**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

(Mark One)
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|---|-----------------------------------------------------------------------------------------|

For the quarterly period ended April 30, 2006

 
| [      | ]                                                           | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    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|   | For the transition period from ____________ to ____________ |  
 

Commission File No. 000-51059

 

**TenthGate Incorporated**

(Exact Name of Small Business Issuer as Specified in Its Charter)

 

**Delaware**

(State or Other Jurisdiction of Incorporation or Organization)

 

 

**20-2976749**

(IRS Employer 

Identification No.)

 

 

 

**1900 Campus Commons Drive**

**Suite 100**

**Reston, VA 20191**

 (Address of Principal Executive Offices)

 

**(703) 766-6556**

(Issuer’s Telephone Number, Including Area Code)

 

 

 

(Former Name, Former Address and Former Fiscal Year,

If Changed Since Last Report)

 

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 issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No [   ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.  Yes [   ]  No x

 

As of June 10, 2006,  there were 14,334,600 outstanding shares of the registrant’s common stock, $.001 par value per share.

 

Transitional Small Business Disclosure Format:  Yes [  

]  No x

 

 

 

 

**TENTHGATE INCORPORATED**

**(A DEVELOPMENT STAGE COMPANY)**

 

**INDEX TO FORM 10-QSB**

 

**PART I.  FINANCIAL INFORMATION**

**Page**

 

 

Item 1. Consolidated Financial Statements (unaudited)

 

 

 

Consolidated Balance Sheet as of April 30, 2006 

3

 

 

Consolidated Statements of Operations for the three and nine months ended April 30, 2006 and 2005   and the period from inception until April 30, 2006

4

 

 

Consolidated Statements of Cash Flows for the nine months ended April 30, 2006 and 2005 and the period from inception until April 30, 2006 

5

 

 

Condensed Notes to Consolidated Financial Statements

6

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 

11

 

 

Item 3. Controls and Procedures

13

 

 

**PART II.  OTHER INFORMATION**

 

 

 

Item 1. Legal Proceedings

14

 

 

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

14

 

 

Item 3. Defaults Upon Senior Securities

14

 

 

Item 4. Submission of Matters to a Vote of Securities Holders

14

 

 

Item 5. Other Information

14

 

 

Item 6. Exhibits 

14

 

 

Signature

15

 

 

 

 

2

 

 

 

**Item 1.  Consolidated Financial Statements.**

 

**TENTHGATE INCORPORATED**

**(A DEVELOPMENT STAGE COMPANY)**

**CONSOLIDATED BALANCE SHEET**

**(Unaudited)**

 
 

 

 

 

 

 

 

 

**ASSETS**

 

April 30, 2006

 

 

 

 

 

CURRENT ASSETS:

 

 

 

Cash

$

6,677

 

Inventories

 

1,000

 

Prepaid expenses and other current assets

 

7,382

 

Total current assets

 

15,059

 

INTANGIBLE ASSETS-LICENSING AGREEMENTS           (net of accumulated amortization of $55,902)

 

 

 

 

 

 

 

1,357,298

 

 

 

 

 

**TOTAL**

$

1,372,357

 

 

 

 

 

**LIABILITIES AND STOCKHOLDERS’ DEFICIT**

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

Accrued liabilities

$

36,628

 

Current portion of royalties payable

 

35,000

 

Due to related parties

 

474,667

 

Total current liabilities

 

546,295

 

 

 

 

 

ROYALTIES PAYABLE (net of current portion and 

unamortized discount of $869,594)

 

 

 

 

455,407

 

Total liabilities

 

1,001,702

 

 

 

 

 

STOCKHOLDERS’ DEFICIT:

 

 

 

Preferred stock, $0.001 par value, 50,000,000 shares

 

 

 

authorized; -0- shares issued and outstanding

 

-

 

Common stock, $0.001 par value, 150,000,000 shares

 

 

 

authorized; 14,259,600 shares issued and outstanding 

 

14,260

 

Additional paid-in capital

 

2,134,770

 

Deferred stock compensation 

 

(56,666)

 

Deficit accumulated during the development stage

 

(1,721,709)

 

Total stockholders’ equity 

 

370,655

 

 

 

 

 

**TOTAL**

$

1,372,357

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

3

 

 

 

**TENTHGATE INCORPORATED**

**(A DEVELOPMENT STAGE COMPANY)**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three

 

Nine

 

Three

 

Nine

 

 

 

 

Months Ended

 

Months Ended

 

Months Ended

 

Months Ended

 

Inception

Through

 

 

April 30, 2006

 

April 30, 2006

 

April 30, 2005

 

April 30, 2005

 

April 30, 2006

 

 

 

 

 

 

 

 

 

 

 

REVENUE

$

-

$

4,037

$

-

$

10,924

$

32,702

 

 

 

 

 

 

 

 

 

 

 

COST OF REVENUE

 

-

 

2,730

 

-

 

-

 

17,480

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

-

 

1,307

 

-

 

10,924

 

15,222

 

 

 

 

 

 

 

 

 

 

 

OTHER OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

Officer compensation and benefits

 

105,296

 

269,921

 

30,000

 

90,000

 

476,921

Stock based consulting

 

167,500

 

288,333

 

30,000

 

90,000

 

979,833

Professional fees

 

31,779

 

93,250

 

10,700

 

26,495

 

132,495

Amortization

 

7,986

 

23,952

 

7,988

 

23,963

 

55,902

Other

 

17,823

 

22,013

 

972

 

12,139

 

24,897

Total other operating expenses

 

330,384

 

697,469

 

79,660

 

242,597

 

1,670,048

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

 

(330,384)

 

(696,162)

 

(79,660)

 

(231,673)

 

(1,654,826)

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

13,896

 

23,704

 

8,362

 

25,088

 

66,883

 

 

 

 

 

 

 

 

 

 

 

**NET LOSS**

$

(344,280)

$

(719,866)

$

(88,022)

$

(256,761)

$

(1,721,709)

 

 

 

 

 

 

 

 

 

 

 

**NET LOSS PER SHARE:**

 

 

 

 

 

 

 

 

 

 

Basic and diluted

$

(.03)

$

(.06)

$

(.10)

$

(.59)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares 

outstanding - Basic and diluted

 

13,167,400

 

12,714,400

 

860,000

 

434,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 

 

 

4

 

 

 

**TENTHGATE INCORPORATED**

**(A DEVELOPMENT STAGE COMPANY)**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine

Months Ended

April 30, 2006

 

 

Nine

Months Ended

April 30, 2005

 

Inception through 

April 30, 2006

**CASH FLOWS FROM OPERATING ACTIVITIES:**

 

 

 

 

 

 
Net loss

 

$

(719,866)

 

$

(256,761)

$

(1,721,709)

Adjustments to reconcile net loss to net cash used in 

operating activities:

 

 

 

 

 

 

 

 

Amortization of intangible asset

 

 

23,952

 

 

23,962

 

55,902

Non-cash interest expense

 

 

22,056

 

 

25,088

 

65,236

Stock based consulting

 

 

288,333

 

 

90,000

 

979,833

Changes in assets and liabilities, net:

 

 

 

 

 

 

 

 

Other current assets  

 

 

(2,380)

 

 

(1,000)

 

(8,380)

Increase in accrued liabilities and accrued compensation included in due to related parties 

 

 

262,045

 

 

100,000

 

433,295

**NET CASH USED IN OPERATING ACTIVITIES**

 

 

(125,860)

 

 

(18,711)

 

(195,823)

 

 

 

 

 

 

 

 

 

**CASH PROVIDED BY INVESTING ACTIVITIES -**

 

 

 

 

 

 

 

 

Payments made for intangible asset 

 

 

(45,000)

 

 

-

 

(45,000)

 

 

 

 

 

 

 

 

 

**CASH FLOWS FROM FINANCING ACTIVITIES:**

 

 

 

 

 

 

 

 

Proceeds from stockholder notes and advances

 

 

78,000

 

 

-

 

78,000

Proceeds from sales of common stock

 

 

90,000

 

 

21,000

 

167,500

**NET CASH PROVIDED BY FINANCING ACTIVITIES**

 

 

168,000

 

 

21,000

 

247,500

 

 

 

 

 

 

 

 

 

**NET CHANGE  IN CASH**

 

 

(2,860)

 

 

2,289

 

6,677

 

 

 

 

 

 

 

 

 

**CASH, BEGINNING OF PERIOD**

 

 

9,537

 

 

-

 

-

 

 

 

 

 

 

 

 

 

**CASH, END OF PERIOD**

 

$

6,677

 

$

2,289

$

6,677

 

 

 

 

 

 

 

 

 

**SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:**

 

 

 

 

 

 
Interest paid

 

$

-

 

$

-

$

-

Income taxes paid

 

$

-

 

$

-

$

-

 

 

 

 

 

 

 

 

 

**SUPPLEMENTAL DISCLOSURE OF NON-CASH**

**INVESTING AND FINANCING ACTIVITIES:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock subscription advances issued for common stock 

Subscribed

 

$

-

 

$

-

$

10,000

Related party notes payable exchanged for equity securities

 

$

-

 

$

-

$

324,300

 

Assets acquired through assumption of liabilities and

conveyance of equity securities

 

$

889,050

 

$

479,150

$

1,323,200

Common stock issued for related party notes payable

 

$

-

 

$

-

$

324,300

 

Accrued interest payable forgiven and included in additional

paid-in capital

 

$

-

 

$

-

$

9,729

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

5

 

 

 

**TENTHGATE INCORPORATED AND SUBSIDIARIES**

**(A DEVELOPMENT STAGE COMPANY)**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

 

**NOTE 1** - **NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

TenthGate Incorporated (“TenthGate” or the “Company”) is incorporated under the laws of the state of Delaware.  The Company is a medical holding company that is strategically positioned to acquire, create and implement specialty healthcare, bio-tech products and service solutions designed to enhance effectiveness, viability and well being.  TenthGate is actively seeking acquisition of life changing technologies to add to its portfolio.  

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries (collectively “we”, “us”, “our”).  All significant inter-company accounts and balances have been eliminated in consolidation.

 

Basis of Presentation

 

The accompanying financial statements are presented in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-QSB and item 310 under subpart A of Regulation S-B.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America.   In the opinion of management, all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation have been included.  Operating results for the three and nine months ended April 30, 2006 are not necessarily indicative of the results that may be expected for the year ended July 31, 2006.  The accompanying consolidated financial statements and the notes thereto should be read in conjunction with our audited consolidated financial statements as of July 31, 2005 and for various periods ended July31, 2005 and 2004 included in our Form 8-K/A filed December 15, 2005.   

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements.  The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions we are required to make.  Estimates that are critical to the accompanying financial statements include assessing the impact of contingencies as well as estimating the useful lives and recoverability of long-lived assets.  The markets for our products are characterized by intense price competition and evolving standards, both of which could impact the future recoverability of our assets.  Estimates and assumptions are reviewed periodically and the effects ofrevisions are reflected in the financial statements in the period they are determined to be necessary.   It is at least reasonably possible that our estimates could change in the near term with respect to these matters. 

 

Fair Value of Financial Instruments

 

We believe the book values of our current assets and liabilities approximate their fair values due to their short-term nature. We also believe the book values of our royalties payable approximates their fair values as the interest rates used to discount such liabilities approximates what we believe is a market rate for liabilities having similar risk exposure.  

 

 

6

 

 

 

Unamortized Discount

 

Unamortized discount resulting from royalties payable under our licenses agreement are being amortized to interest expense over the estimated useful lives of the agreements using the interest method.

 

Intangible Assets   

 

Intangible assets are recorded at cost and are being amortized over a period of fifteen years (the estimated useful lives of the licensing agreements) on a straight-line basis.  

 

**NOTE 2 - GOING CONCERN**

 

Our consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business.  We have incurred losses since our inception, and on a cumulative basis have experienced negative cash flows from operations.  In addition, we have a working capital deficit of approximately $531,000 as of April 30, 2006 and will continue to have ongoing requirements for substantial additional capital investment to accomplish our business plan over the next several years.  Because we do not expect our operating revenues to be sufficient to cover costs of operations in the immediate future, we will require equity and/or debt financing to implement our business plan.  Our plans include the completion of additional equity or debt financing of$1,000,000-$5,000,000 (see Note 7) over the next 12 months.  Cash commitments and expenditures will be kept to a minimum until such time as an appropriate amount of capital can be secured.  However there is no assurance that we will secure any amount of equity capital and/or generate enough revenues to meet our cash requirements.  These factors, among others, indicate that we may be unable to continue as a going concern for a reasonable period of time.  

 

Our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. 

 

**NOTE 3 - STOCK BASED COMPENSATION**

 

A 12-month strategic agreement between UTEK Corporation (“UTEK”) and us was established August 26, 2005, for which 240,000 restricted shares of our common stock were issued as consideration, valued by UTEK at $120,000 or $0.50 per share.  These shares vest at 20,000 a month and the agreement can be cancelled by us by providing a 90-day notice of such, thus prompting the return of all unearned shares to us.  At the time the agreement was entered we recorded deferred stock compensation of $120,000, which amount is being amortized to stock based consulting expense on a straight line basis over the term of the consulting agreement. We recognized $30,000 of stock based consulting expense under this arrangement during the quarter ended April 30, 2006. 

 

In addition, UTEK was issued 240,000 shares of our common stock during the quarter ended October 31, 2004 as consideration for services rendered under a technology agreement between August 2004 and August 2005. We recognized approximately $30,000 and $90,000 of stock based compensation under this arrangement during the three and nine months ended April 30, 2005, respectively.  

 

During the quarter ended October 31, 2005, we engaged Lehrer Financial and Economic Advisory Services to provide financial and valuation consulting services to us.  Consideration paid to Dr. Lehrer for services to be provided over a period of one year was 100,000 restricted shares of our common stock valued at $.50 per share and a one-time administrative fee of $2,500.  At the time the agreement was entered, we recorded deferred stock compensation of $50,000, which amount is being amortized to stock based consulting expense on a straight line basis over the term of the consulting agreement.  We recognized $12,500 of stock based consulting expense under this arrangement during the quarter ended April 30, 2006. 

 

 

7

 

 

 

During the three months ended January 31, 2006, we engaged Christopher Novak dba The Summit Team to provide professional search and placement services for a Chief Financial Officer and members of the Board of Directors.  On January 31, 2006, consideration was paid to Mr. Novak for the services provided in the amount of 100,000 restricted shares of our common stock valued at $.50 per share.  As a result, during the nine months ended April 30, 2006, we recognized $50,000 of stock based consulting expense under this arrangement. 31, 2006.  Mr. Novak is the brother of Tim Novak, our President.

 

On February 13, 2006, we issued 250,000 shares of restricted common stock valued at $.50 to L. Joy Putnam, Chief Financial Officer, as part of the terms of her employment.  We recognized stock based compensation expense of $125,000 during the quarter ended April 30, 2006.

 

**NOTE 4 – OTHER RELATED PARTY TRANSACTIONS**

 

Due to Related Parties in the accompanying consolidated balance sheet arises from the following:

 

Description

Terms

 

Amounts

 

 

 

 

Accrued compensation to our officers

See below

$

396,667

Promissory note from our President on September 19,  2005

Interest at 8%, due July 18, 2006

 

10,000

Promissory note from our President on September 19,  2005

Interest at 8%, due July 17, 2006

 

50,000

Stockholder advances 

See below

 

18,000

 

 

 

 

Total 

 

$

474,667

 

All of the amounts above are unsecured, and the accrued compensation and stockholder advances are non interest bearing and due on demand. 

 

**NOTE 5 – PRIVATE PLACEMENT MEMORANDUM**

 

We opened a private placement offering for $1,000,000 on November 1, 2005.  We are offering a maximum of 2,000,000 Units for $0.50 per Unit (each unit consists of one share of common stock and one common stock warrant that allows the holder to purchase one share of our common stock for $0.75 within one year of the date the Units are purchased). The Units are being offered to persons who qualify as accredited investors and to a limited number of sophisticated investors on a best efforts basis.   Since there is no required minimum amount that must be raised, funds received from all subscribers will be released to us upon acceptance of the subscriptions.  On February 28, 2006, the closing date of this private placement offering was extended until June 30, 2006. We are pursuing debt and equity financing through this arrangement and others for ournext round of working capital, and plan to secure $1,000,000-$5,000,000 over the next twelve months.

 

These securities are being offered in reliance upon an exemption from registration under the Securities Act, which exemption depends upon the existence of certain facts, including, but not limited to, the requirements that the securities are not being offered through general advertising or general solicitation, advertisements or communications in newspapers, magazines or other media, or broadcasts on radio or television, and that the private placement memorandum will be treated as confidential by the persons to whom it is delivered.  

 

We have accepted proceeds of $37,500 from three investors under this arrangement through the filing date of this 10-QSB.  

 

**NOTE 6 – LICENSE AGREEMENTS**

 

At January 31, 2006, our intangible asset arose from the cost of one licensing agreement that arose from the acquisition of a licensing agreement to distribute Ice Baton®.  During the three months ended April 30, 2006, we  signed a license agreement with Science & Technology Corporation @ University of New Mexico (the “Licensor”) for the grant of license for patents related to melanoma detection by electron paramagnetic resonance.  On April 13, 

 

8

 

 

2006, consideration was paid to the Licensor in the amount of 500,000 restricted shares of our common stock valued at $.50 per share.  The value of these shares ($250,000), as well as  $45,000 of cash we paid to the Licensor, and the value of the 800,000 shares we issued to UTEK as discussed below  ($400,000) has been included in Intangible Assets – Licensing Agreements as of  April 30, 2006.   In addition, as mentioned below, the fair value of the future stream of royalties payable is included in the balance of the intangible.  No residual value has been assumed to exist.  

 

In connection with this agreement on April 13, 2006, we accepted a subscription agreement from UTEK for 800,000 restricted shares of our common stock at an offering price of $.05 per share as negotiated and accepted under the terms of our existing technology search agreement with UTEK.  These shares and investment were issued and accepted to facilitate the closing of the transaction with Science and Technology Corporation @ University of New Mexico (the “Licensor” 

 

Pursuant to terms of the licensing agreement, on a quarterly basis, we are required to pay 30% of all income directly attributable to the licensed patents, net of all sales and other taxes.  On an annual basis beginning with the calendar year ended December 31, 2006, we are required to pay a royalty of the greater of the minimum annual royalty payment for a particular year or 3% of gross receipts from licensed products during that year.  Minimum annual royalty payments are:

 

 

**•**

$5,000 for the annual period ending December 31, 2006 

 

**•**

$10,000 for the annual period ending December 31, 2007

 

**•**

$25,000 for the annual period ending December 31, 2008

 

**•**

$35,000 for the annual period ending December 31, 2009

 

**•**

$55,000 for the annual period ending December 31, 2010 and each year thereafter

 

We are also required to pay three milestone payments as follows:

 

 

1)

$50,000 upon the earlier to occur of: i) the first commercial sale of a licensed product, and ii) December 31, 2008

 

2)

$50,000 upon the earlier to occur of: i) the first commercial sale of a licensed product incorporating molecular imaging, and ii) December 31, 2010

 

3)

$35,000 upon the earlier to occur of: i) the first commercial sale of a licensed product incorporating molecular assay, and ii) December 31, 2011

 

Because potential gross receipts and the cost of any royalties in excess of the minimum annual royalty are not determinable, we have only included the fair value (using a discount rate of 15% which we believe is a rate commensurate with the risk of this investment) of the minimum annual royalties and milestone payments in the determination of the cost of the licensing agreement, and this was done over a period of 15 years.   Accordingly, we recorded an intangible asset and royalty payable of $279,050 as of the date the asset was acquired. 

 

**NOTE 7 - SUBSEQUENT EVENTS**

 

On April 27, 2006, we engaged MJ Strategies, LLC to provide capital finder services related to the introduction and placement of qualified entities and/or organizations to place debt and/or equity financing.  On May 1, 2006, consideration was paid to MJ Strategies, LLC per the agreement in the amount of 25,000 restricted shares of our common stock valued at $.50 per share.  We recognized $12,500 of stock based consulting expense under this arrangement during the period in which the shares were issued, the quarter ending July 31, 2006.  We are pursuing debt and equity financing through this arrangement and others for our next round of working capital, and plan to secure $1,000,000-$5,000,000 over the next twelve months.

 

On May 1, 2006, we signed an addendum to retainer agreement with Anslow & Jaclin, LLP providing for the delay of the due date of a payment for professional attorney fees due from the Company.  The due date pertains to a $10,000 payment due by the Company to Anslow & Jaclin upon filing of the SB2 document which is tentatively 

 

9

 

 

slated for June 2006.  The due date for this payment will now be moved to such time as the Company is cleared to trade on the OTC Bulletin Board.  In exchange for this delay of the due date, we issued 50,000 restricted shares of our common stock valued at $.50 per share.  We recognized $25,000 of stock based consulting expense under this arrangement during the period in which the shares were issued, the quarter ending July 31, 2006.  

 

On June 1, 2006, L. Joy Putnam, resigned from her position as Chief Financial Officer and was replaced by Tim Novak, our President and Chief Executive Officer.  Mr. Novak held the position of Chief Financial Officer of TenthGate prior to Ms. Putnam, and he will again take over the responsibilities of this role and that of Chief Accounting Officer for the Company.  An 8K notification was filed as such on June 2, 2006.

 

**End of financial statements.**

 

10

 

 

 

**Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations**

 

This Quarterly Report on Form 10-QSB includes “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which can be identified by the use of forward-looking terminology such as, “may,” “believe,”  “expect,”  “intend,” “anticipate,” “estimate” or  “continue” or the negative thereof or other variations thereon or comparable terminology.  Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct.  Important factors with respect to any such forward-looking statements include, but are not limited to, the Company’s limited history of operations,the availability of additional capital necessary to execute the Company’s plan of operations, the volatility of the over-the-counter bulletin board market, changes in the state and federal regulation of medical products, the availability of necessary personnel, and general economic conditions within the United States.

 

**Background**

 

TenthGate Incorporated (“we”, “us”, “our” or the “Company”) was incorporated under the name of Edmonds 5, Inc. on August 19, 2004.  We have been in the development stage since inception and have had minimal operations. 

 

We are operating in an environment rich in opportunity.  Sparked by unparalleled advancements in technology over the last two decades, the healthcare industry has enjoyed an explosion of development and innovation.  Increases in computing power and modeling, diagnostics, miniaturization capabilities, genetics and biomedicine, as well as a public policy emphasis on both quality and cost-effective care, have resulted in an unprecedented number of life changing technologies being pursued and developed.  These are innovations that can literally reshape the boundaries of healthcare.

 

The pipeline for this innovation has outpaced the system’s ability to properly fund, manage and commercialize all the exciting and promising opportunities that are available.  High potential opportunities are searching for the guidance and resources to promote and realize their potential.  This is the niche that we fill – an aggressive, disciplined and focused medical holding company primed to identify life-changing technologies within the healthcare market segment.  These emerging technologies will benefit from our leadership and resources while enhancing the overall healthcare and wellness landscape.

 

Through the relationship with UTEK Corporation, the Company is in active negotiations for acquiring new life changing technologies.  These acquisitions are being contemplated using common stock of the Company as consideration for the transactions.  No binding obligations have been signed as of the time of this filing.  

 

We presently own or have the rights to three technologies.  

 

 

**•**

SutureMate® Suture Assist Device

 

We are currently producing and selling the SutureMate® Suture Assist Device, which is a disposable surgical tool that occupies a unique niche in the OSHA-mandated needle stick prevention area.   

 

 

**•**

Ice Baton® Pain Relief Products

 

We have acquired the worldwide exclusive rights to manufacture and sell the Ice Baton® Pain Relief Products, an innovative, natural ice treatment for hemorrhoids that avoids the possible complications and patient limitations associated with existing chemical topical ointment treatments.

 

 

**•**

Melanoma Detection by Electron Paramagnetic Resonance

 

 

11

 

 

 

We have acquired the licensed patents and licensed technology on a royalty-bearing basis for the developing technology of detecting melanoma by electron paramagnetic resonance.  This technology may have applications associated with sun protection factor (SPF) and dermatological advancements and early cancer detection.

 

**Comparison of the Three Months Ended April 30, 2006 with the Three Months Ended April 30, 2005.**

 

We had revenue of $0 and cost of goods sold of $0 during the three months ended April 30, 2006 as compared to revenue of $0 and cost of goods sold of $0 during this same period ending April 30, 2005.  

Other operating expenses of $330,384 for the three months ended January 31, 2006 consisted of officer compensation and benefits in the amount of $105,296 (of which $76,667 has not yet been paid), stock based consulting expense in the amount of $167,055 ($125,000 of which resulted from a grant of our stock to our previous chief financial officer), professional fees in the amount of $31,779, and amortization and other expenses in the amount of $25,809.  Most of the fees and other expenses during the three months ended April 30, 2006  related to legal fees and accounting fees, including services required for compliance reporting and the private placement offering, and office related expenses.  Operating expenses of $79,660 for the three months ended April 30, 2005 consisted of officer compensation in the amount of $30,000, stock based consulting expense in the amount of $30,000, professional fees in the amount of$10,700, and amortization and other expenses in the amount of $8,960.  Most of the professional fees and other expenses during the three months ended April 30, 2005  related to legal fees and travel expenses.  

 

As a result of the above, we recognized net losses during the three months ended April 30, 2006 and 2005. 

 

**Comparison of the Nine Months Ended April 30, 2006 with the Nine Months Ended April 30, 2005.**

 

We had revenue of $4,037 and cost of goods sold of $2,730 during the nine months ended April 30, 2006 as compared to revenue of $10,924 and cost of goods sold of $0 during this same period ending April 30, 2005.  These revenues, and related costs, resulted from the sale of SutureMate® Suture Assist Devices.  

 

Other operating expenses of $697,469 for the nine months ended April 30, 2006 consisted of officer compensation and benefits in the amount of $269,921 (of which $226,667 has not yet been paid); stock based consulting expense in the amount of $288,333 (including $125,000 which resulted from a stock grant to our previous chief financial officer), professional fees in the amount of $93,250, and amortization and other expenses in the amount of $45,965.  Most of the fees and other expenses during the nine months ended April 30, 2006 related to legal fees and accounting fees, including services required for compliance reporting and the private placement offering, and establishment of administrative offices and related support services.  Operating expenses of $242,597 for the nine months ended April 30, 2005 consisted of officer compensation in the amount of $90,000, stock based consulting expense in the amount of$90,000, professional fees in the amount of $26,495, and amortization and other expenses in the amount of $36,102.  Most of the professional fees and other expenses during the nine months ended April 30, 2005 related to legal and accounting fees, and travel expenses.  

 

As a result of the above, we recognized net losses during the  nine months ended April 30, 2006 and 2005. 

 

**Liquidity and Capital Resources.**

 

During the quarter ending April 30, 2006, the majority of our cash resources have been directed toward professional fees, services required for compliance reporting, establishment of administrative offices and related support services, and officer compensation.  Cash requirements were funded with proceeds from loans and advances from our President and Executive Vice President of Business Development.  Although the President and Executive Vice President of Business Development have accrued salaries, no payments have been made as of the date of this filing.  It is anticipated that employment agreements for these two employees will be honored upon receipt of appropriate funding.  As of April 1, 2006, an increase to base salary of $20,000 per year for the Chief Financial Officer was approved and mutually agreed to be accrued but not paid until such time as capital resources for such are available to the Company.   

 

 

12

 

 

 

We currently require cash in the amount of approximately $15,000 per month to fund basic continuing operations, excluding employment agreements.  This requirement is projected to increase to approximately $75,000 per month when our operations are ramped up, which is anticipated by October 31, 2006.  

 

We commenced a private placement for $1,000,000 on November 1, 2005.  We are offering a maximum of 2,000,000 Units for $0.50 per Unit (each unit consists of one share of common stock and one common stock warrant that allows the holder to purchase one share of our common stock for $0.75 within one year of the date the Units are purchased). The Units are being offered to persons who qualify as accredited investors and to a limited number of sophisticated investors, on a best efforts basis.   Since there is no required minimum amount that must be raised, funds received from all subscribers will be released to us upon acceptance of the subscriptions.  We have accepted proceeds of $37,500 under this arrangement through the date of this Form 10-

QSB, and $40,000 under a placement of shares that did not incorporate common stock warrants.  

 

At April 30, 2006, we have cash of $6,677, and as such do not currently have the cash on hand to meet our anticipated operating commitments for the next twelve months.  Continued operations will be contingent on sufficient capital resources being raised by the company.  It is essential that we secure a minimum of $50,000 additional investment under our existing PPM  by June 30, 2006 as well $50,000 in bridge financing by July 31, 2006 to maintain basic operations and compliance.  We cannot rely on revenues associated with existing products to fund our continued operations.

 

**Item 3. Controls and Procedures.**

 

**A)**

**Evaluation of Disclosure Controls and Procedures**

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our periodic reports filed under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management and our Board of Directors, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives, and management necessarily is required to apply its judgment in evaluatingthe cost-benefit relationship of possible controls and procedures. 

 

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of April 30, 2006.  This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.  Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective for the gathering, analyzing and disclosing the information we are required to disclose in the reports we file under the Securities Exchange Act of 1934.  

 

 

**(B)**

**Changes in Internal Controls Over Financial Reporting**

 

In connection with the evaluation of the Company’s internal controls during the Company’s third fiscal quarter ended April 30, 2006, the Company’s Chief Executive Officer and Chief Financial Officer have determined that as of such date, there were no changes to the Company’s internal controls over financial reporting that have materially affected, or were reasonably likely to materially affect, the Company’s internal controls over financial reporting.  However, subsequent to this date the Company’s chief financial officer resigned, and our Chief Executive Officer is temporarily serving as our Chief Accounting Officer.   We are currently evaluating the impact of this resignation on our internal accounting and disclosure controls, and are evaluating our needs as they relate to accounting and disclosure controls and procedures.  As part of this plan and implementation, we arere-evaluating, re-designing, and documenting policies and procedures, putting those procedures in operation and monitoring the effectiveness of the procedures.

 

13

 

 

 

**PART II - OTHER INFORMATION**

 

**Item 1.  Legal Proceedings** -  

None

 

**Item 2.  Unregistered Sale of Equity Securities and Use of Proceeds**

 

The following securities were issued to investors pursuant to our private placement offering, officers, and to an entity associated with a license agreement during the quarter ending April 30, 2006.  These securities were issued without registration in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933 Securities Act because of the limited number of persons involved in each transaction, the separate negotiation of each transaction with the purchaser of the securities, the absence of any public solicitation or advertising, and the restriction on such securities from resale.

 

**Investor/Officer/Entity**

 

**Number of Shares**

 

**Date**

 

**Consideration**

L. Joy Putnam

 

250,000

 

02/13/2006

 

Employment Agreement

Matthew Taylor

 

60,000

 

02/22/2006

 

$30,000

Brooke Capital, LLC

 

10,000

 

04/07/2006

 

$5,000

UTEK Corporation

 

800,000

 

04/13/2006

 

$40,000

Science & Technology Corporation @ University of New Mexico

 

 

500,000

 

 

04/13/2006

 

 

License Agreement

 

**Item 3.  Defaults Upon Senior Securities** -  

None

 

**Item 4.  Submission of Matters to a Vote of Securities Holders** -  

None

 

**Item 5.  Other Information** -  

None

 

**Item 6.  Exhibits**

 

The following documents are filed as Exhibits:

 

 

**Exhibit**

 

**Description**

 

 

 

**2.1**

 

Stock Purchase Agreement dated May 24, 2005 between Richard Neussler and TenthGate, Inc. (incorporated herein by reference as contained in Form 8-K filed on May 26, 2005).

 

 

 

**2.2**

 

Plan of Merger dated August 18, 2005 between TenthGate, Inc. and Edmonds 5, Inc. (incorporated herein by reference as contained in Form 10-QSB filed on August 19, 2005). 

 

 

 

**3.1**

 

Articles of Incorporation of the Company (incorporated herein by reference as contained in Form 10-SB12G, filed on December 1, 2004).

 

 

 

**3.2**

 

Bylaws of the Company (incorporated herein by reference as contained in Form 10-SB12G, filed on December 1, 2004).

 

 

 

**10.1**

 

Strategic Alliance Agreement dated August 25, 2005 between UTEK Corporation and the Company. (incorporated herein by reference as contained in Form 10-QSB filed on December 20, 2005).

 

 

 

 

 

14

 

 

 

 

**10.2**

 

Engagement Agreement dated August 26, 2005 between Lehrer Economic and Financial Services and the Company. (incorporated herein by reference as contained in Form 10-QSB filed on December 20, 2005).

 

 

 

**10.3**

 

Promissory Note in the original principal amount of $50,000 payable to Tim Novak.

 

 

 

**31.1***

 

Certification required by Rule 13a-14(a) by the Chief Executive Officer.

 

 

 

**31.2***

 

Certification required by Rule 13a-14(a) by the Chief Financial Officer.

 

 

 

**32.1***

 

Certification required by Rule 13a-14(b).

 

*  Filed herewith

 

**SIGNATURES**

 

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

 

Date: June 19, 2006

TenthGate Incorporated

 

(Registrant)

 
 

 

By:

/s/ Tim Novak

 

(Signature)  

 
Name: Tim Novak

 

Title:

President,

Chief Executive Officer,

Chief Financial Officer

 

 

 

 

15

 

 

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