UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] | ANNUAL REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended December 31, 2013. |
| OR |
[ ] | TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from _______ to _______. |
000-52864
(Commission file number)
Entia Biosciences, Inc.
(Exact name of registrant as specified in its charter)
Nevada | 26-0561199 |
(State or other jurisdiction | (IRS Employer |
of incorporation or organization) | Identification No.) |
13565 SW Tualatin-Sherwood Rd, Sherwood, OR 97140
(Address of principal executive offices)
(509) 427-5132
(Registrant’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. YES [ ] NO [X]
Indicate by check mark whether the registrant (1) has 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 filing requirements for the past 90 days. YES [ ] NO [X]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive DataFile required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non- accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant is $2,399,407 based on the stock market price of the company’s shares on June 30, 2013. Shares of common stock held by each officer and director and by each person who is known by the registrant to own 5% or more of the outstanding common stock, if any, have been excluded in that such persons may be deemed to be affiliates of the registrant. The determination of affiliate status is not necessarily a conclusive determination for any other purpose.
Number of shares outstanding of the issuer’s common stock as of March 28, 2014: 8,297,645 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
This Report on Form 10-K and the documents incorporated by reference include “forward-looking statements.” To the extent that the information presented in this Report on Form 10-K discusses financial projections, information or expectations about our business plans, results of operations, products or markets, or otherwise makes statements about future events, such statements are forward-looking. Such forward-looking statements can be identified by the use of words such as “intends,” “anticipates,” “believes,” “estimates,” “projects,” “forecasts,” “expects,” “plans” and “proposes”. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. These include, among others, the cautionary statements in the “Risk Factors” and “Management’s Discussion and Analysis or Plan of Operation” sections of this Report on Form 10-K. These cautionary statements identify important factors that could cause actual results to differ materially from those described in the forward-looking statements. When considering forward-looking statements in this Report on Form 10-K, you should keep in mind the cautionary statements in the “Risk Factors” and “Management’s Discussion and Analysis” sections below, and other sections of this Report on Form 10-K.
The statements contained in this Report on Form 10-K that are not purely historical are forward-looking statements including, without limitation, statements regarding our expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results could differ materially from those included in such forward-looking statements. There are many factors that could cause actual results to differ materially from the forward-looking statements. For a detailed explanation of such risks, please see the section entitled “Risk Factors” beginning on page 15 of this Report on Form 10-K. Such risks, as well as such other risks and uncertainties as are detailed in our SEC reports and filings for a discussion of the factors that could cause actual results to differ materially from the forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements.
The following discussion should be read in conjunction with the audited consolidated financial statements and the notes included in this Report on Form 10-K and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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PART I
Item 1. Business
Background
Entia Biosciences, Inc. (“Entia”) is a biotechnology company that has acquired the exclusive worldwide rights to the genetic transporter for L-Ergothioneine (Ergo), a powerful amino acid that Entia believes is essential to life. Ergo cannot be synthesized by mammals but is acquired exclusively from the diet and carried by this unique and specific transporter (human gene symbol SLC22A4) to cells throughout the body. Research studies started during 2011 by Entia have confirmed significant transporter activity in diabetes, arthritis and other serious non-communicable chronic conditions, suggesting an important physiologic role for Ergo in diseases afflicting millions of people world-wide. We have also acquired the exclusive rights to UV light enrichment technology for Ergocalciferol, the food-based version of Vitamin D, which has also been linked to a variety of serious medical conditions.
Since 2011, we have been conducting pre-clinical and clinical pilot studies evaluating a proprietary organic compound that contains elevated concentrations of these two nutrients and other important co-factors from mushrooms (ErgoD2®) and have observed significant improvements in both symptoms and disease associated biomarkers of patients with diabetes/anemia, Parkinson’s disease, and chronic kidney disease. We have also conducted several immunohistochemistry (IHC) studies that have confirmed significant Ergo transporter activity at the sites of rapidly dividing cells (macrophages and stem cells) suggesting Ergo is genetically required to prevent/repair damage from free radicals and support the production/maintenance of healthy cells. The results from our pre-clinical and clinical studies suggest that our ErgoD2® compound has the potential to play an important physiologic role in iron related disorders and auto-immune conditions afflicting millions of people world-wide.
We have filed patent applications on the use of Ergo and D2 in several therapeutic and non-therapeutic applications and are commencing follow-on studies to confirm our positive initial clinical results in larger patient populations, with the objective of releasing our first branded medical foods for the treatment of anemia (ErgoD2® Hemo), neurodegenerative disease (ErgoD2® Neuro), and potentially other therapies as our funding allows. ‘Over-the-counter’ (OTC) strength versions of these formulations and other consumer-oriented products for the general wellness and beauty markets are currently being offered online and through a limited number of resellers by our wholly owned subsidiary Total Nutraceutical Solutions (TNS). We have announced our intention to develop companion diagnostics to identify Ergo and other nutrient deficiencies to support the future sales of our medical foods and OTC products and may consider supplying our ErgoD2® formulations, diagnostics and other products to a select number of strategic partners for use in their branded offerings.
Iron and Health
Iron disorders currently affect more than two billion people world-wide. Iron is one of the most abundant metals on Earth and is a requirement for normal human physiology, playing an essential role in oxygen transport and the regulation of cell growth and differentiation. A deficiency of iron limits oxygen delivery to the cells, resulting in fatigue, decreased physical performance, and reduced immunity. Excess iron can result in toxicity, cell death, and mortality. The World Health Organization estimates 30% of the global population develops anemia as a consequence of iron deficiency, making iron-deficiency anemia one of the most prevalent medical problems worldwide. Iron-deficiency anemia and other iron disorders are typically associated with an imbalance of iron homeostasis. Too little iron leads to hypoxia, metabolic dysfunction, and hypo myelination disorders. Too much iron leads to oxidative stress, inflammation, and neurodegeneration, such as occurs in Parkinson’s disease and Multiple Sclerosis (MS). Iron overload and/or anemia is present in up to 90% of chronic kidney disease patients and significantly increases morbidity and the mortality risk in this population. Iron deficiency anemia is also a factor in alopecia (hair loss) and psoriasis (skin and nail dysfunction).
The iron regulatory system is comprised of proteins that control iron absorption, storage, export, and mobilization. When an imbalance occurs, one or more of these proteins is ‘up or down’ regulated, resulting in either iron deficiency or iron overload. Iron imbalance can be estimated by measuring levels of Transferrin (mobile iron) and Ferritin (iron storage), concentrated in plasma and tissue, respectively. In iron deficiency disorders, such as anemia and chronic kidney disease, iron storage (Ferritin) is decreased so more iron is released for utilization. In contrast, in cases of iron overload, such as hemochromatosis or Parkinson’s disease, levels of Ferritin are increased, which indicates increased iron
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storage. Such iron sequestration is important because free/unbound iron can trigger formation of free radicals that damage DNA and can cause cell death.
Typical treatment for iron-deficiency anemia is iron supplementation and, in cases of chronic kidney disease, this treatment is also followed by erythropoietin stimulating agents (ESA’s). Although the objective is to stimulate red blood cell production, ESA’s can have serious side effects and heavy iron supplementation can be toxic. For example, excessive iron intake can saturate the iron regulatory system, leading to free/unbound iron accumulation inside the cell and associated iron–induced cellular toxicity. Intracellular iron accumulation is also involved in the nerve cell degeneration in Parkinson’s/MS.
Our Business
Stabilizing iron homeostasis in various disease states is at the core of our innovative medical therapies, which aim to positively affect DNA synthesis, red blood cell production, neuronal function, and the immune system to improve the lives of millions suffering from iron-related diseases. ErgoD2® is a proprietary pharmaceutical grade organic compound from whole food that contains the micro-nutrients L-Ergothioneine, an amino acid with a dedicated transporter (SLC22A4), and vitamin D2, that has been naturally enriched using patented technology licensed from Penn State University. These genetically required nutrients have recently been implicated in iron regulation and intracellular iron chelation, indicating their therapeutic potential.
In the United States, the 19-24 million adults currently suffering from early to late chronic kidney disease (CKD) are seeing a primary care physician and have limited access to therapy beyond suggested lifestyle modifications (dietary restrictions and iron supplementation). There are an additional 1.1 million CKD patients who have anemia but have not yet begun dialysis therapy and another 350,000 that are currently receiving hemodialysis. We believe that our ErgoD2® Hemo product will become a widely prescribed, cost-effective additional therapy for all three groups to enhance the effects of lifestyle changes in the early stages of the disease and dialysis and ESA treatments in the later stages: reducing mortality risks and improving quality of life. This combinational approach also seeks to reduce the amount of ESA’s and other expensive drugs needed for treatment, which can dramatically increase the bottom line for dialysis providers that are subject to capped reimbursement rates. The CKD market alone represents a combined $11.5 billion opportunity in the US. There are more than 1 million people living with Parkinson’s disease in the US and another 0.3 million with MS. Iron is also a factor in a number of auto-immune conditions including diabetes, rheumatoid arthritis (joints), psoriasis (skin/nails), and alopecia (hair).
We intend to rapidly integrate into these existing market opportunities by leveraging the regulatory advantages described in the Orphan Drug Act (21 U.S.C. 360ee (b) (3)) related to Medical Foods. Unlike common OTC supplements for general wellness, which are not allowed to make claims of efficacy, Medical Foods are prescribed by a healthcare provider to tackle nutritional deficiencies related to a specific medical condition or disease being treated. When used in conjunction with pharmaceuticals, Medical Foods can also reduce required medication dosages and can be effective in preventing or reducing the associated side effects. In addition, Medical Foods are currently not regulated by the Food and Drug Administration, which significantly decreases the overall timing, investment, and risks typically associated with bringing a new pharmaceutical to market.
To bring ErgoD2®-based Medical Foods to market, we will need to clinically validate their efficacy through independent studies that will comprehensively evaluate disease-associated biomarkers and their relationship with markers of iron regulation. In our upcoming follow-on studies, we intend to initially recruit patients in four categories: (1) at risk for developing anemia or kidney disease; (2) diagnosed with early stage kidney disease, accompanied by anemia; (3) diagnosed with advanced-stage kidney disease, accompanied by anemia, and undergoing dialysis treatment; (4) diagnosed with early-stage Parkinson's disease. Other neurodegenerative and auto-immune conditions will be considered as funding allows.
ErgoD2®
Our ErgoD2® formulations utilize organically cultivated specialty mushrooms available from a number of domestic and international suppliers that are generally accepted as safe (GRAS) and are increasingly being sold to upscale restaurants and organic/specialty food stores throughout North America. Certain species of these specialty mushrooms contain naturally higher concentrations of Ergo and D2 than the standard white, brown, and Portabello typically sold at grocery stores. Our research has identified which species and suppliers provide the optimal nutritional profiles for our ErgoD2® formulations and we routinely test our raw and finished ingredients to ensure quality control and confirm that these nutritional profiles are maintained.
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The mushroom fruit bodies are dried, milled into powder, blended, and then enhanced using a patented UV light enrichment process that naturally increases vitamin D2 content by over 2000% within seconds. We have also developed extraction methods that separate the Ergo and other water-soluble cofactors from the D2, chitin-glucans and other solids contained in the UV enriched powder. These functional ingredients can then be encapsulated or used in medical foods and other branded products. Our manufacturing processes are 100% USDA certified organic and are being performed in-house by Entia technicians. Management intends to expand its manufacturing volumes and efficiency as our revenue and funding allows.
Functional Ingredients
L-Ergothioneine (Ergo) is a naturally occurring amino acid and master antioxidant that mammals are incapable of producing. Acquired exclusively from the diet, Ergo is carried to cells throughout the body by a unique and specific genetic transporter (human gene symbol SLC22A4). Research studies and peer-reviewed articles have reported that Ergo has the ability to act as a chelator and/or chaperone for iron and is a potent cytoprotectant that is required for normal cell physiology and DNA protection from free radicals.
Working with Lifespan Biosciences in 2011 and 2012, we identified an antibody that detects Ergo transporter activity in both human and animal tissues using immunohistochemistry (IHC). Our research has confirmed high concentrations of the Ergo transporter in a number of serious non-communicable chronic conditions and at the sites of rapidly dividing cells (macrophages and stem cells) suggesting the body genetically requires Ergo to prevent/repair damage from inflammation and free radicals and to support the production and maintenance of healthy cells.
Vitamin D is an essential antioxidant that is frequently called the sunshine vitamin. Vitamin D can be manufactured in mammals through skin exposure to sunlight or ingested from the diet. Like Ergo, sufficient levels of Vitamin D are vital to upkeep of a strong immune system and cell proliferation and differentiation. Deficiency has been linked to various health problems including CKD, hair loss, obesity, diabetes, cancer, heart disease, inflammatory illnesses, depression, multiple sclerosis, and other neurodegenerative diseases.
Vitamin D is primarily available in two active form; Ergocalciferol (D2) and Cholecalciferol (D3), and is an important food additive currently used in a variety of fortified food products including milk, margarine, cereal, orange juice, and vitamin supplements. Vitamin D2 is plant based and produced in naturally high concentrations within mushrooms. Ingestible forms of Vitamin D3 are typically non-vegan and extracted from animal lanolin or chemically synthesized. Entia’s patented UV light enrichment technology safely increases the D2 content in mushrooms by more than 2000% within seconds.
Our Products
We have been developing and studying the use of our functional ingredients in medical foods and other branded products that address multi-billion dollar market opportunities in health, beauty, and agriculture. Our primary focus has been on three core products:
ErgoD2 Hemo™ is a medical food for treatment of anemia and is projected to be commercially available in 2015 following completion of two clinical trials that independently confirm the product’s efficacy. ErgoD2 Hemo™ helps the body naturally achieve iron homeostasis and potentially reduces or delays the need for costly hemodialysis drugs and the risks of potential side effects from current therapies (erythropoietin stimulating agent “ESA”) like Epogen®.
ErgoD2 Neuro™ is a medical food that is being developed to treat dysfunctional iron metabolism in neurodegenerative conditions, such as, Parkinson’s disease and multiple sclerosis. EgroD2 Neuro™ is projected to be commercially available at the end of 2015 following completion of a confirmational Parkinson’s pre-clinical trial, which is anticipated to start in second quarter 2014, and two clinical trials that independently confirm the product’s efficacy.
GROH® is an emerging line of natural beauty products for the professional salon and spa industry. The GROH® line was expanded in 2013 to include several topically applied products for hair and skin care and is being marketed as an all-natural, vegan luxury brand that supplies key nutrients that the body needs to support/protect the hair, skin, and nails at the cellular level. In February 2014, the Mario Tricoci Group of salons and day spas, a leading member of the Elizabeth Arden Red Door salon and spa network, officially launched the entire GROH® Ergo Boost product and
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professional services line, an important milestone following eight months evaluation of the GROH® PRO deep conditioning hair and scalp treatment at their 17 locations.
During 2013, Entia conducted clinical studies into the benefits of ErgoD2® medical foods for the treatment of anemia and other iron related disorders. Study participants have been reporting significant improvements in hair growth and sense of overall well-being. These observations are also being reported with users of GROH® and pre-launch product testing has been generating extremely favorable feedback from the staff and guests at Mario Tricoci. This business opportunity is further supported by the GROH® professional online training and certification platform, which was deployed in Q4 2013 and designed to quickly and conveniently educate salon professionals in nutrigenomics and the impact Entia's patented technologies can have on cellular well-being and beauty.
Patent License and Acquisition Agreements
The following patent applications were assigned to us by our Chairman and Chief Executive Officer, Marvin S. Hausman, M.D.:
US patent application No. 61/277,150 filed September 21, 2009 entitled “Vitamin Fortified Mushrooms and Fungi for Increasing Survivability and Longevity”. Assigned November 9, 2009.
US patent application No. 61/280,578 filed November 5, 2009 entitled “Vitamin Fortified Mushrooms and Fungi for Increasing Resistance to Oxidative Stress”. Assigned November 9, 2009.
US patent application No. 61/335394 files January 6, 2010 entitled “Vitamin D Enriched Mushrooms and Fungi for Treating Alzheimer’s Disease, Taupathies, and Other Disease States Associated with Amyloid Precursor Protein.” Assigned January 2010.
US patent application No. 12/887,276, PCT US10/49684 filed on September 21, 2010 entitled: “Vitamin D2 Enriched Mushrooms and Fungi For Treatment of Oxidative Stress, Alzheimer’s Disease and Associated Disease States.” Assigned September 21, 2010. This application claims priority under 35 U.S.C.119 to the above 3 provisional applications which are incorporated in this patent by reference in their entirety.
US patent application No. 61/496,321 filed on June 13, 2011 entitled “A Nutritional Approach to the Control of Anemia and Prevention of Associated Comorbid States with the Use of Ergothioneine.” Assigned to Entia by Marvin S. Hausman, M.D. on June 13, 2011. International application published on December 20,2012, PCT/US2012/042131; Entitled: “A Nutritional Approach to the Control of Anemia, Diabetes and Other Diseases or Conditions and Prevention of Associated Comorbid States with the Use of Ergothioneine.”
US patent application No. 61/581,480 filed on December 29, 2011 entitled “A Nutritional Approach to the use of Ergothioneine for Hair and Nail Growth.” Assigned to Entia by Marvin S. Hausman, M.D. on December 29, 2011. International application filed December 21,2012, PCT/US12/71170; Entitled: “A Nutritional Approach to the Use of Ergothioneine and Vitamin D2 for Hair, Nail and Skin Growth.” Assigned to Entia by Marvin S. Hausman, M.D.
PCT/US 2008/056234 Serial number 12/529,859 entitled “Use of Ergothioneine as a Preservative in Foods and Beverages” inventors Beelman, R.B. and M. Hausman, PCT filed on March 7, 2008. Assigned to Entia on November 10, 2009 by Hausman, Beelman, and Sobol. Issued in the Nation of Canada in 2011. US and EU pending.
US patent application No. 13/363,579 filed on February 1, 2012 entitled “Anti-inflammatory Approach to Prevention and Suppression of Post-Traumatic Stress Disorder, Traumatic Brain Injury, Depression, and Associated Disease States.” Assigned to Entia by Marvin S. Hausman, M.D.
PCT/US 13/47853 filed on June 26,2013 entitled “A Nutritional Approach to Improving Athletic Performance and Reducing Injury with L-Ergothioneine and/or Vitamin D2.” Assigned to Entia by Marvin S. Hausman, M.D.
On November 10, 2009, we acquired rights to the patent application
PCT/US 2008/056234 Serial number 12/529,859 entitled “Use of Ergothioneine as a Preservative in Foods and Beverages.” The transfer of the patent to Entia was subject to an “Assignment and Assumption” agreement between Dr. Philip Sobol, Dr. Robert Beelman, and Dr. Marvin Hausman. Under that agreement, Entia agreed to issue a maximum of 150,000 shares of common stock to the assignors
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upon the first to occur of the following events: upon issuance of the patent in the U.S. (100,000 shares), upon issuance of the patent in the first European Union jurisdiction (50,000 shares), if Entia enters into a license agreement for the patent with any third party (150,000 shares), or upon the successful commercialization of any product or technology covered by the patent (50,000 shares). Upon the successful commercialization of any product or technology covered by the patent, we will pay the assignors a royalty equal to 3% of net sales of any such product or technology and/or 20% of any sublicensing payments if the patent is sublicensed. The patent was issued in Canada in February 2011 and 100,000 shares were issued on April 27, 2011.
On March 9, 2010, Entia acquired from the University of Cologne, Cologne, Germany, an exclusive license to the patent application entitled; “Identification of Ergothioneine Transporter and Therapeutic Uses Thereof.” Patent application No. PCT/EP 2005/005613 entitled; “Identification of Ergothioneine Transporter and Therapeutic Uses Thereof.” Filed on May 24, 2005, US Patent Application No. 11/569,451 filed on June 25, 2007. On March 9, 2010 Entia acquired from the University of Cologne, Cologne, Germany, an exclusive license agreement to this patent application. Issued in the Nation of Canada in 2012.; Issued in the US and Israel in 2013.
In June 2010, Entia acquired from The Penn State Research Foundation (PSRF) an exclusive license to US patent application No. 12/386,810 entitled “Methods of Use and Rapid Generation of Vitamin D2 from Mushrooms and Fungi Using Pulsed UV-light.” filed on April 23, 2009 and based on 61/047,268 entitled “Methods and Compositions for Improving the Nutritional Content of Mushrooms and Fungi” filed April 23, 2008. Issued in the US in 2013; Notice of Allowance in Canada in 2014.
Under the Exclusive License Agreement with PSRF, Entia undertook to pay a royalty on net sales of dietary supplements and nutraceutical or medical foods, functional ingredients and other products -utilizing the patented technology. Entia also undertook to pay the costs of filing, prosecuting and maintaining and defending the licensed patent and undertook to obtain and carry commercial general liability insurance for not less than $1 million per occurrence for personal injury or death once it begins to manufacture products based on the patented technology.
Production, Distribution and Marketing
In 2012, Entia began to integrate the enrichment, encapsulation and bottling process of its supplement products into its manufacturing, fulfillment and operation center located in Sherwood, Oregon. During 2013, Entia expanded its production capabilities to include the manufacturing & bottling process related to its GROH® branded soaps, lotions and conditioners.
We utilize several methods of marketing and distribution for our branded products. Consumer products are marketed direct to the consumer primarily through the internet utilizing a variety of e-commerce channels, such as, direct email marketing, social media outlets and e-commerce sites likeTotalnutraceutical.com and Amazon.com. Our GROH® line of products are primarily marketed to reseller network made up of high-end salons and day spas. We have also engaged with several Distribution partners to accelerate the launch of the products within the Salon and Spa industry.
Competitive Environment
The medical foods, dietary supplements and functional ingredients markets are highly competitive, with many well-known and established suppliers. The biotechnology industry is subject to rapid change. New products are constantly being introduced to the market. Our ability to remain competitive depends on our ability to develop and manufacture new products in a timely and cost effective manner, to accurately predict market transitions, and to effectively market our products. Our future financial results will depend to a great extent on the successful introduction of several new products. We cannot be certain that we will be successful in selecting, developing, contract manufacturing and marketing new products.
The success of new product introductions depends on various factors, including, but not limited to the following:
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proper new product selection;
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availability of raw materials;
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pricing of raw materials;
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timely delivery of new products;
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regulatory allowance of the products; and
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customer acceptance of new products.
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We face challenges in developing new products, primarily with funding development costs and diversion of management time. On a regular basis, we will evaluate opportunities to develop new products through product line extensions and product modifications. There is no assurance that we will successfully develop product line extensions or integrate newly developed products into our business. In addition, there are no assurances that newly developed products will contribute favorably to our operations and financial condition. Our failure to develop and introduce new products on a timely basis could adversely affect our future operating results.
Industry
The nutritional supplements industry is intensely competitive. It includes companies that manufacture and distribute products which are generally intended to enhance the body's performance as well as to enhance well-being. Nutritional supplements include vitamins, minerals, dietary supplements, herbs, botanicals and compounds derived therefrom. Opportunities in the nutritional supplements industry were enhanced by the enactment of the Dietary Supplement Health and Education Act of 1994 ("DSHEA"). Under DSHEA, vendors of dietary supplements are now able to educate consumers regarding the effects of certain component ingredients. However, they are subject to many existing and proposed new regulations regarding labeling and advertising of such products. See “Government Regulation” below.
Competition
The global nutritional supplements industry (which includes the nutraceutical and medical foods segments) is quite fragmented, with many small and large companies participating. The fragmented nature of the industry offers scope for mergers, acquisitions and new companies to rise to leadership positions provided they bring new innovative products to the market. The four major players in the global nutritional supplements industry include Atrium Innovations, Glanbia Plc, NBTY Inc., and Herbalife Ltd.
These companies market and distribute their products through various channels including: retail, multi-level marketing, e-commerce, and direct to consumer marketing (direct mail, TV & Radio infomercials, and email).
The market is highly sensitive to the introduction of new products and management has positioned Entia as an emerging biotechnology company with collaborative research projects at major universities, including but not limited to Massachusetts General Hospital, Boston, MA, Pennsylvania State University, State College, Pennsylvania and University of Cologne, Cologne, Germany. This position has allowed Entia to obtain a significant portfolio of intellectual property, which is being utilized to secure the manufacturing process and the intended applications for our new products. Furthermore, we will align our products, when advantageous, to take advantage the protection granted under the Orphan Drug Act, which allows for the development of medical foods to treat specific disease conditions. This approach will decrease many of the barriers to entry and facilitate Entia’s ability to bring new innovative products to market.
Government Regulation
The term “medical food” means a food which is formulated to be consumed or administered internally under the supervision of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation. See 21 U.S.C. § 360ee(b)(3).
In the Nutrition Labeling and Education Act of 1990 (“NLEA”), Congress incorporated the definition of medical foods contained in the Orphan Drug Amendments of 1988 into 21 U.S.C. § 343(q)(5)(A)(iv) of the FDCA and exempted medical foods from the nutrition labeling, health claim, and nutrient content claim requirements applicable to most other foods. The final rule on mandatory labeling (58 FR 2079 at 2151, January 6, 1993) exempted medical foods from the nutrition labeling requirements and incorporated the statutory definition of a medical food into the agency’s regulations in regulation 21 C.F.R. § 101.9(j)(8). The FDA enumerated criteria that were intended to clarify the characteristics of medical foods. The regulation provides that a food may claim the exemption from nutrition labeling requirements only if it meets the following criteria in § 101.9(j)(8):
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It is a specially formulated and processed product (as opposed to a naturally occurring foodstuff used in its natural state) for the partial or exclusive feeding of a patient by means of oral intake or enteral feeding by tube;
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It is intended for the dietary management of a patient who, because of therapeutic or chronic medical needs, has limited or impaired capacity to ingest, digest, absorb, or metabolize ordinary foodstuffs or certain nutrients, or who has other special medically determined nutrient requirements, the dietary management of which cannot be achieved by the modification of the normal diet alone;
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It provides nutritional support specifically modified for the management of the unique nutrient needs that result from the specific disease or condition, as determined by medical evaluation;
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It is intended to be used under medical supervision; and
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It is intended only for a patient receiving active and ongoing medical supervision wherein the patient requires medical care on a recurring basis for, among other things, instructions on the use of the medical food. 58 Fed. Reg. 2079 at 2185.
Medical Foods are Protected Under the Proxmire Amendments and DSHEA
Congress enacted legislation (Pub. L. 94-278, Title V, April 22, 1976) that became section 411 of the act (21 USC 350) (known as the “Proxmire Amendment”). This amendment prevents the FDA from classifying any vitamin or mineral as a drug solely because it exceeds a potency level that is deemed to have a nutritionally sound rationale. In order to be excluded from regulation as a "drug" under the provisions of 21 USC § 350(a) and 21 USC § 350(b) or, in other words, in order to be a food to which 21 USC § 350 applies, a product must, under the definition of that phrase in 21 USC § 350(c), be a food for humans which is a food for special dietary use, (A) which is [a] vitamin . . . , and (B) which – (i) is intended for ingestion in tablet, capsule, powder, softgel, gelcap, or liquid form, or (ii) if not intended for ingestion in such a form, is not
represented as conventional food and is not represented for use as a sole item of a meal or of a diet. United States v. Ten Cartons, 888 F. Supp. 381, 1995 U.S. Dist. LEXIS 3925 (E.D.N.Y.1995).
Compliance with Environmental Laws
We are not aware of any environmental laws that have been enacted, nor are we aware of any such laws being contemplated for the future, that impact issues specific to our business. In our industry, environmental laws are anticipated to apply directly to the owners and operators of companies. They do not apply to companies or individuals providing consulting services, unless they have been engaged to consult on environmental matters. We are not planning to provide environmental consulting services.
Employees
We currently have eight full-time employees. Our President, Chief Executive Officer, President and Acting Chief Financial Officer, Marvin S. Hausman, M.D., our Chief Operating Officer and Vice President Devin Andres (who also serves as President of TNS) have been employees since October 28, 2011. In addition William Meyer, is head of Production, Sabrina Jetton, Director of Marketing and Communications, Daniel Wanvig, investor relations and we have three administrative employees. We utilize a number of part-time employees to manufacture and produce products.
Item 1A. Risk Factors.
Risk Factors Relating to Our Company
We have significant outstanding debt which we must repay with interest and limited cash flows from operations from which to repay debt.
We currently have aggregate debt in the principal amount of $515,500 with $50,000 of debt at 6% per annum interest, $425,500 of debt at 8% per annum and $40,000 of debt at 0% per annum. Of this aggregate principal debt, $90,000 plus accrued interest is due on March 31, 2014, $63,000 plus accrued interest is due on June 5, 2014, $312,500 plus accrued interest is due on June 30, 2014 and $50,000 plus interest is due on August 13, 2014. All of the debt is convertible into shares of our company at the option of the payee. Given that our revenues have not been sufficient to allow for repayment of this debt, we will likely have to undertake private placements of new debt or equity securities to repay these obligations.
We may not be able to raise sufficient capital or generate adequate revenue to meet our obligations and fund our operating expenses.
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Failure to raise adequate capital and generate adequate sales revenues to meet our obligations, including our debt, of which the principal amount of $515,500 is due during 2014, pay our significant accounts payable and accrued expenses of $1,157,717 and develop and sustain our operations could result in reducing or ceasing our operations. If we are unable to raise sufficient funds from additional borrowing or private placements of equity securities to meet our debt obligations, we may default on that debt, leaving us unable to continue in business. If we do not pay certain of our accounts payable, we may lose crucial services rendered to our company. Additionally, even if we do raise sufficient capital and generate revenues to support our operating expenses, there can be no assurances that the revenue will be sufficient to enable us to develop business to a level where it will generate profits and cash flows from operations. These matters raise substantial doubt about our ability to continue as a going concern.
We expect losses in the future because we have generated limited revenue.
We have generated limited revenues and we expect losses over the next year since we have modest revenues to offset the expenses associated in executing our business plan. As disclosed in this annual report on Form 10-K for the year ended December 31, 2013, our revenues decreased marginally from $369,273 for the fiscal year ended December 31, 2012 to $314,746 for the fiscal year ended December 31, 2013 with a net loss increasing from $(1,264,148) for the fiscal year ended December 31, 2012 to $(3,104,827) for the fiscal year ended December 31, 2013. We cannot guarantee that we will ever be successful in generating substantial revenues in the future or becoming profitable. We recognize that if we are unable to generate substantial revenues, we will not be able to earn profits or continue operations as a going concern. There is only a limited corporate history upon which to base any assumption as to the likelihood that we will prove successful, and we can provide investors with no assurance that we will generate any operating revenues or ever achieve profitable operations.
As discussed in the Notes to the Consolidated Financial Statements included in this annual report for our fiscal year ended December 31, 2013 we had a working capital deficit of $(1,355,230). We had a net loss of $(3,104,827) for the year ending December 31, 2013 and an accumulated deficit of $(8,520,351) from inception (July 19, 2007) through December 31, 2013.
These factors raise substantial doubt that we will be able to continue operations as a going concern, and our independent auditors included an explanatory paragraph regarding this uncertainty in their audit report. Our ability to continue as a going concern is dependent upon our generating cash flow sufficient to fund operations and reducing operating expenses. Our business plans may not be successful in addressing these issues. If we cannot continue as a going concern, our stockholders may lose their entire investment in us.
Our future profitability is uncertain.
We cannot predict our ability to reduce our costs or achieve profitability. Our research and development expenses are expected to increase as we attempt to develop potential products. As evidenced by the substantial net losses during 2013 and 2012, losses and expenses may increase and fluctuate from quarter to quarter. There can be no assurance that we will ever achieve profitable operations.
We have a limited operating history as an independent public company and we may be unable to operate profitably as a stand-alone company. In order to establish our business, we will need to rely on the sales of our products and we incur expenses for advertising, information systems, rent and additional personnel to support these activities in addition to the salary expenses already mentioned. We therefore expect to incur substantial operating losses for the foreseeable future. Our ability to become profitable depends on our ability to have successful operations and to generate and sustain sales, while maintaining reasonable expense levels, all of which are uncertain in light of our absence of any prior operating history.
We may not be able to successfully put in place the financial, administrative, and managerial structure necessary to operate as fully reporting independent public company and the development of such structure will require a significant amount of management's time and other resources.
Our business is sensitive to public perception. If any product we develop proves to be harmful to consumers or if scientific studies provide unfavorable findings regarding their safety or effectiveness, then our image in the marketplace would be negatively impacted.
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Our results of operations may be significantly affected by the public’s perception of our company and similar companies. In addition, our business could be adversely affected if any of our future products prove to be harmful to consumers or if scientific studies provide unfavorable findings regarding the safety or effectiveness of our products or any similar products. Moreover, the U.S. FDA could potentially regulate our industry in the future and adversely affect our marketing ability and success. While quality control testing is conducted on the ingredients in such products, we are highly dependent upon consumers' perception of the overall integrity of the dietary supplements business. The safety and quality of products made by competitors in our industry may not adhere to the same quality standards that ours do, and may result in a negative consumer perception of the entire industry. If our products suffer from negative consumer perception, it is likely our sales will slow and we will have difficultly generating revenues.
If our products do not have the healthful effects intended, our business may suffer.
In general, our products consist of regulated medical foods and certain consumer products which are classified in the United States as “dietary supplements” which we believe do not require approval from the FDA or other regulatory agencies prior to sale. Although many of the ingredients in such products are vitamins, minerals, herbs and other substances for which there is a long history of human consumption, they may also contain innovative ingredients or combinations of ingredients. Although we believe all of such products and the combinations of ingredients in them are safe when taken as directed, there is little long-term experience with human or other animal consumption of certain of these innovative product ingredients or combinations thereof in concentrated form. The products could have certain side effects if not taken as directed or if taken by a consumer that has certain medical conditions. In addition, such products have been proven to be more effective when taken in accordance with certain instructions which include certain dietary restrictions. Therefore, such products may not be effective if such instructions are not followed. Furthermore, there can be no assurance that any of the products, even when used as directed, will have the effects intended or will not have harmful side effects. If any of such products were shown to be harmful or negative publicity resulted from an individual who was allegedly harmed by one product, it could hurt our business, profitability and growth prospects.
We may not be able to compete with larger sales contract companies, the majority of whom have greater resources and experience than we do.
The market for nutraceutical and medical food products is highly competitive. Numerous manufacturers and distributors compete with us for customers throughout the United States, Canada and internationally in the packaged nutritional supplement industry selling products to retailers such as mass merchandisers, drug store chains, independent pharmacies, and health food stores. Many of our competitors are substantially larger and more experienced than we are. In addition, they have longer operating histories and have materially greater financial and other resources than we do. They therefore have the advantage of having established reputations, brand names, track records, back office and managerial support systems and other advantages that we will be unable to duplicate in the near future. Many of these competitors are private companies, and therefore, we cannot compare our revenues with respect to the sales volume of each competitor. If we cannot compete in the marketplace, we may have difficulty selling our products and generating revenues. Additionally, competition may drive down the prices of our products, which could adversely affect our cost of goods sold and our profitability, if any.
We are also subject to competition from many drug companies due to the fact that some of our products have what we believe to be health benefits that certain drugs are created to produce. We are also subject to competition in the attraction and retention of employees. Many of our competitors have greater financial resources and can offer employees compensation packages that are difficult for us to compete with.
We depend upon our executive officers and key personnel.
Our performance depends substantially on the performance of our executive officers. Our President, Chief Executive Officer and acting Chief Financial Officer, Marvin S. Hausman, M.D, is the inventor of the process and formulas used to contract manufacture the future products to be sold by us. We anticipate that he will be the developer of any additional products that we plan to add to our product line. Our Vice President and Chief Operating Officer, Devin Andres, is responsible for our day-to-day operations. The loss of services of our chief executive officer or our Vice President and COO could have a material adverse effect on our business, revenues, and results of operations or financial condition. We do not maintain key person life insurance on the lives of our officers or key employees but have agreed to do so when our financial condition will allow.
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The success of our business in the future will depend on our ability to attract, train, retain and motivate high quality personnel. Competition for talented personnel is intense, and we may not be able to continue to attract, train, retain or motivate other highly qualified technical and managerial personnel in the future. In addition, market conditions may require us to pay higher compensation to qualified management and technical personnel than we currently anticipate. Any inability to attract and retain qualified management and technical personnel in the future could have a material adverse effect on our business, prospects, financial condition, and/or results of operations.
Our success is dependent upon our ability to protect and promote our proprietary rights.
Our success will depend in large part on our ability to protect and promote our proprietary rights to our formulas and proprietary processes and ingredients.
Our ability to compete effectively depends, to a significant extent, on our ability to maintain the proprietary nature of our intellectual property. There can be no assurance that the scope of the steps we take to protect all of our interests can’t be circumvented, or that it will not violate the proprietary rights of others, or that we will not be prevented from using our product if challenged. In fact, even if broad enough, others may still infringe upon our rights, which will be costly to protect. Furthermore, the laws of other countries may less effectively protect our proprietary rights than U.S. laws. Infringement of our rights by a third party could result in uncompensated lost market and revenue opportunities.
We are at risk for product liability claims and require adequate insurance to protect us against such claims. If we are unable to secure the necessary insurance coverage at affordable cost to protect our business against any claims, then our exposure to liability will greatly increase and our ability to market and sell our products will be more difficult since certain customers rely on this insurance in order to distribute our products.
We are also constantly at risk that consumers and users of our products will bring lawsuits alleging product liability. We are not aware of any claims pending against us that would adversely affect our business. While we will continue to attempt to take what we consider to be appropriate precautions, these precautions may not protect us from significant product liability exposure in the future. We currently do not have any product liability insurance and there can be no assurance that even if we were to attempt to obtain such insurance that we will be able to obtain, retain coverage or that this coverage will be cost-justified or sufficient to satisfy any future claims. If we are sued, we may not have sufficient resources to defend against the suit or to pay damages. A material lawsuit could negatively impact our business.
Our officers/directors own a significant interest in our voting stock which could limit the ability of the other shareholders to express their voice and result in decisions adverse to the interests of our general shareholders.
Our officers/directors, in the aggregate, beneficially own approximately or have the right to vote approximately 58.9% of our outstanding common stock. As a result, these stockholders, acting together, could influence matters submitted to our stockholders for approval including:
·
election of our board of directors;
·
removal of any of our directors;
·
significant corporate transactions;
·
amendment of our Articles of Incorporation or bylaws; and
·
adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us.
In addition, the future prospect of sales of significant amounts of shares held by our directors and executive officers could affect the market price of our common stock if the marketplace does not orderly adjust to the increase in shares in the market and the value of your investment in the company may decrease. Management's stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
Risks Relating To Our Common Shares
We have incurred increased costs as a result of being a public company.
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As a public company, we have incurred significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as related rules adopted by the Securities and Exchange Commission, has imposed substantial requirements on public companies, including certain corporate governance practices and requirements relating to internal control over financial reporting. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. In addition, in the future we will be required to document, evaluate, and test our internal control procedures under Section 404 of the Sarbanes-Oxley Act and the related rules of the Securities and Exchange Commission which will be costly and time consuming. Effective internal controls are necessary for us to produce reliable financial reports and are important in helping prevent financial fraud. If we are unable to achieve and maintain adequate internal controls, our business and operating results could be harmed.
We may issue shares of preferred stock in the future that may adversely impact your rights as holders of our common stock.
Our articles of incorporation authorize us to issue up to 5,000,000 shares of preferred stock. To date, we have issued an aggregate of 281,969 shares of Series A Preferred Stock, with each preferred share convertible into 10 shares of common stock. Our board of directors has the authority to fix and determine the relative rights and preferences of preferred shares, as well as the authority to issue such shares, without further stockholder approval. As a result, our board of directors could authorize the issuance of additional series of preferred stock that would grant to holders of such preferred shares preferred rights to our assets upon liquidation, the right to receive dividends before dividends are declared to holders of our common stock, and the right to the redemption of such preferred shares, together with a premium, prior to the redemption of the common stock. To the extent that we do issue such additional shares of preferred stock, your rights as holders of common stock could be impaired thereby, including, without limitation, dilution of your ownership interests in us. In addition, shares of preferred stock could be issued with terms calculated to delay or prevent a change in control or make removal of management more difficult, which may not be in your interest as holders of common stock.
We may, in the future, issue additional common shares, which would reduce investors' percent of ownership and may dilute our share value.
Our Articles of Incorporation authorize the issuance of 150,000,000 shares of common stock. The future issuance of common stock may result in substantial dilution in the percentage of our common stock held by our then existing shareholders. We may value any common stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might have an adverse effect on any trading market for our common stock.
Our common shares are subject to the "Penny Stock" Rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock. The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions.
For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person's account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives of the person; and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our Common shares and cause a decline in the market value of our stock.
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Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Because we do not intend to pay any cash dividends on our common stock, our stockholders will not be able to receive a return on their shares unless they sell them.
We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them. There is no assurance that stockholders will be able to sell shares when desired.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters is located at 13565 SW Tualatin-Sherwood Road #800, Sherwood, OR 97140. We believe our current office space is adequate for our immediate needs; however, as our operations expand, we may need to relocate and secure additional office space.
Item 3. Legal Proceedings.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
We are not presently a party to any material litigation, nor to the knowledge of management is any litigation threatened against us, which may materially affect us.
Item 4. Mine Safety Disclosures.
Not Applicable
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a) Market Information
Entia Biosciences, Inc. common stock, $0.001 par value, is quoted on the OTC-Bulletin Board under the symbol: ERGOD.OB. The stock was initially cleared for trading on the OTC-Bulletin Board on November 1, 2007.
The table below sets forth the high and low bid prices of our common stock for each quarter shown, Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
OTC Bulletin Board (Symbol "ERGO") |
| |
Period | High (US $) | Low (US $) |
First Quarter 2012 | 0.71 | 0.51 |
Second Quarter 2012 | 0.49 | 0.23 |
Third Quarter 2012 | 0.36 | 0.36 |
Fourth Quarter 2012 | 0.50 | 0.50 |
First Quarter 2013 | 0.50 | 0.33 |
Second Quarter 2013 | 0.52 | 0.31 |
Third Quarter 2013 | 0.95 | 0.33 |
Fourth Quarter 2013 | 0.74 | 0.46 |
These bid prices are estimates only, based on price graph information. | ||
(b) Holders of Common Stock
As of December 31, 2013, there were approximately 149 shareholders of record of our common stock with 8,297,645 total shares outstanding.
(c) Dividends
In the future we intend to follow a policy of retaining earnings, if any, to finance the growth of the business and do not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of future dividends on the Common Stock will be the sole discretion of board of directors and will depend on our profitability and financial condition, capital requirements, statutory and contractual restrictions, future prospects and other factors deemed relevant.
(d) Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information about the common stock available for issuance under compensatory plans and arrangements as of December 31, 2013.
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| (a) | (b) | (c) |
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants, and rights. | Weighted-average exercise price of outstanding options, warrants, and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
Equity compensation plan approved by security holders | 2,352,099 | $1,211,774 | 2,247,901 |
Total | 2,352,099 | $1,211,774 | 2,247,901 |
The Entia Biosciences, Inc. 2010 Stock Incentive Plan was adopted by the board of directors on September 17, 2010 and approved by the stockholders on October 21, 2010. Initially 15 million shares were reserved for issuance under the Plan. On January 1, 2012, 500,000 additional shares were automatically added to the shares reserved for issuance under the Plan, pursuant to an evergreen provision in the Plan. On February 15, 2012, pursuant to a 1:10 reverse stock split the number of shares reserved for issuance under the Plan was reduced from 15,500,000 shares to 1,550,000 shares. During 2013, an additional 50,000 shares were automatically added to the shares reserved for issuance under the Plan and the shareholders, on two separate occasions, approved an additional 1.5 million shares each to be added bringing the total shares reserved to 4.6 million shares.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities that have not previously been disclosed in our periodic reports.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the years ended December 31, 2013 or 2012.
Item 6. Selected Financial Data.
Not applicable.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview of Current Operations
Entia Biosciences, Inc. (Entia) is an emerging biotechnology company engaged in the discovery, formulation, production and marketing of functional ingredients that can be used in branded medical foods, nutraceuticals, cosmetics and other products developed and sold by Entia and third parties. Our current portfolio of formulations includes ERGO D2, vitamin D, L-Ergothioneine and curcumin.
Through our wholly owned subsidiary Total Nutraceutical Solutions, Inc. (TNS), we currently market nutraceutical products under the GROH® and SANO™ brands direct to consumers online and through leading hair salons and other resellers in North America. TNS currently offers three natural organic nutraceutical mushroom dietary supplement products, ImmuSANO®, GlucoSANO®, and GROH®, which has been designed to nutritionally support hair follicles and nail beds. ImmuSANOTM is designed to nutritionally address the needs of the immune system by balancing cellular function and promoting a stronger immune system. GlucoSANOTM is designed to assist in maintaining more normal cellular metabolism and stabilizing blood sugar levels.
Our formulations, which are highly potent antioxidants, have the nutritional potential to provide multiple health benefits for humans, including balancing iren hemostatis, reducing inflammation, supporting the immune system, promoting healthy joints, increasing stamina, and reducing stress and anxiety. These naturally occurring dietary substances have not been chemically altered, and we believe these products have both health benefits and mass appeal to people wanting natural
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and non-toxic nutritional-based healthcare. We utilize novel clinical models, biomarkers, and analytical tools to validate the nutritional and clinical efficacy of our formulations and the products that incorporate them. Research and development of new formulations and nutraceutical products are also performed under contract with outside laboratories, such as the Department of Food Science, Pennsylvania State University.
Results of Operations for the year ended December 31, 2013 and 2012
Revenues and Cost of Goods Sold (in thousands, except percentages):
|
| For the Years Ended December 31, |
| Change | ||||
|
| 2013 |
| 2012 |
| $ |
| % |
Revenues |
| $ 314,746 |
| $ 369,273 |
| $ (54,527) |
| -14.8% |
Cost of Goods Sold | 131,123 |
| 107,465 |
| 23,658 |
| 22.1% |
Revenues. Revenues are generated primarily from the sale of our mushroom based nutraceutical dietary supplement products and functional ingredients. The 14.8% decrease in revenues from 2012 was primarily due to the decrease in sales of our Groh® products due to a rebranding/marketing strategy undertaken in 2013. During this time, we did not sell this product to consumers.
Cost of Goods Sold. Cost of goods sold includes raw materials such as nutraceutical mushrooms, as well as production costs for manufacturing our supplement products. Cost of goods sold for 2013 increased 22.1% from 2012 due to increased freight-in for materials for our new GROH® product and increase freight on shipments to customers. In addition, we wrote off obsolete inventory during 2013 that was used in our old GROH® product line. This expense was approximately $24,000.
The following is a summary of certain consolidated statement of operations data for the periods:
Operating Expenses (in thousands, except percentages):
|
|
|
|
| For the Years Ended December 31, |
| Change | ||||
|
|
|
|
| 2013 |
| 2012 |
| $ |
| % |
Advertising & promotion expenses |
| $ 171 |
| $ 40 |
| $ 131 |
| 327.5% | |||
Professional fees |
|
| 147 |
| 138 |
| 9 |
| 6.6% | ||
Consulting fees |
|
| 920 |
| 300 |
| 620 |
| 206.7% | ||
General and Administrative expenses |
| 1,915 |
| 865 |
| 1,050 |
| 121.4% |
Advertising and promotional expenses. These costs include costs for promotional products, production fees for marketing materials, costs associated with fulfillment, fees for advertising programs such as ad placement fees, and postage fees for mailing marketing materials. The increase from 2012 for these expenses was due to our new marketing and rebranding for our GROH® product.
Professional fees. These expenses primarily include accounting/auditing fees, legal fees and stock transfer fees. The increase in professional fees from 2012 is due primarily to increased stock transfer and accounting fees for 2013.
Consulting fees. These expenses are comprised of fees incurred by third-party consultants for the provision of administrative, information technology, investment banking and marketing management services. The increase in these expenses from 2012 was due to the fact that there were increased warrants issued to compensate third party consultants for services in 2013.
General and administrative expenses. These expenses primarily include compensation, costs related to travel, rent and utilities, insurance, depreciation and product development. The increase from 2012 is attributable to an increase in
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payroll, rent and insurance fees. In 2013, this amount also includes an impairment that was recorded against our intangibles in the amount of $288,454.
Inflation
Inflation has not had a significant impact in the current or prior periods.
Significant changes in the number of employees
We currently have eight full-time employees. Our President, Chief Executive Officer, President and Acting Chief Financial Officer, Marvin S. Hausman, M.D., our Chief Operating Officer and Vice President Devin Andres (who also serves as President of TNS) have been employees since October 28, 2011. In addition William Meyer, is head of Production, Sabrina Jetton, marketing, Daniel Wanvig, investor relations and we have three administrative employees. We utilize a number of part-time employees to manufacture and produce products. As our operations expand we anticipate the need to hire additional employees, and contract with additional consultants; however, the exact number is not quantifiable at this time.
Liquidity and Capital Resources
At December 31, 2013, cash totaled $36,886 compared to $13,081 at December 31, 2012. The primary reasons for the net increase in 2013 are described below. Our cash is held primarily in general checking accounts. Working capital was $(1,355,230) at December 31, 2013, compared to $(864,921) at December 31, 2012. The change in working capital was due primarily to the maturity date of most of our debt and increase in accrued expenses. The net change in cash and cash equivalents for the periods presented was comprised of the following (in thousands):
|
|
| For the Years Ended December 31, |
| Change | ||||
|
|
| 2013 |
| 2012 |
| $ |
| % |
Net cash provided by (used in) |
|
|
|
|
|
|
| ||
| Operating activities | $ (767) |
| $ (315) |
| $ (452) |
| 143.5% | |
| Investing activities | (65) |
| (63) |
| (2) |
| 3.2% | |
| Financing activities | 855 |
| 374 |
| 481 |
| 128.6% |
Operating Activities. The increase in net cash flows used from operating activities was due primarily to a large decrease in the amortization of discount on convertible notes along with a large increase in accounts payable/accrued expenses and an increase in the amortization and depreciation of assets.
Investing Activities. The increase in net cash flows used from investing activities was due primarily to an increase in fixed assets purchased.
Financing Activities. The increase in net cash flows from financing activities was due primarily to proceeds from the sale of preferred stock and increase in proceeds from notes payable.
Future Liquidity. We have a history of incurring net losses and negative operating cash flows. We are also deploying new technologies and continue to develop commercial products and services. Based on our cash on hand, income from operations and the degree to which our burn rate can be reduced while continuing operations, management believes it has sufficient funds to remain operational through May 2014.
We expect our revenues to increase in 2014. Notwithstanding, we anticipate generating losses in 2014 and therefore we may be unable to continue operations in the future. In order for us to continue as a going concern and ultimately to achieve profitability, we may be required to obtain capital from external sources, increase revenues and reduce operating costs. We will require additional capital of at least approximately $515,500 plus accrued interest to repay $90,000 plus accrued interest due on March 31, 2014, $63,000 plus accrued interest due on June 5, 2014, $312,500 plus accrued interest due on June 30, 2014 and $50,000 plus interest due on August 13, 2014 and we intend to raise the monies by undertaking one or more equity private placements. We may also pursue re-negotiation and re-structuring of the debt. However, there can be no assurances that our operations will become profitable or that external sources of financing,
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including the issuance of debt and/or equity securities, will be available at times and at terms acceptable to us, or at all. The issuance of additional equity or convertible debt securities will also cause dilution to our shareholders. If external financing sources are not available or are inadequate to fund our operations, we will be required to reduce operating costs, which could jeopardize our future strategic initiatives and business plans. For example, a reduction in operating costs could jeopardize our ability to launch, market and sell new nutraceutical supplement products necessary to grow and sustain our operations.
Subsequent Events
On February 3, 2014, Entia entered into a convertible promissory note with a principal amount of $42,000. The term of the note is nine months and the note carries an 8% interest rate per annum, compounded annually. If the note remains unpaid after one hundred and eighty (180) days from the Issue date, the holder has the option to convert the principal and accrued interest into shares of our Company stock at a conversion price equal to 58% of the “trading price” as described in the note. We have calculated a discount for the beneficial conversion feature in the amount of $30,414 and will amortize this over 9 months to interest expense.
In July 2012, we entered into a note receivable with an investor in exchange for the issuance of common stock. The investor has not paid any principal on this note and, in February 2014, we sold the note receivable to another investor for $40,000 cash. We have recorded the sale of the note receivable for cash with a loss on sale of note receivable in the amount of $9,000 during first quarter of 2014.
Going Concern
We have a history of incurring net losses and net operating cash flow deficits. We are also developing new technologies related to our organic nutraceutical products. At December 31, 2013, we had cash and cash equivalents of $36,886. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. As a result, we anticipate that our cash and cash equivalent balances, anticipated cash flows from operations and anticipated operating cash flows will be sufficient to meet our cash requirements through May 2014.
In order for us to continue as a going concern beyond this point and ultimately to achieve profitability, we may be required to obtain capital from external sources, increase revenues and reduce operating costs. The issuance of equity securities will also cause dilution to our shareholders. If external financing sources of financing are not available or are inadequate to fund our operations, we will be required to reduce operating costs including personnel costs, which could jeopardize our future strategic initiatives and business plans.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
Revenue Recognition: We recognize revenue from product sales once all of the following criteria for revenue recognition have been met: pervasive evidence that an agreement exists; the services have been rendered; the fee is fixed and determinable and not subject to refund or adjustment; and collection of the amount due is reasonable assured.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
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Item 8. Financial Statements and Supplementary Data
Entia Biosciences, Inc.
Index to Consolidated Financial Statements
December 31, 2013 and 2012
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|
|
|
Report of Independent Registered Public Accounting Firm……………...……………………………….... | 23 | ||||||||||
|
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|
|
Consolidated Balance Sheets at December 31, 2013 and 2012………......………….…………..………..... | 24 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations for the Years Ended December 31, 2013 and 2012…..................... | 25 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2013 and 2012....................................................................................................................................... | 26-27 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013 and 2012...……...…...... | 28 | ||||||||||
|
|
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|
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|
|
|
|
Notes to the Consolidated Financial Statements……….…………………..……………………..........…... | 29 |
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Entia Biosciences, Inc.
Sherwood, Oregon
We have audited the accompanying consolidated balance sheets of Entia Biosciences, Inc. and subsidiary ("the Company") as of December 31, 2013 and 2012, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Entia Biosciences, Inc. and subsidiary as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced recurring losses from operations and negative cash flows from operating activities. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ PETERSON SULLIVAN LLP
Seattle, Washington
March 28, 2014
23
Part 1: FINANCIAL INFORMATION
Item 1. Financial Statements
ENTIA BIOSCIENCES, INC. | |||||||||
CONSOLIDATED BALANCE SHEETS | |||||||||
| |||||||||
|
|
|
|
|
| December 31, 2013 |
|
| December 31, 2012 |
Assets |
|
|
|
|
|
|
| ||
Current Assets: |
|
|
|
|
|
| |||
| Cash |
|
| $ | 36,886 |
| $ | 13,081 | |
| Accounts receivable, net |
|
| 11,197 |
|
| 62,397 | ||
| Inventory, net |
|
| 138,941 |
|
| 132,133 | ||
| Interest income receivable |
|
| 3,965 |
|
| 4,083 | ||
| Prepaid expenses |
|
| 34,462 |
|
| 32,542 | ||
|
| Total Current Assets |
|
| 225,451 |
|
| 244,236 | |
|
|
|
|
|
|
|
|
|
|
Property and Equipment, net |
|
| 62,145 |
|
| 35,627 | |||
Patents and license, net |
|
| 343,498 |
|
| 183,106 | |||
|
|
|
|
|
|
|
|
|
|
Total Assets |
| $ | 631,094 |
| $ | 462,969 | |||
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity (Deficit) |
|
|
|
|
|
| |||
Current Liabilities: |
|
|
|
|
|
| |||
| Accounts payable and accrued expenses |
| $ | 1,157,717 |
| $ | 654,919 | ||
| Short-term convertible notes payable, net of discount related-party |
| 23,427 |
|
| 63,493 | |||
| Short-term convertible notes payable, net of discount |
| 373,644 |
|
| 365,416 | |||
| Capital lease payable |
|
| 2,105 |
|
| 2,808 | ||
| Notes payable |
|
| 23,788 |
|
| 22,521 | ||
|
| Total Current Liabilities |
|
| 1,580,681 |
|
| 1,109,157 | |
Long Term Liabilities: |
|
|
|
|
|
| |||
| Capital lease payable |
|
| - |
|
| 2,105 | ||
|
| Total Long Term Liabilities |
|
| - |
|
| 2,105 | |
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
| 1,580,681 |
|
| 1,111,262 | |||
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity (Deficit): |
|
|
|
|
|
| |||
| Preferred stock, $0.001 par value, 5,000,000 shares authorized, |
|
|
|
|
| |||
|
| Series A preferred stock, 350,000 shares designated, |
|
|
|
|
| ||
|
| 281,969 and 109,900 shares issued and outstanding, |
|
|
|
|
| ||
|
| respectively, aggregate liquidation value of $1,409,845 |
|
|
|
|
| ||
|
| and $549,500, respectively |
|
| 282 |
|
| 110 | |
| Common stock, $0.001 par value, 150,000,000 shares authorized, |
|
|
|
|
| |||
|
| 8,297,645 and 7,444,591 shares issued and outstanding, respectively | 8,298 |
|
| 7,444 | |||
| Stock subscription receivable |
|
| (49,000) |
|
| (49,000) | ||
| Additional paid-in capital |
|
| 7,793,760 |
|
| 5,115,587 | ||
| Deferred compensation |
|
| (182,576) |
|
| (394,510) | ||
| Accumulated deficit |
|
| (8,520,351) |
|
| (5,327,924) | ||
|
| Total Stockholders' Equity (Deficit) |
|
| (949,587) |
|
| (648,293) | |
Total Liabilities and Stockholders' Equity (Deficit) | $ | 631,094 |
| $ | 462,969 | ||||
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements. |
24
ENTIA BIOSCIENCES, INC. | |||||||
CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||
| |||||||
|
|
|
|
| For the Year |
| For the Year |
|
|
|
|
| Ended |
| Ended |
|
|
|
|
| December 31, 2013 |
| December 31, 2012 |
|
|
|
|
|
|
|
|
REVENUES |
|
| $ 314,746 |
| $ 369,273 | ||
|
|
|
|
|
|
|
|
COST OF GOODS SOLD |
|
| 131,123 |
| 107,465 | ||
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
| 183,623 |
| 261,808 | ||
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
| ||
| Advertising and promotion |
|
| 171,137 |
| 39,776 | |
| Professional fees |
|
| 147,469 |
| 137,554 | |
| Consulting fees |
|
| 919,710 |
| 300,070 | |
| Impairment of intangible asset |
|
| 288,454 |
| - | |
| General and administrative |
|
| 1,626,873 |
| 865,092 | |
|
|
|
|
|
|
|
|
|
| Total Operating Expenses |
|
| 3,153,643 |
| 1,342,492 |
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
| (2,970,020) |
| (1,080,684) | ||
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES) |
|
|
|
|
| ||
| Interest income |
|
| 9,882 |
| 4,150 | |
| Interest expense |
|
| (144,689) |
| (262,929) | |
| Gain on extinguishment of debt |
|
| - |
| 75,315 | |
|
| Total Other Income (Expenses) |
|
| (134,807) |
| (183,464) |
|
|
|
|
|
|
|
|
NET LOSS |
|
| $ (3,104,827) |
| $ (1,264,148) | ||
|
|
|
|
|
|
|
|
DEEMED DIVIDEND RELATED TO BENEFICIAL |
|
|
|
|
| ||
| CONVERSION FEATURE OF CONVERTIBLE |
|
|
|
|
| |
| PREFERRED STOCK |
|
| (87,600) |
| (21,400) | |
|
|
|
|
|
|
|
|
NET LOSS PER SHARE ALLOCABLE TO COMMON |
|
|
|
| |||
| STOCKHOLDERS |
|
| $ (3,192,427) |
| $ (1,285,548) | |
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE |
|
|
|
|
| ||
| - BASIC AND DILUTED: |
|
| $ (0.42) |
| $ (0.18) | |
|
|
|
|
|
|
|
|
| Weighted common shares outstanding |
|
|
|
|
| |
|
| - basic and diluted |
|
| 7,533,540 |
| 7,298,579 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements. |
25
ENTIA BIOSCIENCES, INC. | ||||||||||||||||||||||||||
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||||||||||||||||||||
FOR THE YEARS ENDED DECEMBER 31, 2013 and 2012 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
| Stock |
|
|
|
| Stockholders' |
|
|
|
|
| Preferred Stock |
| Common Stock |
|
| Paid |
|
| Deferred |
| Subscriptions |
| Accumulated |
| Equity | |||||||
|
|
|
|
| Shares |
| Amount |
| Shares |
|
| Amount |
|
| In Capital |
|
| Compensation |
|
| Receivable |
|
| Deficit |
| (Deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance -December 31, 2011 |
|
| 43,500 |
| $ 44 |
| 7,171,175 |
|
| $ 7,171 |
|
| $ 4,272,792 |
|
| $ (497,383) |
|
| $ - |
|
| $ (4,042,376) |
| $ (259,752) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of preferred stock for cash | 57,400 |
| 57 |
| - |
|
| - |
|
| 286,942 |
|
| - |
|
| - |
|
| - |
| 286,999 | ||||
Issuance of preferred stock for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| cancellation of debt |
| 2,000 |
| 2 |
| - |
|
| - |
|
| 9,998 |
|
| - |
|
| - |
|
| - |
| 10,000 | ||
Issuance of preferred stock for services | 7,000 |
| 7 |
| - |
|
| - |
|
| 34,993 |
|
| - |
|
| - |
|
| - |
| 35,000 | ||||
Deemed dividend related to beneficial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| conversion feature of convertible preferred stock | - |
| - |
| - |
|
| - |
|
| 21,400 |
|
| - |
|
| - |
|
| (21,400) |
| - | |||
Issuance of warrants in connection with |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| convertible notes payable | - |
| - |
| - |
|
| - |
|
| 27,704 |
|
| - |
|
| - |
|
| - |
| 27,704 | |||
Issuance of common stock for license agreement | - |
| - |
| 50,000 |
|
| 50 |
|
| 25,451 |
|
| - |
|
| - |
|
| - |
| 25,501 | ||||
Issuance of common stock and warrants for cash | - |
| - |
| 100,000 |
|
| 100 |
|
| 39,900 |
|
| - |
|
| - |
|
| - |
| 40,000 | ||||
Issuance of common stock for note receivable | - |
| - |
| 122,500 |
|
| 122 |
|
| 48,878 |
|
| - |
|
| (49,000) |
|
| - |
| - | ||||
Stock compensation |
|
| - |
| - |
| 916 |
|
| 1 |
|
| 170,456 |
|
| - |
|
| - |
|
| - |
| 170,457 | ||
Issuance of warrants for services | - |
| - |
| - |
|
| - |
|
| 128,540 |
|
| (128,540) |
|
| - |
|
| - |
| - | ||||
Issuance of warrants for extension on debt |
| - |
| - |
| - |
|
| - |
|
| 48,533 |
|
| - |
|
| - |
|
| - |
| 48,533 | |||
Amortization of deferred compensation |
| - |
| - |
| - |
|
| - |
|
| - |
|
| 231,413 |
|
| - |
|
| - |
| 231,413 | |||
Net loss |
|
| - |
| - |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (1,264,148) |
| (1,264,148) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued on the next page)
|
26
(continued from previous page)
| ||||||||||||||||||||||||||
| �� |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
| Stock |
|
|
|
| Stockholders' |
|
|
|
|
| Preferred Stock |
| Common Stock |
|
| Paid |
|
| Deferred |
| Subscriptions |
| Accumulated |
| Equity | |||||||
|
|
|
|
| Shares |
| Amount |
| Shares |
|
| Amount |
|
| In Capital |
|
| Compensation |
|
| Receivable |
|
| Deficit |
| (Deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Balance - December 31, 2012 |
|
| 109,900 |
| 110 |
| 7,444,591 |
|
| 7,444 |
|
| 5,115,587 |
|
| (394,510) |
|
| (49,000) |
|
| (5,327,924) |
| (648,293) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of preferred stock for cash |
| 140,175 |
| 140 |
| - |
|
| - |
|
| 700,735 |
|
| - |
|
| - |
|
| - |
| 700,875 | |||
Issuance of preferred stock for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| cancellation of debt |
|
| 3,162 |
| 3 |
| - |
|
| - |
|
| 15,747 |
|
| - |
|
| - |
|
| - |
| 15,750 | |
Issuance of warrants in connection with |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| convertible notes payable |
|
| - |
| - |
| - |
|
| - |
|
| 16,400 |
|
| - |
|
| - |
|
| - |
| 16,400 | |
Beneficial conversion feature in connection with |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| convertible note payable |
|
| - |
| - |
| - |
|
| - |
|
| 64,956 |
|
| - |
|
| - |
|
| - |
| 64,956 | |
Issuance of preferred stock for conversion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| of convertible notes payable |
|
| 23,332 |
| 23 |
| - |
|
| - |
|
| 116,629 |
|
| - |
|
| - |
|
| - |
| 116,652 | |
Issuance of preferred stock for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| conversion of accounts payable |
| 30,400 |
| 31 |
| - |
|
| - |
|
| 151,970 |
|
| - |
|
| - |
|
| - |
| 152,001 | ||
Deemed dividend related to beneficial conversion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| feature of convertible preferred stock |
| - |
| - |
| - |
|
| - |
|
| 87,600 |
|
| - |
|
| - |
|
| (87,600) |
| - | ||
Issuance of common stock for conversion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| of preferred stock |
|
| (25,000) |
| (25) |
| 250,000 |
|
| 250 |
|
| (225) |
|
| - |
|
| - |
|
| - |
| - | |
Issuance of common stock for conversion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| of accrued compensation |
|
| - |
| - |
| 273,158 |
|
| 274 |
|
| 129,727 |
|
| - |
|
| - |
|
| - |
| 130,001 | |
Stock compensation |
|
| - |
| - |
| - |
|
| - |
|
| 413,921 |
|
| - |
|
| - |
|
| - |
| 413,921 | ||
Issuance of common stock for services |
| - |
| - |
| 129,896 |
|
| 130 |
|
| 83,270 |
|
| - |
|
| - |
|
| - |
| 83,400 | |||
Issuance of common stock & warrants for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| license agreement |
|
| - |
| - |
| 200,000 |
|
| 200 |
|
| 215,329 |
|
| - |
|
| - |
|
| - |
| 215,529 | |
Issuance of warrants for services |
|
| - |
| - |
| - |
|
| - |
|
| 584,108 |
|
| (584,108) |
|
| - |
|
| - |
| - | ||
Issuance of warrants for extension on debt |
| - |
| - |
| - |
|
| - |
|
| 98,006 |
|
| - |
|
| - |
|
| - |
| 98,006 | |||
Amortization of deferred compensation |
| - |
| - |
| - |
|
| - |
|
| - |
|
| 796,042 |
|
| - |
|
| - |
| 796,042 | |||
Net loss |
|
| - |
| - |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (3,104,827) |
| (3,104,827) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2013 |
|
| 281,969 |
| $ 282 |
| 8,297,645 |
|
| $ 8,298 |
|
| $ 7,793,760 |
|
| $ (182,576) |
|
| $ (49,000) |
|
| $ (8,520,351) |
| $ (949,587) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements. |
27
ENTIA BIOSCIENCES, INC. | ||||||||||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||||||
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| For the Year |
|
| For the Year |
|
|
|
|
|
|
|
|
|
|
|
|
| Ended |
|
| Ended |
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2013 |
|
| December 31, 2012 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
|
|
|
|
|
|
|
| $ | (3,104,827) |
| $ | (1,264,148) |
| ||
Adjustments to reconcile net loss to net cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Depreciation/amortization |
|
|
|
|
|
|
|
|
| 35,990 |
|
| 21,527 |
| |
| Inventory reserve |
|
|
|
|
|
|
|
|
| - |
|
| 23,491 |
| |
| Gain on extinguishment of note payable |
|
|
|
|
|
|
|
|
| - |
|
| (75,315) |
| |
| Impairment of intangible asset |
|
|
|
|
|
|
|
|
| 288,454 |
|
| - |
| |
| Amortization of discount on convertible notes |
|
|
|
|
|
|
|
|
| 107,455 |
|
| 184,272 |
| |
| Stock-based compensation |
|
|
|
|
|
|
|
|
| 1,293,363 |
|
| 485,402 |
| |
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Accounts receivable |
|
|
|
|
|
|
|
|
| (30,725) |
|
| (26,124) |
|
|
| Inventory |
|
|
|
|
|
|
|
|
| (15,808) |
|
| 17,954 |
|
|
| Prepaid expenses |
|
|
|
|
|
|
|
|
| (1,920) |
|
| (651) |
|
|
| Other current assets |
|
|
|
|
|
|
|
|
| 118 |
|
| (4,083) |
|
|
| Accounts payable and accrued expenses |
|
|
|
|
|
|
|
|
| 661,167 |
|
| 323,080 |
|
NET CASH USED IN OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
| (766,733) |
|
| (314,595) |
| ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Purchase of property and equipment |
|
|
|
|
|
|
|
|
| (52,548) |
|
| (17,180) |
| |
| Acquisition of patents and patents pending (net) |
|
|
|
|
|
|
| (12,056) |
|
| (46,147) |
| |||
NET CASH USED IN INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
| (64,604) |
|
| (63,327) |
| ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Proceeds from issuance of common stock, preferred stock and warrants |
| 700,875 |
|
| 327,000 |
| |||||||||
| Proceeds from convertible notes payable short-term |
|
|
|
|
|
| 113,000 |
|
| 13,000 |
| ||||
| Net change in notes payable |
|
|
|
|
|
|
|
|
| 1,267 |
|
| 9,364 |
| |
| Proceeds from convertible note payable-related party |
|
|
|
|
|
| 40,000 |
|
| 25,000 |
| ||||
NET CASH PROVIDED BY FINANCING ACTIVITIES |
| 855,142 |
|
| 374,364 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH |
|
|
|
|
|
|
|
|
| 23,805 |
|
| (3,558) |
| ||
Cash at beginning of period |
|
|
|
|
|
|
|
|
| 13,081 |
|
| 16,639 |
| ||
Cash at end of period |
|
|
|
|
|
|
|
| $ | 36,886 |
| $ | 13,081 |
| ||
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: |
|
|
|
|
|
|
| |||||||||
| Interest paid |
|
|
|
|
|
|
|
| $ | 1,064 |
| $ | 5,639 |
| |
SUPPLEMENTAL DISCLOSURE OF NONCASH FLOWS FINANCING |
|
|
|
|
|
| ||||||||||
| AND INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Deemed distribution |
|
|
|
|
|
|
|
| $ | 87,600 |
| $ | 21,400 |
| |
| Conversion of accounts payable, accrued compensation, notes |
|
|
|
|
|
| |||||||||
|
| payable and accrued interest to preferred stock and common stock | $ | 414,404 |
| $ | 10,000 |
| ||||||||
| Stock & warrant issued for inventory |
|
|
|
|
|
|
|
| $ | 9,000 |
| $ | - |
| |
| Stock & warrant issued for license |
|
|
|
|
|
|
|
| $ | 215,529 |
| $ | 25,501 |
| |
| Stock issued for note receivable |
|
|
|
|
|
|
|
| $ | - |
| $ | 49,000 |
| |
| Debt issued for license |
|
|
|
|
|
|
|
| $ | 140,000 |
| $ | - |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements. |
28
Entia Biosciences, Inc.
Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
NOTE 1 - ORGANIZATION AND OPERATIONS
Generic Marketing Services, Inc. was incorporated on July 19, 2007 under the laws of the State of Nevada as a subsidiary of Basic Services, Inc., also a Nevada corporation. On December 31, 2007, Basic Services spun off Generic Marketing Services. On October 8, 2008, Generic Marketing Services changed its name to Total Nutraceutical Solutions, Inc. (TNS, the Company, us, we, or our). We engage in the distribution of organic dietary supplement nutraceutical products in the United States of America. We are also engaged in the discovery, scientific evaluation and marketing of natural formulations that can be used in medical foods, nutraceuticals, cosmetics and other products developed and sold by Entia and by third parties.
On January 9, 2012, the amendment to our Articles of Incorporation involving the name change from Total Nutraceutical Solutions, Inc. to Entia Biosciences, Inc. (“Entia”) became effective with the Secretary of State of Nevada. We also filed articles of incorporation for a wholly owned subsidiary of Entia, with such subsidiary to be named Total Nutraceutical Solutions, Inc. in January 2012.
We have a history of incurring net losses and net operating cash flow deficits. We are also developing new technologies related to our organic nutraceutical products. At December 31, 2013, we had cash and cash equivalents of $36,886. These conditions raise substantial doubt about our ability to continue as a going concern. As a result, we anticipate that our cash and cash equivalent balances, anticipated cash flows from operations and anticipated operating cash flows will be sufficient to meet our cash requirements through May 2014.
In order for us to continue as a going concern beyond this point and ultimately to achieve profitability, we may be required to obtain capital from external sources, increase revenues and reduce operating costs. The issuance of equity securities will cause dilution to our shareholders. If external financing sources of financing are not available or are inadequate to fund our operations, we will be required to reduce operating costs including personnel costs, which could jeopardize our future strategic initiatives and business plans. The accompanying consolidated financial statements have been prepared assuming that the company continues as a going concern.
The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the matters discussed herein.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements and related notes have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Material intercompany transactions and balances have been eliminated in consolidation.
The consolidated financial statements include the accounts of Entia and Total Nutraceutical Solutions as of December 31, 2013 and 2012.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
29
Cash
We consider all highly liquid, short-term investments with original maturities of three months or less when purchased to be cash equivalents.
Accounts receivable
Accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses based on specific identification of accounts in our existing accounts receivable. Outstanding account balances are reviewed individually for collectibility. We determine the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense is included in general and administrative expenses, if any. We consider all accounts greater than 30 days old to be past due. Account balances are charged off against allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts was $2,526 at both December 31, 2013 and 2012.
Inventory
Inventory, which consists primarily of raw materials to be used in the production of our dietary supplement products, is stated at the lower of cost or market using the average cost method. We regularly review our inventory on hand and, when necessary, record a provision for excess or obsolete inventory.
Property and equipment
Property and equipment are recorded at cost. Additions and improvements that increase the value or extend the life of an asset are capitalized. Maintenance and repairs are expensed as incurred. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statement of operations. Depreciation is computed on a straight-line basis over the following estimated useful lives of the assets:
Office equipment | 3 years |
Production equipment | 5 to 7 years |
Leasehold improvements | Lesser of lease term or useful life of improvement |
Patents
Patents, once issued or purchased, are amortized using the straight-line method over their economic remaining useful lives. All internally developed process costs incurred to the point when a patent application is to be filed are expensed as incurred and classified as research and development costs. Patent application costs, generally legal costs, are capitalized pending disposition of the individual patent application, and are subsequently either amortized based on the initial patent life granted, generally 15 to 20 years for domestic patents and 5 to 20 years for foreign patents, or expensed if the patent application is rejected. The costs of defending and maintaining patents are expensed as incurred. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.
Impairment of long-lived assets
Our long-lived assets, which include property and equipment, patents and licenses of patents are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
We assess the recoverability of our long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated
30
useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.
We have recorded an impairment on our intangibles in the amount of $288,454 on December 31, 2013 and $0 for December 31, 2012.
Discount on convertible notes payable
We allocate the proceeds received from convertible notes between convertible notes payable and warrants, if applicable. The resulting discount for warrants is amortized using the effective interest method over the life of the debt instrument. After allocating a portion of the proceeds to the warrants, the effective conversion price of the convertible note payable can be determined. If the effective conversion price is lower than the market price at the date of issuance, a beneficial conversion feature is recorded as an additional discount to the convertible note payable. The beneficial conversion feature discount is amortized using the effective interest method over the life of the debt instrument. The amortization is recorded as interest expense on the consolidated statement of operations.
Fair value of financial instruments
The carrying amounts of our financial assets and liabilities, such as cash, accounts receivable and accounts payable approximate their fair values determined based on level 1 inputs in the fair value hierarchy because of the short maturity of these instruments. Due to conversion features and other terms, it is not practical to estimate the fair value of notes payable and convertible notes.
Fair value measurements
We measure fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 |
| Quoted market prices available in active markets for identical assets or liabilities as of the reporting date. |
|
|
|
Level 2 |
| Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. |
|
|
|
Level 3 |
| Unobservable inputs where there is little or no market data, which require the reporting entity to develop its own assumptions. |
We do not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis. Consequently, we did not have any fair value adjustments for assets and liabilities measured at fair value at December 31, 2013 or 2012, nor any gains or losses reported in the consolidated statement of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the years ended December 31, 2013 and 2012.
Revenue recognition
We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been performed, (iii) amounts are fixed or determinable and (iv) collectibility of amounts is reasonably assured.
Revenues from the sale of products, including shipping and handling fees but excluding statutory taxes collected from customers, as applicable, are recognized when shipment has occurred. We sell our products directly to customers. Persuasive evidence of an arrangement is demonstrated via order and invoice, product delivery is evidenced by a bill of lading from the third party carrier and title transfers upon shipment, the sales price to the customer is fixed upon acceptance of the order and there is no separate sales rebate, discount, or volume incentive.
31
Shipping and handling costs
Amounts charged to customers for shipping products are included in revenues and the related costs are classified in cost of goods sold as incurred. In 2013 and 2012, we incurred $31,996 and $26,059, respectively, in shipping costs included in cost of goods sold.
Advertising costs
Costs associated with the advertising of our products are expensed as incurred.
Research and development
Research and development costs are charged to expense as incurred. Research and development costs consist primarily of material and testing costs for research and development as well as research and development arrangements with unrelated third party research and development institutions. These research and development arrangements usually involve one specific research and development project. We may make non-refundable advances upon signing of these arrangements. Non-refundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are recognized as an expense as the related goods are delivered or as the related services are performed. Management periodically evaluates whether the goods will be delivered or services will be rendered. If management does not expect the goods to be delivered or services to be rendered, the capitalized advance payment is charged to expense. Research and development expense was $27,804 and $58,101 in 2013 and 2012, respectively.
Equity instruments issued to parties other than employees for acquiring goods or services
We account for all transactions in which goods or services are the consideration received for the issuance of equity instruments based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur. Currently such transactions are primarily awards of warrants to purchase common stock.
The fair value of each warrant award is estimated on the date of grant using a Black-Scholes option-pricing valuation model.
The assumptions used to determine the fair value of our warrants are as follows:
- | The expected life of warrants issued represents the period of time the warrants are expected to be outstanding. |
|
|
- | The expected volatility is generally based on the historical volatility of comparable companies’ stock over the contractual life of the warrant. |
|
|
- | The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the warrant. |
|
|
- | The expected dividend yield is based on our current dividend yield as the best estimate of projected dividend yield for periods within the contractual life of the warrant. |
Income taxes
We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
32
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in our consolidated statements of income in the period that includes the enactment date.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in our consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Should they occur, our policy is to classify interest and penalties related to tax positions as income tax expense.
The tax years that are open to examination are 2010, 2011, 2012 and 2013.
Net loss per common share
Basic and diluted net loss per share has been computed by dividing our net loss by the weighted average number of common shares issued and outstanding. Convertible preferred stock, options and warrants to purchase our common stock as well as debt which are convertible into common stock are anti-dilutive and therefore are not included in the determination of the diluted net loss per share for 2013 and 2012. The following table presents a reconciliation of basic loss per share and excluded dilutive securities:
|
|
| For the Years Ended | ||
|
|
| 2013 |
| 2012 |
Numerator: |
|
|
|
| |
Net loss |
| $ (3,213,827) |
| $ (1,285,548) | |
|
|
|
|
|
|
Denominator: |
|
|
|
| |
Weighted-average common shares outstanding | 7,533,540 |
| 7,298,579 | ||
|
|
|
|
|
|
Basic and diluted net loss per share | $ (0.43) |
| $ (0.18) | ||
|
|
|
|
|
|
Common stock warrants | 4,058,050 |
| 2,408,078 | ||
Series A convertible preferred stock | 2,819,690 |
| 1,099,000 | ||
Stock options |
| 2,352,099 |
| 830,504 | |
Convertible debt including interest | 932,332 |
| 405,226 | ||
Excluded dilutive securities | 10,162,171 |
| 4,742,808 |
Reclassifications
Certain reclassifications have been made to prior period financial statements and footnotes in order to conform to the current period's presentation.
Segments
We have determined that we operate in one segment for financial reporting purposes.
Recently issued accounting pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
33
NOTE 3 – INVENTORY
Inventory consists of the following at:
|
|
| December 31, 2013 |
| December 31, 2012 |
Raw materials |
|
| $ 240,750 |
| $ 271,312 |
Finished goods |
|
| 49,255 |
| 11,885 |
|
|
| 290,005 |
| 283,197 |
Less: reserve for excess and obsolete inventory | (151,064) |
| (151,064) | ||
|
|
| $ 138,941 |
| $ 132,133 |
We recorded a reserve adjustment of $0 and $23,491 for excess inventory in 2013 and 2012, respectively.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consists of the following at:
|
|
| December 31, 2013 |
| December 31, 2012 |
Office equipment |
| $ 26,284 |
| $ 24,584 | |
Production equipment | 83,615 |
| 39,791 | ||
Leasehold improvements | 16,328 |
| 13,946 | ||
|
|
| 126,227 |
| 78,321 |
Less: accumulated depreciation | (64,082) |
| (42,694) | ||
|
|
| $ 62,145 |
| $ 35,627 |
Depreciation expense was $25,327 and $18,312 for the years ended December 31, 2013 and 2012, respectively.
NOTE 5 - PATENTS AND LICENSES, NET
Our identifiable long-lived intangible assets are patents and prepaid licenses. On July 23, 2013, we were issued a patent in the United States. We have begun amortizing this patent on this date for a period of 15 years. The amount capitalized is $31,325. On May 1, 2013, we entered into an exclusive license agreement with Penn State Research Foundation (PSRF) for 15 years to market and sell product under a patent issued to PSRF in the United States. We incurred a license fee of $150,000 for this agreement and we are amortizing it over the life of the agreement. $70,000 was due on December 31, 2013 with the remainder due in May 2014. We have not made the payment for December 2013 because we are in negotiations with PSRF to expand the relationship under the licensed patents. In addition, in December 2013, we acquired indefinite-lived intangibles from a customer in exchange for stock and warrants. Total value of $288,454 for the intangibles were recorded to patents and licenses and are not subject to amortization, but are subject to impairment. Management has recorded an impairment of $288,454 for year ended 2013.
The licenses are being amortized over an economic useful life of 15-17 years. The gross carrying amounts and accumulated amortization related to these intangible assets consist of the following at:
|
|
| December 31, 2013 |
| December 31, 2012 |
Licenses and amortizable patents |
| $ 234,324 |
| $ 188,570 | |
Unamortized patents |
| 125,301 |
| - | |
Accumulated amortization |
| (16,127) |
| (5,464) | |
Patents and Licenses, net |
| $ 343,498 |
| $ 183,106 |
34
License amortization expense was $10,663 and $3,213 for the years ended December 31, 2013 and 2012, respectively. Annual aggregate amortization expense for our licenses for each of the next five years through December 31, 2018, is $15,357 per year and for years 2019 and later it is estimated to be $141,412.
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accrued expenses (included with accounts payable) consisted of the following at:
| December 31, 2013 |
| December 31, 2012 |
Executive compensation | $ 476,368 |
| $ 192,552 |
Royalties | - |
| 4,760 |
Other accruals | 60,671 |
| 18,309 |
| $ 537,039 |
| $ 215,621 |
Entia entered into an exclusive license agreement with PSRF for 15 years to market and sell product under a patent issued to PSRF in the United States. We incurred a license fee of $150,000 for this agreement where we paid $10,000 upfront and we owe $140,000 during second quarter of 2014. This debt does not accrue interest and is classified within accounts payable and accrued expenses on the balance sheet.
NOTE 7 – NOTES PAYABLE
Notes payable consists of the following at:
|
|
| December 31, 2013 |
| December 31, 2012 |
Notes payable - current |
|
|
| ||
7.85% unsecured, $781 due monthly | $ 1,964 |
| $ 1,426 | ||
4.15% unsecured, $2,678 due monthly | - |
| 21,095 | ||
4.15% unsecured, $2,771 due monthly | 21,824 |
|
| ||
|
|
| $ 23,788 |
| $ 22,521 |
Convertible notes payable, net | December 31, 2013 |
| December 31, 2012 | ||
5% unsecured due June 2013, convertible into preferred stock at $5.00 per share | $ - |
| $ 15,000 | ||
8%, unsecured due June 2014 (net of discount related to beneficial conversion feature of $49,004 in 2013 and $35,807 in 2012), convertible into common stock at $0.45 per share | 263,496 |
| 276,693 | ||
6% unsecured due June 2013 (net of discount related to beneficial conversion feature of $0 in 2013 and $4,277 in 2012), convertible into preferred stock at $5.00 per share | - |
| 8,723 | ||
5% unsecured due June 2013, convertible into preferred stock at $5.00 per share | - |
| 15,000 | ||
8% secured due August 2014 (net of discount related to beneficial conversion feature of $12,300 in 2013 and $0 in 2012), convertible into preferred stock at $5.00 per share | 37,700 |
| - | ||
6% unsecured, convertible into common stock at $2.00 per share, due March 31, 2014 | 50,000 |
| 50,000 | ||
8% unsecured due August 2014 (net of discount related to beneficial conversion feature of $40,552 in 2013 and $0 in 2012), convertible into common stock at a price to be determined after June 5, 2014 | 22,448 |
| - | ||
|
|
| $ 373,644 |
| $ 365,416 |
35
Convertible notes payable related party, net | December 31, 2013 |
| December 31, 2012 | ||
6% unsecured due December 2013 (net of discount related to beneficial conversion feature of $0 in 2013 and $11,507 in 2012), convertible into common stock at $2.00 per share | - |
| 63,493 | ||
0% unsecured due March 30, 2014 (net of discount related to beneficial conversion feature of $16,573 in 2013 and $0 in 2012, convertible into common stock at $0.65 per share | 23,427 |
| - | ||
|
|
| $ 23,427 |
| $ 63,493 |
Entia has debt in the principal amount of $515,500 in the form of five convertible notes payable; $90,000 is due on March 31, 2014, $63,000 that matures on June 5, 2014, $312,500 that matures on June 30, 2014 and $50,000 that matures on August 13, 2014.
On June 20, 2013, Entia entered into an Amendment and Transfer of Promissory Note agreement with Mark Wolf to extend the maturity date on a promissory note dated February 18, 2010 in the principal amount of $50,000 with interest accruing at 6% per annum from December 31, 2011 to December 31, 2013. Mr. Wolf also received consent from Entia to transfer ownership of the Promissory Note to Larry Johnson. This note has been extended until March 31, 2014.
On July 1, 2013, Entia was successful in negotiating an extension on the note for $312,500 at a rate of 8% due on June 30, 2014. This note had accrued interest in the amount of $41,010 as of June 30, 2013. In exchange for the extension, we issued 200,000 warrants with an exercise price of $0.45 per share with a 3-year term. All of the warrants vested on July 1, 2013 and were valued using the Black-Scholes valuation model. The fair value of the warrants was valued at $98,006 and is being amortized over the life of the loan as interest expense.
During the second quarter of 2013, Entia negotiated a conversion of $28,000 of debt and $1,840 of accrued interest that was due on June 30, 2013 and $75,000 of its debt and $11,812 of accrued interest that was due to mature on December 31, 2013 into Series A Preferred stock at $5.00 per share.
On August 13, 2013, Entia entered into a promissory note for one year at 8% in the principal amount of $50,000. The note is convertible into the Series A Preferred stock at $5.00 per share and the company granted the creditor warrants to purchase 50,000 shares of Entia’s common stock at $2.00 per share. We deemed there was no beneficial conversion feature related to the conversion option into the Series A Preferred stock but did post a discount for the value of the warrants and will amortize this expense to interest expense over the life of the note. The discount of $16,400 is classified as a reduction in the debt and is netted with the debt on the balance sheet. In addition, the note is secured by corporate property valued at $103,000.
On December 5, 2013, Entia entered into a convertible promissory note with a principal amount of $63,000. The term of the note is nine months and the note carries an 8% interest rate per annum, compounded annually. If the note remains unpaid after one hundred and eighty (180) days from the Issue date, the holder has the option to convert the principal and accrued interest into shares of our Company stock at a conversion price equal to 58% of the “trading price” as described in the note. We have calculated a discount for the beneficial conversion feature in the amount of $45,621 and will amortize this over 9 months to interest expense. The amount amortized for 2013 is $5,069 and zero for 2012.
On December 13, 2013, Entia entered into a promissory note due on March 31, 2014 at 0% in the principal amount of $40,000. This note is convertible into the common stock at $0.65 per share. Entia also granted the creditor warrants to purchase 20,000 shares of Entia’s common stock at $0.65 per share. The fair value of the warrants was valued at $9,760 and is being amortized over the life of the loan as interest expense. In addition, we calculated a beneficial conversion feature related to the conversion option and we posted a discount of $9,575 and will amortize this expense to interest expense over the life of the loan.
36
NOTE 8 – RELATED PARTY TRANSACTIONS
Debt agreements from board member
Entia issued 131,579 shares of common stock as payment for $50,000 of accrued compensation to its chief executive officer and board member. The shares were valued at $0.38 per share which resulted in a discount of $15,790 which was posted as a period expense.
On June 11, 2013, a board member executed a convertible promissory note in the amount of $40,000. The note stated no interest and was due on July 1, 2013. We granted the board member a five year warrant to purchase 10,000 shares of common stock at $0.45. The warrants are to vest 100% on July 1, 2013. This note was paid off prior to June 30, 2013.
Entia entered into a promissory note with a board member during 2012, for a 6% note for $75,000 maturing on December 31, 2013. These notes plus accrued interest of $11,812 were converted on June 4, 2013, into Series A Preferred stock at $5.00 per share.
Preferred stock purchase from board member
During the first quarter 2013, a board member purchased 1,000 shares of Series A Preferred stock for $5,000 cash.
NOTE 9 – STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred Stock
On May 26, 2011, our board of directors designated 350,000 shares of preferred stock as Series A preferred stock, $0.001 par value. The Series A preferred stock is entitled to a liquidation preference in the amount of $5 per share, votes on an as converted basis with the common stock on all matters as to which holders of common stock shall be entitled to vote, and is convertible into common stock on a one-for-ten basis.
During 2013, we issued the following:
·
140,175 shares were issued for cash proceeds of $700,875;
·
30,400 shares for conversion of $152,001 of accounts payable; and
·
26,494 shares for conversion of $132,402 of debt and accrued interest.
25,000 shares of the Series A Preferred stock were converted during 2013 into 250,000 shares of our common stock.
During 2012, 44,600 shares of Series A Preferred stock were issued for $223,000 in cash. In addition:
·
12,800 shares were issued for cash proceeds of $64,000. The fair value of the common stock into which the Series A preferred stock is convertible exceeded the allocated purchase price of the Series A preferred stock by $21,140 on the date of issuance, resulting in a beneficial conversion feature. Entia recognized the beneficial conversion feature as a one-time, non-cash deemed dividend to the holders of the Series A preferred stock on the date of issuance;
·
2,000 shares were issued in exchange for cancellation of a note payable totaling $10,000; and
·
7,000 shares valued at $35,000 were issued in exchange for consulting services provided.
Common stock
During 2013, we issued shares of common stock per the following:
·
264,158 shares with a value of $125,001 in exchange for accrued payroll by two of our officers;
·
250,000 shares were issued from conversion of 25,000 shares of Series A Preferred stock;
·
53,500 shares with a value of $31,090 to vendors in association with consulting agreements signed in 2013;
37
·
9,000 shares with a value of $4,320 in association with a consulting agreement signed August 1, 2013;
·
200,000 shares with a value of $124,000 for the purchase of a license agreement; and
·
76,396 shares with a value of $48,893 in association with employment agreements dated 2011 for two officers.
During 2012, we issued shares of common stock per the following:
·
666 shares of common stock were issued to two employees as compensation. This stock had a fair market value of $400,
·
50,000 shares of common stock were issued in exchange for a license agreement. The stock had a value of $25,501,
·
pursuant to an agreement authorized by Entia’s board of directors, Entia authorized a special price to current holders of warrants and/or options to exercise their warrants and/or options. If they committed to exercising their warrants/options, Entia would allow them to convert at $0.40 per share. This special price was effective only through July 31, 2012. There were a total of 222,500 warrants exercised for proceeds of $89,000. $30,000 was received in cash during third quarter 2012, $10,000 in cash was received during fourth quarter 2012 with the remaining $49,000 was exercised by receiving short-term notes with interest ranging from 6% to 20% due before April 2013. These notes are recorded on the balance sheet as a contra-equity account and the incremental expense from modification of warrants was calculated and deemed immaterial and
·
250 shares of common stock to its employees as a performance bonus. This stock has a value of $1.
Stock incentive plan
On September 17, 2010, our Board of Directors adopted the Total Nutraceutical Solutions, Inc. 2010 Stock Incentive Plan (“Plan”). The Plan provides for the grant of options to purchase shares of our common stock, and stock awards consisting of shares of our common stock, to eligible participants, including directors, executive officers, employees and consultants of the Company. We have reserved 1,550,000 shares of common stock for issuance under the Plan with an annual increase in shares of 50,000 as of January 1 of each year; commencing January 1, 2012. Stock options are granted at or below the closing price of our stock on the date of grant for terms ranging from four to fifteen years and generally vest over a five year period. The fair value of the option grants were calculated at the date of the grants using the Black-Scholes option pricing model with the following assumptions:
|
| December 31, 2013 |
| December 31, 2012 |
Expected dividend yield |
| - |
| - |
Expected stock price volatility |
| 216.96% - 236.55% |
| 233.73% - 248.63% |
Risk-free interest rate |
| 0.95% - 2.47% |
| 0.84% - 1.15% |
Expected term (in years) |
| 5 - 10 years |
| 5 - 7 years |
Weighted-average granted date fair value |
| $0.45 |
| $0.49 |
A summary of option activity under the stock option plan as of December 31, 2013, and changes during the year then ended is presented below:
38
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
| Weighted |
| Average |
|
|
|
| Number |
| Exercise |
| Average |
| Remaining |
| Aggregate |
|
| of |
| Price |
| Exercise |
| Contractual Term |
| Intrinsic |
|
| Shares |
| Range |
| Price |
| (Years) |
| Value |
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2011 |
| 659,242 |
| $ 0.47-$1.00 |
| $ 0.62 |
| 10 |
| - |
|
|
|
|
|
|
|
|
|
|
|
Granted |
| 542,857 |
| $ 0.40-$0.50 |
| $ 0.45 |
| 9 |
| - |
Exercised |
| - |
| - |
| - |
| - |
| - |
Expired |
| - |
| - |
| - |
| - |
| - |
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2012 |
| 1,202,099 |
| $ 0.40-$1.00 |
| $ 0.56 |
| 7.74 |
| - |
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2012 |
| 830,504 |
| $ 0.40-$1.00 |
| $ 0.57 |
| 8.19 |
| - |
|
|
|
|
|
|
|
|
|
|
|
Granted |
| 1,150,000 |
| $ 0.38-$0.81 |
| $ 0.47 |
| 8.07 |
| - |
Exercised |
| - |
| - |
| $ - |
| - |
| - |
Expired |
| - |
| - |
| $ - |
| - |
| - |
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2013 |
| 2,352,099 |
| $ 0.38-$1.00 |
| $ 0.51 |
| 7.90 |
| 199,505 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2013 |
| 1,810,344 |
| $ 0.38-$1.00 |
| $ 0.52 |
| 7.88 |
| 138,707 |
The range of exercise prices for options outstanding under the 2010 Stock Incentive Plan at December 31, 2013 are as follows:
Number of |
| Exercise |
shares |
| Price |
55,000 |
| $ 0.38 |
135,000 |
| $ 0.40 |
20,000 |
| $ 0.44 |
540,000 |
| $ 0.45 |
247,242 |
| $ 0.47 |
247,857 |
| $ 0.49 |
15,000 |
| $ 0.62 |
854,000 |
| $ 0.50 |
200,000 |
| $ 0.85 |
38,000 |
| $ 1.00 |
2,352,099 |
|
|
At December 31, 2013, the Company had 2,247,901 unissued shares available under the Plan. Also, at December 31, 2013, the Company had $221,217 of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 7 years.
39
Outstanding warrants to purchase common stock are as follows:
Date of Issue |
| December 31, 2013 |
| Exercise Price |
| Expiration |
November-13 |
| 369,997 |
| $0.50 - $0.70 |
| 11/2018 - 11/2020 |
October-13 |
| 137,985 |
| $1.00 |
| 10/2016 |
September-13 |
| 21,118 |
| $0.50 |
| 9/2020 |
August-13 |
| 50,000 |
| $2.00 |
| 8/2018 |
July-13 |
| 212,400 |
| $0.50 |
| 7/2020 |
June-13 |
| 850,852 |
| $0.45 - $5.00 |
| 06/2016 - 06/2020 |
May-13 |
| - |
|
|
|
|
April-13 |
| - |
|
|
|
|
March-13 |
| 88 |
| $0.70 |
| 03/2017 |
February-13 |
| 35 |
| $5.00 |
| 02/2019 |
January-13 |
| 20,201 |
| $0.49 - $5.00 |
| 06/2017 - 01/2020 |
As of December 2012 |
| 2,944,374 |
| $0.36 - $10.00 |
| 10/2013 - 10/2021 |
Total |
| 4,607,050 |
|
|
|
|
Less: |
|
|
|
|
|
|
Expired |
| 549,000 |
|
|
|
|
Exercised |
| - |
|
|
|
|
Total |
| 4,058,050 |
|
|
|
|
We use the Black-Scholes option-pricing model to determine the fair value of warrants on the date of grant.
In determining the fair value of warrants, we employed the following key assumptions:
|
| 2013 |
| 2012 |
Risk-Free interest rate | 0.95% - 3.32% |
| 0.84% - 1.08% | |
Expected dividend yield | 0% |
| 0% | |
Volatility |
| 216.48% - 239.20% |
| 202.65% - 264.48% |
Expected life |
| 3 - 10 years |
| 5 - 7 years |
At December 31, 2013 and 2012, the weighted-average Black-Scholes value of warrants granted was $0.57 and $0.50, respectively.
NOTE 10 – INCOME TAXES
For the years ended December 31, 2013, and 2012, we incurred net operating losses and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At December 31, 2013, we had approximately $3,245,256 of net operating losses. The net operating loss carryforwards, if not utilized, will begin to expire in 2026.
The components of our deferred tax assets/liabilities as of December 31, are as follows:
40
| 2013 |
| 2012 |
Deferred tax assets: |
|
|
|
Reserves and accruals | $ 188,000 |
| $ 118,000 |
Net operating loss carryforwards | 1,149,000 |
| 843,000 |
Total deferred tax assets: | 1,337,000 |
| 961,000 |
Deferred tax liabilities: |
|
|
|
Depreciation and amortization | 11,000 |
| 8,000 |
Net deferred tax assets before valuation allowance | 1,326,000 |
| 953,000 |
Less: Valuation allowance | (1,326,000) |
| (953,000) |
Net deferred tax assets | $ - |
| $ - |
For financial reporting purposes, we have incurred a loss in each period since inception. Based on the available objective evidence, including our history of losses, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, we provided for a full valuation allowance against our net deferred tax assets at December 31, 2013, and 2012. A reconciliation between the amount of income tax benefit determined by applying the applicable U.S. statutory income tax rate to pre-tax loss for the years ended December 31, is as follows:
| 2013 |
| 2012 |
Federal Statutory Rate | $ (1,056,000) |
| $ (430,000) |
Nondeductible expenses | 683,000 |
| 212,000 |
Change in allowance on deferred tax assets | (373,000) |
| (218,000) |
| $ - |
| $ - |
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Leases
On April 4, 2012, the Company entered into a Commercial Lease agreement with Lanz Properties, LLC for 13,081 square feet of office and warehouse space located at 13565 SW Tualatin-Sherwood Road, Suite 800, Sherwood, OR 97140. The new lease commenced on June 1, 2012 and will terminate on July 31, 2015. No rent was payable until October 2012. The base monthly rental rate started at $3,160, increasing to $3,260 in October 2013, and then $3,343 in June 2014. The Company has straight-lined the full value of the lease agreement over the life of the lease and has recorded this amount monthly. The amount of rent expense that is above the actual rent amount is recorded as deferred rent and is shown on the balance sheet in current liabilities as part of accounts payable and accrued expenses. The amount recorded for 2013 is $6,555 and $8,499 for 2012.
Future minimum lease payments for all of our facilities amount to $47,986 each year through 2014 and $27,992 for 2015. Rent expense for the years ended December 31, 2013 and 2012 was $43,497 and $36,312, respectively.
NOTE 12 – CONCENTRATIONS AND CREDIT RISK
Customers and Credit Concentrations
During 2013, approximately 29.8% of our net sales were to two customers as compared to 35.3% in 2012. Accounts receivable for these customers accounted for 27% and 86% of total accounts receivable at December 31, 2013 and 2012, respectively.
41
Vendor Concentrations
During 2013, approximately 25% of our purchases were made from one vendor as compared to 33% during 2012.
NOTE 13 – SUBSEQUENT EVENTS
On February 3, 2014, we entered into a convertible promissory note with a principal amount of $42,000. The term of the note is nine months and the note carries an 8% interest rate per annum, compounded annually. If the note remains unpaid after one hundred and eighty (180) days from the Issue date, the holder has the option to convert the principal and accrued interest into shares of our Company stock at a conversion price equal to 58% of the “trading price” as described in the note. We have calculated a discount for the beneficial conversion feature in the amount of $30,414 and will amortize this over 9 months to interest expense.
In July 2012, we entered into a note receivable with an investor in exchange for the issuance of common stock. The investor has not paid any principal on this note and, in February 2014, we sold the note receivable to another investor for $40,000 cash. We have recorded the sale of the note receivable for cash with a loss on sale of note receivable in the amount of $9,000 during first quarter of 2014.
42
Item 9. Changes in and Disagreements With Accountants On Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of disclosure controls and procedures
Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of those internal controls. As defined by the SEC, internal control over financial reporting is a process designed by our principal executive officer/principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements in accordance with U. S. generally accepted accounting principles.
As of the end of the period covered by this report, December 31, 2013, we initially carried out an evaluation, under the supervision and with the participation of our President (who is also our principal financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our President and chief financial officer initially concluded that our disclosure controls and procedures were not effective.
Management's Report On Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
As of December 31, 2013, our President, Chief Executive Officer and Principal Accounting and Financial Officer, Marvin S. Hausman, M.D., assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments. Based on that evaluation, our management concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
43
The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives; (3) ineffective controls over period end financial disclosure and reporting processes; and (4) inadequate control over contracts and commitments. The aforementioned material weaknesses were identified by our Chief Executive Officer and Principal Accounting and Financial Officer, Marvin S. Hausman, M.D., in connection with the review of our financial statements as of December 31, 2013. These material weaknesses were also identified in our annual evaluation as of December 31, 2012.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to SEC rules that permit smaller reporting issuers like us to provide only the management's report in this annual report.
Changes in internal controls over financial reporting
There was no change in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B. Other Information.
None.
44
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth certain information regarding our current directors and executive officers. Our executive officers serve one-year terms.
Name |
| Age |
| Position |
|
|
|
|
|
Marvin S. Hausman, MD |
| 72 |
| Chief Executive Officer and Chairman since August 28, 2008, Acting Principal Accounting and Financial Officer |
|
|
|
|
|
Elliot L. Shelton, Esq. |
| 64 |
| Secretary, Director since August 28, 2008. |
|
|
|
|
|
Devin Andres |
| 38 |
| Vice President for Marketing and Sales since October 22, 2010 Chief Operating Officer since March 12, 2013 |
|
|
|
|
|
Philip A. Sobol, MD |
| 59 |
| Director since August 28, 2008. |
Biography of Marvin S. Hausman M.D., Chairman and CEO
Dr. Hausman received his M.D. degree from New York University School of Medicine in 1967 and is a Board-Certified Urological Surgeon. He has over 30 years of drug development and clinical care experience at various pharmaceutical companies, including working in conjunction with Bristol-Myers International, Mead-Johnson Pharmaceutical Co., and E.R. Squibb.
Dr. Hausman served on the board of directors of OXIS International, Inc. from March 2002 to November 2003. Subsequently, Dr. Hausman was re-appointed to the board of directors of OXIS in August 2004. On December 10, 2004, the board of directors appointed Marvin S. Hausman, M.D. to serve as Chairman of the Board, Acting Chief Executive Officer and Acting Chief Financial Officer of OXIS. In February 2005, Dr. Hausman ceased to be the Chief Executive Officer of OXIS. In September 2006, Dr. Hausman was again appointed to serve as President and Chief Executive Officer by the board of directors of OXIS. In June 2008, Dr. Hausman resigned as President, Chief Executive Officer, Acting Principal Accounting and Financial Officer and Chairman of the Board of OXIS International, Inc. and as a director. Dr. Hausman served as a director and as Chairman of the Board of Axonyx Inc., a biotechnology company developing drugs for Alzheimer’s disease, from 1997 until the merger of Axonyx into Torrey Pines Therapeutics in October 2006, and had served as President and Chief Executive Officer of Axonyx from 1997 until September 2003 and March 2005, respectively. Dr. Hausman was a co-founder of Medco Research Inc., a pharmaceutical biotechnology company specializing in adenosine products which was subsequently acquired by King Pharmaceuticals. He has also served as a director of Arbios Technologies, Los Angeles, CA from 2003-2005 and of Regent Assisted Living, Inc., Portland, OR, from 1996-2001.
Dr. Hausman has done residencies in General Surgery at Mt. Sinai Hospital in New York, and in Urological Surgery at U.C.L.A. Medical Center in Los Angeles. He also worked as a Research Associate at the National Institutes of Health, Bethesda, Maryland. He has been a Lecturer, Clinical Instructor and Attending Surgeon at the U.C.L.A. Medical Center Division of Urology and Cedars-Sinai Medical Center, Los Angeles. He has been a Consultant on Clinical/ Pharmaceutical Research to various pharmaceutical companies, including Bristol-Meyers International, Mead-Johnson Pharmaceutical Company, Medco Research, Inc., and E.R. Squibb.
Dr. Hausman is President of Northwest Medical Research Partners, Inc. a firm specializing in the identification and acquisition of breakthrough pharmaceutical and nutraceutical products and which has assigned certain intellectual property to Entia in consideration for 350,000 shares of the Company’s common stock.
Dr. Hausman’s experience as a medical doctor who also has extensive experience with pharmaceutical and biotechnology companies, both as an executive and as a director, served as a basis for his qualification to be a member of our board of directors.
45
Biography of Philip A. Sobol, M.D., Director
Dr. Sobol has served on our board of directors since August 2008. Dr. Sobol is a practicing Orthopedic Surgeon who is the managing director of Sobol Orthopedic Medical Group, Inc., of Southern California. Dr. Sobol is certified by the American Board of Orthopedic Surgery and a Fellow of the American Academy of Orthopedic Surgery. From June 2007 to April 2010 Dr. Sobol served as a director of Cordex Pharma, Inc., formerly named Duska Therapeutics, Inc. Since 2004 he has been a member of S&B Surgery Center Board of Directors, and from 1984 until 1993 he was an Assistant Clinical Professor at the University of Southern California. Dr. Sobol received his BA degree from the University of Rochester, Rochester, New York and a Medical Doctorate degree from the University of Southern California, Los Angeles, California. Dr. Sobol’s experience as a medical doctor who also has experience with early stage companies and drug development was the basis for his appointment as a director of our company.
Biography of Devin Andres, Chief Operating Officer and Vice President
Devin Andres was appointed as Vice President on October 22, 2010 and was appointed Chief Operating Officer on March 12, 2013. Devin Andres has been compensated as a consultant to Entia from January 1, 2010 until October 28, 2011 at which time he committed to an employment agreement related to managing the day-to-day operations, developing and integrating core business processes, building market position for Entia through product, brand and channel development as well as locating, developing, and defining strategic business positions that maximize opportunities for Entia and Entia products.
Mr. Andres founded Simplenet Information Systems in 2000 and has developed extensive experience within the Information Technology and marketing fields. Mr. Andres successfully negotiated design, development, and support contracts on behalf of Simplenet with various companies including Equant (now Orange Business System), Dell, whereby, Mr. Andres consulted on projects for companies such as Lufthansa Airlines, Continental Airlines, Adidas, MasterCard, Evergreen Aviation Inc, and various others. Mr. Andres also served as the Director of Information Technology & Marketing for Willamette Autogroup Pontiac Buick GMC in Salem, Oregon from September 2004 to March 2010.
Mr. Andres received a Master of Business Administration from Capella University, Minneapolis, Minnesota in August 2009 and a Bachelor of Science, Information Technologies – Network Communications from Capella University in March 2008. Mr. Andres’ experience with information technology and marketing was the basis for his appointment as a director.
Biography of Elliot L. Shelton, Director
Mr. Shelton has served on our board of directors since August 2008. Mr. Shelton received his law degree from Pepperdine University in 1975 and from 1975 until the present has practiced law in the State of California. He has been Of Counsel, from September 1998 to date, to Fenigstein and Kaufman, a Professional Corporation, and the President of Elliot L. Shelton, a Professional Corporation. From 1999 to the present, he has been President and Director of the Assisted Living Foundation of America, a non-profit corporation. Mr. Shelton has worked as a partner in several law firms, including Mitchell, Silberberg & Knupp; Shea & Gould and, Gold; Marks, Ring & Pepper. Mr. Shelton’s experience as an attorney with a corporate related practice served as the basis for his appointment as a director of our company.
Our directors, executive officers and control persons have not been involved in any of the following events during the past ten years:
46
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires our executive officers and directors, and persons who beneficially own more than ten percent of our common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Executive officers, directors and greater than ten percent beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based upon a review of the copies of such forms furnished to us and written representations from our executive officers and directors concerning the fiscal year ended December 31, 2013, the following officers and directors failed to timely to report changes in ownership: Dr. Hausman failed to timely file a Form 4 reporting his acquisition of shares of common stock on July 12, 2013, but later reported the acquisition in a Form 4 on July 22, 2013. Marvin Hausman also failed to timely file a Form 4 reporting his acquisition of common stock purchase warrants and incentive stock options, but later reported the acquisitions in a Form 4 on October 17, 2013. Dr. Sobol failed to timely file a Form 4 reporting his acquisition of shares of common stock purchase warrants on July 11, 2013, but later reported the acquisition in a Form 4 on October 17, 2013. Devin Andres failed to timely file a Form 4 reporting his acquisition of common stock purchase warrants and incentive stock options, but later reported the acquisitions in a Form 4 on October 17, 2013.
Code of Ethics
We have not adopted a Code of Ethics for the Board nor any salaried employees.
Audit Committee and Financial Expert
We do not have an Audit Committee; our directors perform some of the same functions of an Audit Committee, such as: recommending a firm of independent certified public accountants to audit the annual financial statements; reviewing the independent auditors independence, the financial statements and their audit report; and reviewing management’s administration of the system of internal accounting controls. We do not currently have a written audit committee charter.
We have no financial expert. We believe the cost related to retaining a financial expert at this time is prohibitive. Further, because of our start-up operations and financial experience of our officers, we believe the services of a financial expert are not warranted.
Item 11. Executive Compensation.
The following table sets forth summary compensation information for the fiscal year ended December 31, 2013 and 2012 for our Chief Executive Officer who is also our Acting Chief Financial Officer, (our “Named Executive Officer”) who was appointed on August 28, 2008 and our Chief Operating Officer. We did not have any other executive officers during the fiscal years ended December 31, 2013 and 2012 who received compensation in excess of $100,000.
47
Summary Compensation Table
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|
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|
|
|
|
|
|
| Non- |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Qualified |
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|
|
|
Name |
|
|
|
|
|
|
|
|
|
|
| Non-Equity |
| Deferred |
|
|
|
|
and |
|
|
|
|
|
|
| Stock |
| Option |
| Incentive Plan |
| Compensation |
| All other |
|
|
Principal |
|
|
| Salary |
| Bonus |
| Awards |
| Awards |
| Compensation |
| Earnings |
| Compensation |
|
|
Position |
| Year |
| ($) |
| ($) |
| ($) |
| ($) |
| ($) |
| ($) |
| ($) |
| ($) |
Marvin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Hausman |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEO, Dir |
| 2013 |
| $ 300,000 |
| $ - |
| $ 15,000 |
| $ 79,814 |
| $ - |
| $ - |
| $ 187,212 |
| $ 582,026 |
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Marvin |
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|
Hausman |
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|
|
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|
|
|
CEO, Dir |
| 2012 |
| $ 150,000 |
| $ - |
| $ 15,000 |
| $ - |
| $ - |
| $ - |
| $ 102,488 |
| $ 267,488 |
|
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|
|
|
|
|
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Devin |
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|
Andres |
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|
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|
|
COO, VP |
| 2013 |
| $ 175,000 |
| $ - |
| $ 12,500 |
| $ 69,036 |
| $ - |
| $ - |
| $ 63,109 |
| $ 319,645 |
(1) $30,221 of this salary was paid during 2013 with the remaining $269,779 was accrued. $224,811 was accrued between January and October 2013 under the terms of the Employment Agreement dated October 28, 2011, while the remaining $50,000 represented compensation for the months of November and December at $25,000 per month pursuant to the increase in the cash salary in the third year of the Employment Agreement from $300,000 to $350,000 per year. (2) The stock award was part of the employment agreement that stated $30,000 was to be paid in stock in four quarterly tranches over a one year period. Half of these stock certificates, valued at $15,000, were issued in 2012 with the other half issued in 2013. (3) All other compensation for 2013 includes the value of warrants vested from employment agreement valued at $164,162 and reimbursement for travel expenses of $23,050. (4) $86,687 of the salary was paid during 2013, $63,836 was accrued and $24,477 was paid in common stock. (5) The stock award was part of the employment agreement dated October 28, 2011. Stock was issued for $25,000 with half of it being issued in 2012 and the remaining $12,500 issued in 2013. (6) All other compensation for 2013 includes the value of warrants vested from employment agreement. The warrants were valued at $59,860 and the remaining $3,249 is from reimbursements of travel expenses. |
We have an employment agreement with Marvin S. Hausman, M.D., our Named Executive Officer, dated October 28, 2011 pursuant to which Dr. Hausman was to be compensated as follows: (1) a base salary of $250,000 of which $120,000 was to be paid in cash and the remaining $130,000 to be paid in the form of $30,000 in common stock in four equal quarterly installments at $0.36 per share, and the first installment of 20,835 shares was issued on October 28, 2011, an option to purchase 138,900 shares at $0.47 per share, and a ten year warrant to purchase 138,900 shares at $0.36 per share; (2) as a retention incentive, a warrant to purchase 500,000 shares at $0.55 per share that vests monthly over three years, and (3) an annual bonus which Dr. Hausman may be awarded at the discretion of the board of directors based on his performance and the financial condition of the corporation. Dr. Hausman will also receive employee benefits, including family health and dental insurance coverage and short and long term disability insurance coverage. In addition, Dr. Hausman was issued 834,233 shares of common stock in lieu of cash for accrued consulting fees due to Dr. Hausman and out of pocket expenses incurred in the aggregate amount of $300,300. The employment agreement is for a one year term automatically extending for additional one-year terms until terminated by either party. The term of the agreement shall end immediately upon Dr. Hausman’s death, or upon his termination for cause, disability or his resignation for good reason. In the case of Dr. Hausman’s death, all compensation under the agreement shall cease. Entia or Dr. Hausman may elect not to renew the employment agreement by giving at least 60 days written notice prior to the termination date of the current term. Upon termination for cause by Entia, after a cure period of at least 10 days, all compensation shall cease and all unvested equity compensation shall expire. In the event Dr. Hausman terminates his relationship with Entia for “Good Reason,” as defined in the Employment Agreement, within six months of the occurrence of the event which established the “Good Reason,” or for “Good Reason” within six months of a change of control, Dr. Hausman shall receive an amount equal to 12 months of base salary for the then current term.
48
After the initial one-year term, Dr. Hausman’s compensation increases by $50,000 per annum for the subsequent two terms. Minimal compensation has been actually paid in correlation with his total salary. His unpaid compensation is being accrued and is shown on the balance sheet as a current liability in accrued expenses. All stock attributable to the employment agreement dated October 28, 2011 has been issued.
We do not maintain key-man life insurance for any our executive officers/directors. We do not have any long-term compensation plans.
Stock Option Grants
On June 21, 2013, Dr. Hausman was granted 7-year stock options at $0.45 per share vesting immediately.
Outstanding Equity Awards at Fiscal Year-Ending December 31, 2013
Outstanding Equity Awards at Fiscal Year-End |
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| |||
Options Awards |
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| Stock Awards |
|
| ||
Name | Number of Unexercised | Number of Unexercised | Equity Number of | Option $ | Option Date | Number of Stock | Market Or Units that | Equity Awards: | Equity Awards: Market |
(a) | (b) | ( c) | (d) | ( e) | (f) | (g) | (h) | (i) | (j) |
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|
Dr. Marvin |
|
|
|
|
|
|
|
|
|
S. Hausman | 138,900 | - | - | $ 0.47 | 10/27/2021 | - | - | - | - |
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|
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|
Dr. Marvin |
|
|
|
|
|
|
|
| �� |
S. Hausman | 200,000 | - | - | $ 0.45 | 6/20/2020 | - | - | - | - |
Potential Payments Upon Termination or Change in Control
Pursuant to his employment agreement dated October 28, 2011, Dr. Hausman would receive the following compensation following his resignation, retirement, or other termination of employment or following a change in control.
Upon termination within one year after change of control Dr. Hausman shall receive payment of 12 months of his base salary, full vesting of his equity awards and shall continue his health coverage at a cost to himself equal to that of similarly situated employees for the rest of the current term of the agreement or at least 12 months.
In the event Dr. Hausman terminates his relationship with Entia for “Good Reason” within six months of the occurrence of the event which established the “Good Reason,” or for “Good Reason” within six months of a change of control, Dr. Hausman shall receive an amount equal to 12 months of base salary for the then current term.
We have not entered into any other compensatory plans or arrangements with respect to our named executive officer, which would in any way result in payments to such officer because of his resignation, retirement, or other termination of employment with us or our subsidiaries.
49
Director Compensation
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| Fees |
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| Non-Equity |
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|
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| earned |
|
|
|
|
| Incentive |
| All |
|
|
|
|
|
| or Paid in |
| Stock |
| Option |
| Plan |
| Other |
|
|
|
|
|
| Cash |
| Awards |
| Awards |
| Compensation |
| Compensation |
| Total |
Name |
| Year |
| ($) |
| ($) |
| ($) |
| ($) |
| ($) |
| ($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elliot Shelton |
| 2013 |
| $ - |
| $ - |
| $ - |
| $ - |
| $ 59,860 |
| $ 59,860 |
Philip Sobol |
| 2013 |
| $ - |
| $ - |
| $ - |
| $ - |
| $ 83,757 |
| $ 83,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elliot Shelton |
| 2012 |
| $ - |
| $ - |
| $ - |
| $ - |
| $ 17,888 |
| $ 17,888 |
Philip Sobol |
| 2012 |
| $ - |
| $ - |
| $ - |
| $ - |
| $ 17,888 |
| $ 17,888 |
(2) All other compensation includes value of warrants granted and vested during 2013. 150,000 warrants were granted for services rendered while participating on the board. (2) All other compensation includes value of warrants vested during 2013. 189,669 warrants were granted to Dr. Sobol during 2013; 30,000 shares in connection with debt and 159,669 for services rendered while participating on the board. All but 20,000 warrants vested immediately. 20,000 will vest on March 31, 2014. |
We did not pay our directors any cash compensation during fiscal years ending December 31, 2013, and December 31, 2012.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table presents information, to the best of our knowledge, about the ownership of our common stock on March 28, 2014 relating to those persons known to beneficially own more than 5% of our capital stock and by our named executive officers and directors. The percentage of beneficial ownership for the following table is based on 8,297,645 shares of common stock outstanding
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and does not necessarily indicate beneficial ownership for any other purpose. Under these rules, beneficial ownership includes those shares of common stock over which the stockholder has sole or shared voting or investment power. It also includes shares of common stock that the stockholder has a right to acquire within 60 days after March 28, 2014 pursuant to options, warrants, conversion privileges or other right. The percentage ownership of the outstanding common stock, however, is based on the assumption, expressly required by the rules of the Securities and Exchange Commission, that only the person or entity whose ownership is being reported has converted options or warrants into shares of Entia Biosciences, Inc.’s common stock.
(1) These percentage figures are based upon 8,297,645 shares of our common stock outstanding as of March 28, 2014. Except as otherwise noted in these footnotes, the nature of beneficial ownership for shares reported in this table is sole voting and investment power.
(2) Marvin Hausman’s holdings include 2,919,988 shares of common stock, 20,025 shares of preferred stock that converts to 10 shares of common per preferred at $5.00 per share, a non-statutory stock option to purchase 138,900 shares at $0.47 per share issued on October 28, 2011, a non-statutory stock option to purchase 200,000 shares at $0.45 per share
50
issued on June 21, 2013, a five year warrant to purchase 25,000 shares at $1.00 per share, a ten year warrant to purchase 138,900 shares at $0.36 per share issued on October 28, 2011, a 10 year warrant to purchase 430,556 vested shares out of 500,000 shares exercisable at $0.55 per share issued on October 28, 2011, a five year warrant to purchase 100,000 vested shares at $0.60 per share issued on December 20, 2011 in conjunction with extending a convertible note payable, a seven year warrant to purchase 400,000 shares at $0.45 issued on June 21, 2013 and a three year warrant to purchase 7,313 shares at $1.00 issued on October 16, 2013. Dr. Hausman’s holdings of 2,587,025 fully diluted shares also include 350,000 common shares owned by Northwest Medical Research Partners Inc., which is controlled by Marvin S. Hausman, M.D. and 66,667 of 100,000 shares owned by MSH Ventures, Inc., in which Dr. Hausman has an equity interest of 66.66%. This number does not include 150,000 shares of common stock owned by the adult children of Marvin S. Hausman, M.D.
(3) Devin Andres’ holdings include 201,031 shares of common stock, 5,000 shares issuable upon exercise of a common stock purchase warrant exercisable at $2.50 per share, a ten year warrant to purchase 108,342 shares at $0.36 per share issued on October 28, 2011, a warrant to purchase 301,389 vested shares out of 350,000 shares exercisable at $0.55 per share issued on October 28, 2011, a seven year warrant to purchase 150,000 shares at $0.45 issued on June 21, 2013, a non-statutory stock option to purchase 108,342 shares at $0.47 per share issued on October 28, 2011, a non-statutory stock option to purchase 5,000 shares at $0.40 per share issued on June 29, 2011, a non-statutory stock option to purchase 25,000 shares at $0.38 per share issued on February 20, 2013 and a non-statutory stock option to purchase 150,000 shares at $0.45 per share issued on June 21, 2013.
(4) Phil Sobol’s holdings include 81,667 shares of common stock, 19,338 shares of preferred stock that converts to 10 shares of common per preferred at $5.00 per share, a five year warrant to purchase 25,000 shares at $1.00 per share, a ten year warrant to purchase 100,000 shares at $0.60 per share granted on December 20, 2011, a five year warrant to purchase 150,000 shares at $0.55 granted on May 17, 2012, a five year warrant to purchase 100,000 out of 150,000 shares at $0.40 per share issued on June 29, a five year warrant to purchase 10,000 shares at $0.45 issued on July 1, 2013, a seven year warrant to purchase 150,000 at $0.45 issued on June 21, 2013, a three year warrant to purchase 9,669 shares at $1.00 share issued on October 16, 2013 and a seven year warrant to purchase 20,000 shares at $0.65 issued on December 13, 2013 and a non-statutory stock option to purchase 100,000 shares at $0.85 issued on January 24, 2011. Dr. Sobol also has 61,538 shares of stock that can be converted pursuant to a convertible note entered into in December 2013.
(5) Elliot Shelton’s holdings include 142,916 shares of common stock, 100,000 shares of common stock issuable upon exercise of vested non-statutory stock options exercisable at $0.85 per share granted on January 24, 2011, a five year warrant to purchase 100,000 out of 150,000 at $0.40 issued on June 29, 2012 and a seven year warrant to purchase 150,000 shares at $0.45 granted on June 21, 2013.
Unless indicated otherwise, the address of each person or entity listed above is 13565 SW Tualatin-Sherwood Road #800, Sherwood, OR 97140.
We are not aware of any arrangements that may result in "changes in control" as that term is defined by the provisions of Item 403(c) of Regulation S-B.
We believe that all persons named have full voting and investment power with respect to the shares indicated, unless otherwise noted in the table. Under the rules of the Securities and Exchange Commission, a person (or group of persons) is deemed to be a "beneficial owner" of a security if he or she, directly or indirectly, has or shares the power to vote or to direct the voting of such security, or the power to dispose of or to direct the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. A person is also deemed to be a beneficial owner of any security, which that person has the right to acquire within 60 days, such as options or warrants to purchase our common stock.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
On December 20, 2011, we entered into an Amendment No. 1 to Promissory Note with Marvin S. Hausman, M.D., our Chief Executive Officer and Philip Sobol, a director, whereby Dr. Hausman and Dr. Sobol agreed to extend the maturity date of the Promissory Note dated December 30, 2009 in the principal amount of $50,000 from December 31, 2011 to December 31, 2013. The interest rate on the note remains 6% per annum. In exchange for the extension of the maturity date, Drs. Hausman and Sobol were each granted a five year warrant to purchase 100,000 shares of common stock at $0.60 per share with 50,000 warrants to each of Drs. Hausman and Sobol vesting immediately and the remaining warrants vesting monthly over a 2-year period. The other provisions of the Promissory Note remain the same. On June 4, 2013, the note plus accrued interest of $11,812 was converted into Series A Preferred stock at $5.00 per share.
51
Director Independence
Our Board of Directors has determined that none of our three directors are currently “independent directors” as that term is defined in Rule 4200(a)(15 ) of the Marketplace Rules of the National Association of Securities Dealers. We are not presently required to have a majority of independent directors. If we ever become a listed issuer whose securities are listed on a national securities exchange or on an automated inter-dealer quotation system of a national securities association, which has independent director requirements, we intend to comply with all applicable requirements relating to director independence.
Item 14. Principal Accounting Fees and Services.
Our auditors, Peterson Sullivan LLP, were appointed in March 2011 and audited our financial statements for the fiscal years ended December 31, 2013 and December 31, 2012 and reviewed our quarterly reports for our fiscal year ended December 31, 2012 and 2011. Aggregate fees billed to us by Peterson Sullivan LLP for the 2012 and 2011 audit and review of our quarterly reports in 2013 were as follows:
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|
| For the Years Ended December 31, | ||
|
|
| 2013 |
| 2012 |
Fee Category |
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|
|
| |
Audit fees (1) |
| $ 41,339 |
| $ 42,750 | |
Tax Fees |
| - |
| - | |
All other fees |
| - |
| - | |
Total Fees |
| $ 41,339 |
| $ 42,750 |
(1) | “Audit fees” consists of the aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements and review of interim financial statements included in our quarterly reports on Form 10-Q, or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. |
Audit Committee Policies and Procedures
We do not have an audit committee; therefore our board of directors pre-approves all services to be provided to us by our independent auditor. This process involves obtaining (i) a written description of the proposed services, (ii) the confirmation of our Principal Accounting Officer that the services are compatible with maintaining specific principles relating to independence, and (iii) confirmation from our securities counsel that the services are not among those that our independent auditors have been prohibited from performing under SEC rules. Our directors then make a determination to approve or disapprove the engagement of Peterson Sullivan LLP, for the proposed services.
52
PART IV
Item 15. Exhibits, Financial Statement Schedules.
The following information required under this item is filed as part of this report:
(a)
1. Financial Statements
The financial statements listed below are filed in Item 8 of Part II of this Form 10-K above:
| Page |
Consolidated Balance Sheets at December 31, 2013 and December 31, 2012 | 27 |
Consolidated Statements of Operations for the Years ended December 31, 2013 and 2012 | 28 |
Consolidated Statement of Stockholders’ Equity (Deficit) for the Years ended December 31, 2013 and 2012 | 29 |
Consolidated Statements of Cash Flows for the for the Year ended December 31, 2013 and 2012 | 30 |
2. Financial Statement Schedules: Page 31
Not Applicable
3. Exhibits specified by Item 601 of Regulation S-K.
Exhibit Number | Description of Exhibit | Filed Herewith | Form | Exhibit | Filing Date |
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|
|
3.1 | Amended and Restated Articles of Incorporation of Registrant |
| 8-K | 3.1 | 10/29/2010 |
|
|
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|
|
3.2 | Amended and Restated Bylaws of Registrant |
| 8-K | 3.2 | 09/22/2010 |
|
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3.3 | Amended Articles of Merger Incorporation as currently in effect |
| 8-K | 3.3 | 10/13/2008 |
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10.1 | Exclusive Option Agreement dated May 1, 2006, between The Penn State Research Foundation and Northwest Medical Research Inc. |
| 8-K | 10.1 | 09/04/2008 |
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10.2 | Assignment Agreement to the Option Agreement, dated July 31, 2008, among The Penn State Research Foundation, Northwest Medical Research Inc. and Generic Marketing Services, Inc. |
| 8-K | 10.2 | 09/04/2008 |
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10.3 | Assignment and Assumption Agreement, dated July 31, 2008, between Northwest Medical Research Inc. and Generic Marketing Services, Inc. |
| 8-K | 10.3 | 09/04/2008 |
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|
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10.4 | Form of Common Stock and Warrant Purchase Agreement |
| 8-K | 10.1 | 06/12/2009 |
|
|
|
|
|
|
10.5 | Form of Securities Purchase Agreement |
| 8-K | 10.1 | 09/21/2009 |
|
|
|
|
|
|
10.6 | $50,000 Promissory Note between Entia and Marvin S. Hausman, M.D. and Philip Sobol dated December 30, 2009 |
| 8-K | 10.1 | 12/31/2010 |
|
|
|
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|
|
10.9 | $50,000 Promissory Note between Entia and Mark C. Wolf dated February 18, 2010 |
| 10-K | 10.9 | 4/15/2010 |
53
|
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|
10.10 | Profit Sharing Agreement between Entia, American Charter & Marketing LLC, and Delta Group Investments, Limited dated March 26, 2010 |
| 10-K | 10.10 | 4/15/2010 |
|
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10.11 | Form of Common Stock and Warrant Agreement 2010 |
| 8-K | 10.1 | 12/20/2010 |
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10.12 | $312,500 Promissory Note between Entia and Delta Group Investments Limited dated January 21, 2011 |
| 8-K | 10.2 | 2/22/2010 |
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10.13 | Termination of Profit Sharing Agreement dated February 21, 2011 |
| 8-K | 10.1 | 2/22/2011 |
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10.14 | Lease Agreement between Entia and Sherwood Venture LLC dated March 15, 2011 |
| 8-K | 10.1 | 4/6/2011 |
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10.15 | Form of Warrant A Agreement 2010 |
| 8-K | 10.2 | 12/22/2010 |
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10.16 | Form of Warrant B Agreement 2010 |
| 8-K | 10.3 | 12/22/2010 |
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|
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended. | X |
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31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended. | X |
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32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). | X |
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32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). | X |
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54
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, as amended, the registrant caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in Portland, Oregon on this 28th day of March, 2014.
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| ENTIA BIOSCIENCES, INC. | |
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| By: | /s/ Marvin S. Hausman, M.D. |
| Marvin S. Hausman, M.D. Chief Executive Officer, Chairman of the Board (Principal Executive Officer) (Principal Financial and Accounting Officer) | |
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In accordance with Section 13 or 15(d) of the Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant in the capacities indicated below on this 28th day of March, 2014.
Signature |
| Title |
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/s/ Marvin S. Hausman, M.D. |
| Chief Executive Officer, Chairman of the Board, Director |
Marvin Hausman, M.D. |
| (Principal Executive Officer) |
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| (Principal Financial and Accounting Officer) |
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/s/ Philip A. Sobol, M.D. |
| Director |
Philip A. Sobol, M.D. |
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/s/ Elliot L. Shelton, Esq. |
| Director |
Elliot A. Shelton, Esq. |
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