
737,895
 
Net increase (decrease) in cash and cash equivalents
    
(6,205
)
  
166,048
 
Cash and cash equivalents at beginning of period
    
27,791
   
3,708
 
Cash and cash equivalents at end of period
  
$
21,586
  
$
169,756
  
 
 
BLUEGATE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
UNAUDITED

   
Six Months Ended
  
   
June 30,
  
June 30,
 
   
2006
  
2005
  
Non Cash Transactions:
          
           
Conversion of preferred stock to common stock
  
$
1,419
  
$
-
  
Issuance of common stock and common stock equivalents for conversion of related party notes payable
    
-
   
355,018
 
Issuance of common stock and common stock equivalents for conversion of accrued interest
    
-
   
56,573
 
Issuance of common stock and common stock equivalents for conversion of related party accounts payable
    
-
   
154,297
 
Nationwide settlement:
              
Accounts receivable
    
-
   
122,429
 
Accounts payable
    
-
   
151,949
 
Notes receivable
    
-
   
128,230
 
 
 
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 2005 as reported in the Form 10-KSB have been omitted.

STOCK-BASED COMPENSATION

Financial Accounting Standard No. 123R, "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.

During fiscal year 2005 Bluegate applied APB No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized in Bluegate’s financial statements for stock options under any of the stock plans which on the date of grant the exercise price per share was equal to or exceeded the fair value per share. However, compensation cost has been recognized for warrants and options granted to non-employees for services provided. The following table illustrates the effect on net loss and net loss per share if Bluegate had applied the fair value provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation during 2005.

   
Three Months Ended
  
Six Months Ended
  
 
  
June 30, 2005
  
June 30, 2005
  
Net loss attributable to common shareholders as reported
  
$
(759,620
)
$
(2,556,060
)
               
Stock based employee compensation included in reported net loss
    
53,707
   
160,424
 
               
Total stock-based employee compensation expense determined under fair value based method for all options
    
(450,818
)
  
(1,012,473
)
               
Pro forma net loss
  
$
(1,156,731
)
$
(3,408,109
)
 
              
Basic and diluted loss per share
              
As reported:
              
               
Net loss
  
$
(0.17
)
$
(0.69
)
               
Pro forma:
              
               
Net loss
    
(0.25
)
  
(0.92
)
               
Weighted average shares outstanding:
    
4,572,590
   
3,710,123
 
 

RECLASSIFICATIONS

We have reclassified certain June 30, 2005 amounts to conform to the current year’s presentation.

2.
GOING CONCERN CONSIDERATIONS

During  the  six months ended  June 30, 2006 and 2005, 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 shareholder’s deficit.

These  factors  raise  substantial  doubt  about  Bluegate'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.
ACQUISITION OF TRILLIANT CORPORATION ASSETS

On September 15, 2005, Bluegate acquired substantially all of the assets and assumed certain ongoing contractual obligations of Trilliant Corporation, a company that provides assessment, design, vendor selection, procurement and project management for large technology initiatives, particularly in the healthcare arena. The acquisition strengthened Bluegate as a competitor in the technology management industry. The purchase price consisted of $161,033 cash and 258,302 shares of Bluegate's common stock valued at $180,811. The asset sale and purchase agreement provides for additional consideration up to 827,160 common shares depending on the acquired business' revenue over the next two years and royalty payments based on sales over the next two years of certain software acquired. The estimated fair values of the assets acquired at September 15, 2005 are as follows:

Property and equipment
  
$
17,270
  
Computer software
    
41,893
  
Customer list
    
28,702
  
Accounts receivable
    
170,777
  
Goodwill
    
83,202
  
         
Total
  
$
341,844
  

Additional consideration, if any, will be allocated to goodwill upon payment. Goodwill will be tested periodically for impairment as required by FASB Statement No. 142, "Goodwill and other Intangible Assets."

The results of this acquisition are included in the consolidated financial statements from the date of acquisition. Unaudited proforma operating results for Bluegate, assuming the acquisition occurred on January 1, 2005, are as follows:


   
Six Months Ended June 30,
  
   
2006
  
2005
  
Service revenue
  
$
1,750,495
  
$
1,390,149
  
               
Net loss
    
(2,386,373
)
  
(2,609,863
)
               
Net loss per common share
    
(0.32
)
  
(0.70
)

The proforma results are not necessarily indicative of what would have occurred if the acquisition had been in effect for the periods presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might be achieved by combining the operations.
 

4.
NOTES PAYABLE

During the quarter ended June 30, 2006, we borrowed $45,507 on a bank line of credit with an interest rate of 10.75%. The line of credit is due on demand and unsecured.

During the six months ended June 30, 2006, we borrowed $730,330 from related parties with interest rates ranging from 7.35% to 29.99% on their underlying credit cards. The notes are due on demand and unsecured. During the same period, we made payments of $331,611 on related party notes.
 

5.
COMMON STOCK, OPTIONS AND WARRANTS

During the six months ended June 30, 2006, Bluegate completed the following equity transactions:

(a) In January 2006, we issued an option to purchase 546,000 shares of our common stock at an exercise price of $0.75 per share to an employee. The option had a market value of $332,235 on the date of grant, vests through December 2008 and expires in January 2011. We expensed $41,529 during the quarters ended March 31, 2006 and June 30, 2006 related to this option.

(b) During February 2006, we issued 200,000 shares of common stock to a consultant for services rendered. The common stock had a market value of $104,000 on the date of issuance. We expensed $104,000 during the quarter ended March 31, 2006.

(c) In February 2006, we issued 50,000 shares of common stock for $50,000 proceeds from the exercise of a warrant.

(d) In March 2006, we issued 1,418,660 shares of our common stock for conversion of 110.242 shares of our Series A Convertible Non-Redeemable Preferred stock. As a result of this transaction, there are no remaining shares of our Series A Convertible Non-Redeemable Preferred stock outstanding.

(e) In February and March 2006, we issued 273,333 shares of common stock, warrants for 273,333 shares of our common stock at an exercise price of $0.75 per share and warrants for 136,667 shares of our common stock at an exercise price of $1.00 per share, for $205,000 in connection with a private placement of our securities. Bluegate evaluated the freestanding warrants to determine if they were within the scope of SFAS 133 and EITF 00-19. Part of this evaluation considered the ‘Liquidated Damages’ provision in the ‘Registration Rights Agreement’ that covers both the warrants and the common stock. Bluegate concluded the freestanding warrants should not be classified as a liability and therefore are not subject to SFAS 133.

(f) On March 31, 2006 certain adjustment provisions contained in Bluegate's convertible notes payable warrants issued in September 2005 were triggered. Pursuant to the adjustment provisions, the exercise price of the previously issued warrants to purchase 666,667 shares of our common stock at $1.00 per share was reduced to $0.75 per share (See item p below).

(g) In March 2006 a consultant returned, and Bluegate cancelled, 133,000 shares of common stock that was previously issued to the consultant as compensation. The consultant agreed to forfeit an option to purchase 41,250 shares of our common stock at $1.00 per share. The fair value of the stock cancelled was $87,780. Bluegate reversed $26,290 of compensation expense related to the option which was previously recorded.

(h) In April 2006 we exercised our option to extend the due date of the aforementioned convertible notes (see item f above) payable by 90 days to July 31, 2006. As a result, we issued warrants to purchase 349,866 shares of our common stock at $0.75 per share to the note holders, as required by the note agreement. We recorded interest expense of $177,735 in connection with this transaction. (See item p below).

(i) In May 2006 we issued 160,000 shares of stock, warrants for 160,000 shares of our common stock at an exercise price of $0.75 per share and warrants for 80,000 shares of our common stock at an exercise price of $1.00 per share, for cash consideration of $120,000 in connection with a private placement. Bluegate evaluated the freestanding warrants to determine if they were within the scope of SFAS 133 and EITF 00-19. Part of this evaluation considered the ‘Liquidated Damages’ provision in the ‘Registration Rights Agreement’ that covers both the warrants and the common stock. Bluegate concluded the freestanding warrants should not be classified as a liability and therefore are not subject to SFAS 133.

(j) In May 2006, we issued an option to purchase 5,000 shares of our common stock at an exercise price of $0.75 per share to an employee. The option had a market value of $2,540 on the date of grant and expires in May 2011. We expensed $2,540 during the quarter ended June 30, 2006 related to this option.

(k) In May 2006, the employment contract of an employee expired and an option to purchase 233,336 shares of our common stock at $1.00 per share was forfeited. Bluegate reversed $35,307 of compensation expense related to the option which was previously recorded during the quarter ended March 31, 2006.
 

(l) In May and June 2006, we issued 105,883 shares of common stock valued at $68,000 for consulting services.

(m) In June 2006, we issued an option to purchase 600,000 shares of our common stock at an exercise price of $0.75 per share to an employee. The option had a market value of $328,759 on the date of grant, vests through June 2008 and expires in June 2011. We expensed $13,698 during the quarter ended June 30, 2006 related to this option.

(n) In June 2006, we issued warrants to purchase 48,000 shares of our common stock at an exercise price of $0.75 per share and warrants to purchase 24,000 shares of our common stock at an exercise price of $1.00 per share to two vendors. The warrants had a market value of $43,756 on the date of grant and expire in June 2011. We expensed $43,756 during the quarter ended June 30, 2006 related to these warrants.
 
(o) On June 30, 2006, we issued 216,667 shares of our common stock, warrants for 216,667 shares of our common stock at an exercise price of $0.75 per share and warrants for 108,333 of our common stock at an exercise price of $1.00 per share, for consideration of the investors agreement to extend Bluegate’s obligations pursuant to the Registration Rights Agreement until November 30, 2006. The fair value of the stock and warrants issued was $350,743. Bluegate evaluated the freestanding warrants to determine if they were within the scope of SFAS 133 and EITF 00-19. Part of this evaluation considered the ‘Liquidated Damages’ provision in the ‘Registration Rights Agreement’ that covers both the warrants and the common stock. Bluegate concluded the freestanding warrants should not be classified as a liability and therefore are not subject to SFAS 133.

(p) On June 30, 2006, in conjunction with the transaction to extend Bluegate’s obligations pursuant to the Registration Rights Agreement(see item o above), certain adjustment provisions in Bluegate’s convertible note agreements and warrant agreements issued in September 2005 were triggered. Pursuant to the adjustment provisions, the exercise price of the previously issued warrants to purchase 666,667 shares (see item f above) and 349,866 shares (see item h above) of our common stock at $0.75 per share was reduced to $0.50 per share.

(q) During the six months ended June 2006, Bluegate expensed $531,001 related to previously issued stock options that vested during the period.

Bluegate used the Black-Scholes option pricing model to value stock options and warrants using the following assumptions: proceeds as set forth in the option agreements; no expected dividend yield; expected volatility of 260%; risk-free interest rates of 5.0%; and option terms as set forth in the options agreements.
 
6.
SUBSEQUENT EVENTS

On July 3, 2006, we received $100,000 cash and issued warrants and a note payable, secured by Bluegate’s accounts receivable, inventory and fixed assets. The $100,000 note plus $5,000 is due on October 3, 2006. The warrants are to purchase 100,000 shares of our common stock at an exercise price of $0.50 per share expiring in July 2007.

In July 2006, we exercised our option to extend the due date of the aforementioned convertible notes payable by 90 days to October 31, 2006. As a result, we issued warrants to purchase 358,265 shares of our common stock at $0.50 per share to the note holders, as required by the note agreement. We valued the warrants using the Black-Scholes option pricing model using the same assumptions that we used to value stock options. As a result, we recorded interest expense of $214,328 in connection with this transaction.

In July 2006, we issued 120,000 shares of stock, warrants for 120,000 shares of our common stock at an exercise price of $0.75 per share and warrants for 60,000 shares of our common stock at an exercise price of $1.00 per share, for cash consideration of $60,000 in connection with a private placement of our securities.

In July 2006, we issued an option to purchase 550,000 shares of our common stock at an exercise price of $0.75 per share to an employee. The option has a market value of $328,811 on the date of grant and expires in July 2011. We expensed $12,178 in July 2006 related to this option.

On August 1, 2006, we issued an option to purchase 1,200,000 shares of our common stock at an exercise price of $0.60 per share to an employee. The option has a market value of $717,682 on the date of grant and expires in August 2011. We expensed $55,206 in August 2006 related to this option.

On August 1, 2006, we issued an option to purchase 340,000 shares of our common stock at an exercise price of $0.60 per share to an employee. The option has a market value of $203,343 on the date of grant and expires in August 2011. We expensed $15,642 in August 2006 related to this option.

On August 1, 2006, we issued an option to purchase 170,000 shares of our common stock at an exercise price of $0.60 per share to an employee. The option has a market value of $101,672 on the date of grant and expires in August 2011. We expensed $7,821 in August 2006 related to this option.
 

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


FORWARD LOOKING STATEMENT

This Management's Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2006 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 2005.

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 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-QSB, 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.


ABOUT US
Bluegate provides IT consulting, outsourcing, systems integration, applications development and managed security solutions for the health care industry.

CONSULTING PRACTICE
Health care institutions have very unique requirements not found in a typical commercial environment. Our consulting practice works with medium to large medical facilities and systems on evaluation, procurement and implementation of voice, data, video, infrastructure and applications for the health care environment. Our applications group also performs specific applications development, enhancement , coding and integration work for these projects when requested by our customers.

OUTSOURCING
Our outsourcing offering includes help desk support and break-fix arrangements 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 our Bluegate Medical Grade Network(TM) - ultimately enhancing patient care. We also provide affordable access to compatible medical-focused content and applications over the infrastructure to improve practice efficiency and service. We extend IT best practices to the edge of the health care network ensuring every access point for the physician and health care location is as secure as the hospital itself.

TWO-FOLD MARKET OPPORTUNITY

HIPAA COMPLIANCE FOR PHYSICIAN PRACTICES
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 health care 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 health care system by encouraging the widespread use of electronic data interchange in health care.
 

FACILITATE PARTICIPATION IN NATIONAL HEALTHCARE INFORMATION NETWORK (NHIN)
Electronic data communication networks have vast potential for enhancing the quality of patient care, mitigating the soaring costs of health care, and protecting patient privacy. To harness this potential, the current administration, Congress, and administrative agencies are advocating that all physicians get connected to the NHIN, the proposed national health information 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 health care providers at hospitals, clinics, and individual physician offices.

In order to access and use the NHIN, individual physicians must have the appropriate information technology 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 and providing adequate training and technical support to ensure the highest possible network availability and security and the ability to move and manage information back and forth.

Today, Bluegate's offering singularly solves a particularly vexing piece of the HIPAA requirement and the "last mile" challenges of a NHIN: connecting the individual physician's practice to this secured network. As a result, Bluegate has ambitions to provide its Bluegate Medical Grade Network as the beginning national "grid" that all vested parties in the HIPAA initiative turn to when the concern of connecting physicians to the hospital and the insurance companies in a secured manner is addressed. As a result, Bluegate has acquired and deployed significant resources towards this national opportunity. Bluegate began its business installing Medical Grade Networks in Houston, Texas in late 2004 and 2005. We are in active contract negotiations with health care entities in Texas and around the country to design, develop and deploy networks that are based upon the success of those deployed in Houston, Texas.

BLUEGATE STRATEGY

Our current short term strategy is to: (1) increase our market penetration and dominance of the Houston hospital, centralized health care and physician markets; (2) commence systems in other Texas cities; and, (3) commence systems in other cities in the U.S. Our long term strategy is fourfold: (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 join 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, health care facilities, regional health information organizations (RHIOs) and centralized health care organizations (HCOs) for all their information technology needs; and, (4) partner with a wide array of third party providers of software, managed systems, pharmacy benefit and many other applications that must run on electronic networks and be installed in hospitals, HCOs and medical practices.

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 Internet, VPN and data 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 the rapid growth in Internet and VPN usage among customers. Other competitors are:

 
-
Access and content providers, such as AOL, Microsoft, EarthLink andTime Warner;
 
-
Local, regional and national Internet service providers, such asMegapath, EarthLink, XO Communications and Mindspring;
 
-
Regional, national and international telecommunications companies,such as AT&T, MCI and Allegiance Telecom;
 
-
On-line services offered by incumbent cable providers such as TimeWarner;
 
-
DSL providers such as Covad.
 

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

Our web site is www.bluegate.com.  

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon financial statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates. We base our estimates on historical experience and on assumptions that are believed to be reasonable. These estimates and assumptions provide a basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and these differences may be material.

We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

REVENUE RECOGNITION

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. 123R, "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.

GENERAL

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 16, 2006 (included in our annual report on Form 10-KSB for the year ended December 31, 2005).

During the six months ended June 30, 2006, and the year ended December 31, 2005, 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, 2006 and 2005, we experienced negative financial results as follows:

   
Six Months Ended June 30,
 
   
2006
  
2005
  
           
Net loss
  
$
(2,386,373
)
$
(2,556,060
)
Negative cash flow from operations
    
(883,630
)
  
(533,045
)
Negative working capital
    
(1,705,074
)
  
(1,114,195
)
Stockholders' deficit
    
(1,523,785
)
  
(1,023,678
)

We have supported current operations by: 1) raising additional operating cash through the private sale of our common stock and options, 2) selling convertible notes and 3) issuing stock and options as compensation to certain employees and vendors in lieu of cash payments. In addition, we are seeing positive revenue growth trend, which is also increasingly contributing to reducing our operating deficit.

These steps have provided us with the cash flows to continue our business plan, and the improved operating revenue is resulting in some improvement in our financial position. We are taking steps to improve our cash flow situation that include raising capital through additional sale of our common and preferred stock and/or debt securities.
 

This step 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.
 
Our operations are located in Houston, Texas. Our business consists of the sales and marketing of our HIPAA compliant VPN and HIPAA application software and related services.
 
RESULTS OF OPERATIONS
 
THREE MONTHS ENDED JUNE 30, 2006 AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2005
 
During the three months ended June 30, 2006, our revenue was $814,846 versus $409,936 for the three month period ended June 30, 2005. This represents an increase of $404,910 and is primarily attributable to our acquisition of the assets of Trilliant Corp. and our efforts to market BLUEGATE(TM), our core business.
 
Our cost of services for the three months ended June 30,2006 was $344,151 compared to $233,720 for the three months ended June 30,2005. The increase in cost of services of $110,431 is due to higher interconnect fees and costs associated with the expansion of our BLUEGATE(TM) services.
 
Our gross margin for the three months ended June 30, 2006 was $470,695 compared to $176,216 for the three months ended June 30, 2005. Our gross margin as a percentage of sales increased to 58% for the three months ended June 30, 2006 from 43% for the three months ended June 30, 2005 due to an increase in our revenue as we expanded our HIPAA business in the second quarter of 2006.
 
We incurred selling, general and administrative expenses (SG&A) of $1,630,038 for the three months ended June 30, 2006 compared to $898,329 for the three months ended June 30, 2005. The increase in SG&A of $731,709 is primarily attributable to the expansion of our sales and marketing efforts and recording stock option and warrant related expenses as a result of our adoption of SFAS No. 123R in 2006.
 
We incurred a net loss of $1,373,837 for the three months ended June 30, 2006 compared to a net loss of $759,620 for the three months ended June 30, 2005. The increase of $614,217 is primarily attributable to recording stock option and warrant related expenses due to the company’s adoption of SFAS No. 123R, on January 1, 2006, the issuance of common stock and warrants to extend the company’s obligations pursuant to registration rights and the issuance of warrants for the extension of the debt payment relating to the convertibles notes payable.
 
SIX MONTHS ENDED JUNE 30, 2006 AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2005
 
During the six months ended June 30, 2006, our revenue was $1,750,495 versus $875,767 for the six month period ended June 30, 2005. This represents an increase of $874,728 and is primarily attributable to our acquisition of the assets of Trilliant Corp. and our efforts to market BLUEGATE(TM), our core business.
 
Our cost of services for the six months ended June 30, 2006 was $766,891 compared to $421,731 for the six months ended June 30, 2005. The increase in cost of services of $345,160 is due to interconnect fees and costs associated with the expansion of our BLUEGATE(TM) services.
 
Our gross margin for the six months ended June 30, 2006 was $983,604 compared to $454,036 for the six months ended June 30, 2005. Our gross margin as a percentage of sales increased to 56% for the six months ended June 30, 2006 from 52% for the six months ended June 30, 2005 due to an increase in our revenue as we expanded our HIPAA business in the second quarter of 2006.
 

We incurred selling, general and administrative expenses of $2,896,311 for the six months ended June 30, 2006 compared to $2,051,726 for the six months ended June 30, 2005. The increase in SG&A of $844,585 is primarily attributable to the expansion of our sales and marketing efforts and recording stock option and warrant related expenses as a result of our adoption of SFAS No. 123R in 2006.

We incurred a net loss of $2,386,373 for the six months ended June 30, 2006 compared to a net loss of $2,556,060 for the six months ended June 30, 2005, or an overall decrease of $169,687. After taking into effect a non-cash charge to income of $892,882 in 2005 upon the conversion of notes payable to common stock, Bluegate’s net loss increased by $723,195. The increase is primarily attributable to recording stock option and warrant related expenses due to the company’s adoption of SFAS No. 123R on January 1, 2006, the issuance of common stock and warrants to extend the company’s obligations pursuant to registration rights and the issuance of warrants for the extension of the debt payment relating to the convertibles notes payable.
 
 
FORECAST OF GROWTH IN OUR HIPAA CUSTOMER BASE

At June 30, 2006, we had 1,062 HIPAA customers. We are forecasting only a marginal increase in the number of HIPAA customers through 2006. We have shifted our focus towards increasing our outsourced IT services to our existing physician customer base. Our goal is to increase the amount of revenue we obtain from each physician we serve.

We have also initiated an aggressive effort to expand our Bluegate network beyond Houston. Although we have opened up a number of discussions with Hospital groups on other markets, we have no assurances we will be successful in these efforts.
 
 
 LIQUIDITY AND CAPITAL RESOURCES

Operations for the six month period ended June 30, 2006 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 the health care industry.

Our cash on hand at June 30, 2006 was $21,586.

We are seeking additional capital to fund expected operating costs. 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.

If we are unable to raise additional funding, we may have to limit our operations to an extent that we cannot presently determine. The effect of this on our business may require the sale of assets, the reduction or curtailment of new customer acquisition, reduction in the scope of current operations or the curtailment of business operations.

Our ability to achieve profitability will depend upon our ability to raise additional operating capital, the continued growth in demand for connectivity services and our ability to execute and deliver high quality, reliable connectivity services.

Our growth is dependent on attaining profit from our operations and our raising additional capital either through the sale of stock or borrowing. There is no assurance that we will be able to raise any equity financing or sell any of our products at a profit.

Our future capital requirements will depend upon many factors, including the following:

 
-
The cost of operating our VPN
 
-
The cost of third-party software
 
-
The cost of sales and marketing
 
-
The rate at which we expand our operations
 
-
The response of competitors
 
-
Capital expenditures
 

ITEM 3.
CONTROLS AND PROCEDURES

 
(a)
Evaluation of disclosure controls and procedures. Based on their evaluation of our disclosure controls and procedures (as defined in Rule 13a-15e under the Securities Exchange Act of 1934 (the "Exchange Act")), our principle executive officer and principle financial officer have concluded that as of the end of the period covered by this quarterly report on Form 10-QSB such disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, because of an adjustment required by our auditors in the area of equity. Specifically, our independent auditors identified deficiencies in our internal controls and disclosure controls related to expense recognition on issuances of our stock and stock warrants for registration rights agreements extensions. Appropriate adjustments and footnote disclosures have been recorded and disclosed in our Interim Report on Form 10-QSB. We are in the process of improving our internal controls in an effort to remediate these deficiencies through the following efforts: employed a full time controller in January 2006 who is a CPA, has public company as well as, operational experience, 2)our controller was appointed Bluegate’s chief financial officer effective June 1, 2006, 3) implementing better controls and procedures over, expense recognition and stock option issuances, and 4) improving supervision and training of our accounting staff. We are continuing our efforts to improve and strengthen our control processes and procedures to fully remedy these deficiencies. Our management and directors will continue to work with our auditors and other outside advisors to ensure that our controls and procedures are adequate and effective.

 
(b)
Changes in internal control over financial reporting. During the quarter under report, our controller was appointed Bluegate’s Chief Financial Officer effective June 1, 2006, we are implementing better controls and procedures over debt valuation, expense recognition and stock option issuances, and improving supervision and training of our accounting staff.

The evaluation of our disclosure controls included a review of whether there were any significant deficiencies in the design or operation of such controls and procedures, material weaknesses in such controls and procedures, any corrective actions taken with regard to such deficiencies and weaknesses and any fraud involving management or other employees with a significant role in such controls and procedures.  
 

PART II
 
ITEM 1.
LEGAL PROCEEDINGS

We are a party in the following litigation:

Bluegate Corporation v. the Navi-Gates Corporation and Robert C. Weslock, Cause No. 2005-00534; In the 234th Judicial District Court of Harris County, Texas. Bluegate filed this lawsuit, claiming breach of contract, deceptive trade practices and fraud. In June 2006, the parties in this litigation entered into a Mutual Settlement and Release Agreement and the matter has been resolved to the parties’ satisfaction.


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

We issued unregistered securities in transactions summarized below.

(1) In May 2006 we issued 160,000 shares of stock, warrants for 160,000 shares of our common stock at an exercise price of $0.75 per share and warrants for 80,000 shares of our common stock at an exercise price of $1.00 per share, for cash consideration of $120,000 in connection with a private placement. 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. We paid one broker-dealer a sales commission in this transaction. 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.

(2) In May 2006 we issued an option to purchase 5,000 shares of our common stock at an exercise price of $0.75 per share to an employee. The option had a market value of $2,540 on the date of grant, vests immediately and expires in May 2011. We expensed $2,540 during the quarter ended June 30, 2006 related to this option. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities.

(3) In May and June 2006 we issued 105,883 shares of common stock valued at $68,000 for consulting services. These transactions were 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.

(4) In June 2006 we issued an option to purchase 600,000 shares of our common stock at an exercise price of $0.75 per share to an employee. The option had a market value of $328,759 on the date of grant, vests through June 2008 and expires in June 2011. We expensed $13,698 during the quarter ended June 30, 2006 related to this option. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities.

(5) In June 2006 we issued warrants to purchase 24,000 shares of our common  stock at an exercise price of $0.75 per share and warrants to purchase 12,000 shares of our common stock at an exercise price of $1.00 per share to a vendor. The warrants had a market value of $21,878 on the date of grant and expire in June 2011. We expensed $21,878 during the quarter ended June 30, 2006 related to these warrants. These transactions were 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.
 

(6) On June 30, 2006 we issued 216,667 shares of our common stock, warrants for 216,667 shares of our common stock at an exercise price of $0.75 per share and warrants for 108,333 of our common stock at an exercise price of $1.00 per share, for consideration of the investors agreement to extend Bluegate’s obligations pursuant to the Registration Rights until November 30, 2006. We expensed $350,743 in connection with this transaction. These transactions were 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.

(7) On June 30, 2006, in conjunction with the transaction to extend Bluegate’s obligations pursuant to the Registration Rights Agreement, certain adjustment provisions contained in Bluegate’s convertible notes agreements and warrant agreements issued in September 2005 were triggered further. Pursuant to the adjustment provisions, the exercise price of the previously issued warrants to purchase 666,667 shares and 349,866 shares of our common stock at $0.75 per share was reduced to $0.50 per share. These transactions were 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.

(8) In July 2006 we issued 120,000 shares of stock, warrants for 120,000 shares of our common stock at an exercise price of $0.75 per share and warrants for 60,000 shares of our common stock at an exercise price of $1.00 per share, for cash consideration of $60,000 in connection with a private placement. 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.

(9) In July 2006 we issued an option to purchase 550,000 shares of our common stock at an exercise price of $0.75 per share to an employee. The option had a market value of $328,811 on the date of grant and expires in July 2011. We expensed $12,178 in July 2006 related to this option. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities.

(10) In August 2006 we issued an option to purchase 1,200,000 shares of our common stock at an exercise price of $0.60 per share to an employee. The option had a market value of $717,682 on the date of grant and expires in August 2011. We expensed $55,206 in August 2006 related to this option. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities.

(11) In August 2006 we issued an option to purchase 340,000 shares of our common stock at an exercise price of $0.60 per share to an employee. The option had a market value of $203,343 on the date of grant and expires in August 2011. We expensed $15,642 in August 2006 related to this option. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities.

(12) In August 2006 we issued an option to purchase 170,000 shares of our common stock at an exercise price of $0.60 per share to an employee. The option had a market value of $101,672 on the date of grant and expires in August 2011. We expensed $7,821 in August 2006 related to this option. This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities.
 
 
ITEM 5.
OTHER INFORMATION

(1) On June 30, 2006 we issued 216,667 shares of our common stock, warrants for 216,667 shares of our common stock at an exercise price of $0.75 per share and warrants for 108,333 of our common stock at an exercise price of $1.00 per share, for consideration of the investors agreement to extend Bluegate’s obligations pursuant to the Registration Rights Agreement until November 30, 2006. We expensed $350,743 in connection with this transaction.

(2) On June 30, 2006, in conjunction with the transaction to extend the Company’s obligations pursuant to the Registration Rights Agreement, certain adjustment provisions contained in Bluegate’s convertible agreements and warrant agreements issued in September 2005 were triggered further. Pursuant to the adjustment provisions, the exercise price of the previously issued warrants to purchase 666,667 shares and 349,866 shares of our common stock at $0.75 per share was reduced to $0.50 per share.

(3) On July 3, 2006 we issued a warrant to purchase 100,000 shares of our common stock at an exercise price of $0.50 per share. The warrant had a market value of $54,283 on the date of grant and expires in July 2007. We expensed $54,283 in connection with this warrant transaction.

(4) In July 2006 we exercised our option to extend the due date of the aforementioned convertible notes payable by 90 days to October 31, 2006. As a result, we issued warrants to purchase 358,265 shares of our common stock at $0.50 per share to the note holders, as required by the note agreement. As a result, we recorded interest expense of $214,328 in connection with this transaction.

(5) In July 2006 we issued 120,000 shares of stock, warrants for 120,000 shares of our common stock at an exercise price of $0.75 per share and warrants for 60,000 shares of our common stock at an exercise price of $1.00 per share, for cash consideration of $60,000 in connection with a private placement.

(6) In July 2006 we issued an option to purchase 550,000 shares of our common stock at an exercise price of $0.75 per share to an employee. The option had a market value of $328,811 on the date of grant and expires in July 2011. We expensed $12,178 in July 2006 related to this option.

(7) In August 2006 we issued an option to purchase 1,200,000 shares of our common stock at an exercise price of $0.60 per share to an employee. The option had a market value of $717,682 on the date of grant and expires in August 2011. We expensed $55,206 in August 2006 related to this option.

(8) In August 2006 we issued an option to purchase 340,000 shares of our common stock at an exercise price of $0.60 per share to an employee. The option had a market value of $203,343 on the date of grant and expires in August 2011. We expensed $15,642 in August 2006 related to this option.

(9) In August 2006 we issued an option to purchase 170,000 shares of our common stock at an exercise price of $0.60 per share to an employee. The option had a market value of $101,672 on the date of grant and expires in August 2011. We expensed $7,821 in August 2006 related to this option.


ITEM 6.
EXHIBITS

Exhibit
 
Number
Name
   
Stock Option Agreement of Andy Draper
   
Stock Option Agreement of William E. Koehler
   
Stock Option Agreement of Larry Walker
   
Stock Option Agreement of Alex Bitoun
   
Certification pursuant to Section 13a-14 of CEO
   
Certification pursuant to Section 13a-14 of CFO
   
Certification pursuant to Section 1350 of CEO
   
Certification pursuant to Section 1350 of CFO
 

SIGNATURES

In accordance with the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized

   
Bluegate Corporation
     
Date: August 1, 2006
/s/
Manfred Sternberg
     
   
Manfred Sternberg,
   
Chief Executive Officer
     
     
   
Bluegate Corporation
     
Date: August 1, 2006
/s/
Charles E. Leibold
     
   
Charles E. Leibold, CPA,
   
Chief Financial Officer
 
 
II-4