SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the Quarterly Period ended September 30, 2012
Commission File Number: 000-52864
Entia Biosciences, Inc.
(Exact name of Registrant as specified in its charter)
13565 SW Tualatin-Sherwood Rd #800, Sherwood, OR 97140
(Address of principal executive offices)
(Registrants telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
On November 14, 2012, 7,444,341 shares of the registrant's common stock, par value $0.001 per share, were outstanding.
Part 1: FINANCIAL INFORMATION
Item 1. Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, Inc. spun off Generic Marketing Services and on October 8, 2008, Generic Marketing Services changed its name to Total Nutraceutical Solutions, Inc. On January 9, 2012, the Nevada Secretary of State accepted an amendment to our Articles of Incorporation to change the name again to Entia Biosciences, Inc. (Entia, the Company, us, we or our) and to form a wholly owned subsidiary named Total Nutraceutical Solutions, Inc. (TNS) Entia is an emerging biotechnology company engaged in the discovery, formulation and marketing of natural compounds and whole foods that can be used in branded medical foods, nutraceuticals, cosmetics and other products sold by us, our TNS subsidiary and by third parties.
On February 15, 2012 a 10:1 reverse stock split became effective after we received authorization from Financial Industry Regulatory Authority (FINRA) for the corporate action that was approved by the shareholders on December 19, 2011.
On May 15, 2012, Entia moved from its current location to a larger building in order to increase its in-house research and manufacturing capability, increase its warehouse storage capacity, and accommodate anticipated increases in order fulfillment and staffing. By moving to the larger facility, Entia was able to vertically integrate its Vitamin D enhancement technology and the milling, blending, encapsulating, bottling, labeling, packaging and fulfillment of its products. This move resulted in a significant improvement in production efficiencies and the cost of its final products. Production of cosmetic products and certain nutraceuticals are still being outsourced.
We have a history of incurring net losses and net operating cash flow deficits. We are continually researching and developing new technologies related to our organic nutraceutical products, including the production of medical foods for clinical studies in diabetes, anemia and Parkinsons disease. At September 30, 2012, we had cash and cash equivalents of $14,698. 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 December 2012.
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. 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 unaudited interim financial statements and related notes have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information, and with the rules and regulations of the United states Securities and Exchange Commission (SEC) to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Unaudited interim results are not necessarily indicative of the results for the full year. These unaudited interim financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2011 and notes thereto contained in the Companys Annual Report on Form 10-K filed with the SEC.
Investments for which we possess the power to direct or cause the direction of the management and policies, either through majority ownership or other means, are accounted for under the consolidation method. The consolidated financial statements include the accounts of Entia and TNS. All intercompany accounts have been eliminated for the purpose of the consolidated financial statement presentation.
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.
We consider all highly liquid, short-term investments with original maturities of three months or less when purchased to be cash equivalents.
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 and $2,526 at September 30, 2012 and December 31, 2011, respectively.
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 first-in, first-out 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:
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 assets 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 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.
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 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:
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 September 30, 2012 or December 31, 2011, 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 periods ended September 30, 2012 and December 31, 2011.
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.
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.
Advertising and promotion costs
Costs associated with the advertising and promotion of our products are expensed as incurred.
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:
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 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.
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 three months ending September 30, 2012 and 2011 and the nine months ending September 30, 2012 and 2011. The following table presents a reconciliation of basic loss per share and excluded dilutive securities:
Certain reclassifications have been made to prior period financial statements and footnotes in order to conform to the current period's presentation.
We have determined that we operate in one segment for financial reporting purposes.
Recently issued accounting pronouncements
NOTE 3 INVENTORY
Inventory consists of the following:
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consists of the following:
NOTE 5 - PATENTS AND LICENSES, NET
Our identifiable long-lived intangible assets are patents and prepaid licenses. Patent and license amortization is $803 and $178 for the three months ended September 30, 2012 and 2011, respectively and $2,383 and $251 for the nine months ended September 30, 2012 and 2011, respectively.
The licenses are being amortized over an economic useful life of 17 years. The gross carrying amounts and accumulated amortization related to these intangible assets consist of the following at:
NOTE 6 CAPITAL LEASE
In April 2012, we entered into a capital lease agreement totaling $7,021 for the lease of an encapsulating machine used to encapsulate our powdered product. The lease is payable over 30 months interest free.
The following is a schedule by years of future minimum lease payments under capital leases.
NOTE 7 NOTES PAYABLE
Notes payable consists of the following:
Entia had debt in the principal amount of $392,500 in the form of convertible notes payable of which $377,500 was to mature on June 30, 2012. Entia was successful in renegotiating all but one of these notes to extend their maturity dates to June 30, 2013. $50,000 of the debt was extended month-to-month, and as such, all is classified as short-term on the balance sheet. In consideration for extending the maturity date, Entia issued 50,000 warrants valued at $48,533 and modified an existing conversion feature for one of the notes.
For one of the convertible notes payable modified in the second quarter, we deemed the terms of the note modification to be substantially different due to the change in the conversion rate and treated the convertible note payable as extinguished and exchanged for a new note. We recorded a gain of $75,315 on the extinguishment.
NOTE 8 RELATED PARTY TRANSACTIONS
Consulting services from Chairman and CEO
Expense for consulting services provided by the Chairman/CEO were $30,000 and $90,000 for the three and nine months ended September 30, 2011, respectively. No consulting services were provided for 2012, as the Chairman/CEO was converted to an employee in October 2011.
Debt agreements from board member
Entia entered into a promissory note with a board member for a 6% note for $25,000 maturing on December 31, 2013. The note is reflected on the balance sheet, net of discount in the long term liabilities.
Preferred stock purchase from board member
During the second quarter 2012, a board member purchased 5,000 shares of Series A preferred stock, a $0.001 par value for $5.00 per share.
NOTE 9 STOCKHOLDERS EQUITY (DEFICIT)
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 the third quarter 2012, Entia issued 4,600 shares of Series A preferred stock for cash proceeds of $23,000.
During the second quarter 2012, Entia issued shares of Series A preferred stock for the following:
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 $21,139 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;
1,000 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.
During the first quarter 2012, 19,000 shares of Series A preferred stock were issued with a value of $95,000.
During the third quarter of 2012, Entias board of directors agreed to a special price to current holders of 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 with the remaining $59,000 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.
During the second quarter of 2012, 50,000 shares of common stock valued at $50,000 were issued in exchange for a license agreement.
During the first quarter 2012, 666 shares of common stock were issued to two employees as compensation. This stock had a fair market value of $400.
Stock incentive plan
On September 17, 2010, our Board of Directors adopted the 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 1,500,000 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. The fair value of the option grants were estimated at the date of the grants using the Black-Scholes option pricing model with the following assumptions: expected volatility of 233.73% - 248.63%, a risk free rate of 0.84% - 1.15%, and an expected life of 4 - 10 years for the period ended September 30, 2012.
There were 103,513 authorized shares available under the Plan, and there were options to purchase 807,281 shares of stock exercisable, with a remaining contractual term of 10 years at September 30, 2012. The weighted average grant date fair value of stock options granted during the quarter ended September 30, 2012 was $0.53. The weighted average exercise price of stock options granted and exercisable is $0.56 on September 30, 2012. The aggregate fair value of options vested on September 30, 2012 is $170,342. Unvested options amounted to $263,227 at September 30, 2012 and there were 20,000 options forfeited with a value of $7,655, none exercised, or expired during the quarter ended September 30, 2012.
At September 30, 2012 there was $762,430 of aggregate intrinsic value of outstanding stock options, including $512,137 of aggregate intrinsic value of exercisable stock options. Intrinsic value is the total pretax intrinsic value for all in-the-money options (i.e., the difference between the Companys closing stock price on the last trading day of third quarter 2012 and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised their options as of September 30, 2012. This amount changes based on the fair market value of the Companys stock.
The Company had $263,227 of total unrecognized compensation cost related to unvested stock options at September 30, 2012, which is expected to be recognized over a weighted average period of 7 years.
Warrants Consulting Agreements
During the third quarter of 2012, Entias board of directors agreed to a special price to current holders of 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 with the remaining $59,000 was exercised by receiving short-term notes with interest ranging from 6% to 20% due before April 2013.
During the second quarter 2012, we issued warrants to purchase 30,496 shares of common stock under agreements for consulting services and warrants to purchase 308,750 shares of common stock under debt agreements to raise capital. These warrants have an exercise price ranging from $0.45 to $5.00 per share and have an average term of 5.75 years.
During first quarter 2012, we issued warrants to purchase 152 shares of common stock under agreements for consulting services. These warrants have an exercise price of $5.00 per share and have a term of 7 years.
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 during the periods ended September 30:
NOTE 10 - COMMITMENTS AND CONTINGENCIES
On April 4, 2012, Entia Biosciences, Inc. entered into a Commercial Lease agreement with Lanz Properties, LLC for 13,081 square feet of office and warehouse space located at 13565 S.W. Tualatin-Sherwood Road, Suite 800, Sherwood, Oregon 97140. The
new lease commences June 1, 2012 and will terminate on July 31, 2015. No rent will be payable until October 2012. The base monthly rental rate will start at $3,160, increasing to $3,260 in October 2013, and then $3,343 in June 2014.
Entias prior two leases for 3,400 square feet at 14889 S.W. Tualatin-Sherwood Road #205, Sherwood, Oregon 97140, had a base monthly rent of $2,400 and ended on May 31, 2012. Management believes that the new facility offers a better location and configuration for its biotechnology activities and provides significantly more space for manufacturing, fulfillment, and administration over the next three years.
Entia calculated the deferred rent amount related to the long-term lease agreement and determined that the amount to accrue would be immaterial to the financial statements, and thus, decided not to record or disclose this amount.
NOTE 11 CONCENTRATIONS AND CREDIT RISK
Customers and Credit Concentrations
For the three months ending September 30, 2012, approximately 46.0% of our net sales were to four customers compared to approximately 50.9% for the three months ending September 30, 2011 For the nine months ending September 30, 2012, 52.6% of our net sales were to four customers compared to 48.7% at September 30, 2011. As of September 30, 2012, accounts receivable for these customers accounted for approximately 68% of total accounts receivable as compared to 36% at December 31, 2011.
For the three months ending September 30, 2012, approximately 76.3% of our purchases were made from two vendors as compared to approximately 74.7% for the three months ending September 30, 2011. For the nine months ending September 30, 2012, 61.5% of our purchases were made from two vendors as compared to 71.3% for the nine months ending September 30, 2011.
NOTE 12 SUBSEQUENT EVENTS
There have been no subsequent events as of the date of this filing.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Entia Biosciences, Inc. (also referred to as Entia or "the Company") is an emerging biotechnology company that has acquired the exclusive world-wide rights to the genetic transporter for 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 roll for Ergo in diseases afflicting millions of people world-wide.
Initially discovered in the early 1900s, Ergo is a little known antioxidant that is found in naturally high concentrations almost exclusively in mushrooms and other fungi. Ergo is transferred directly from these sources into the soil where it is taken up by plants and grazing mammals. For thousands of years, our hunter/gatherer genetics have relied on this process to help maintain adequate levels of Ergo in our blood to fight oxidative stress, DNA damaging free radical reactions, and the onset and progression of disease. Entia theorizes that during the past century the introduction of modern agricultural practices (chemical fertilizers/insecticides and over tilling of the soil) have been gradually eradicating mushrooms from our farmland and depleting Ergo from the food supply. During this same period, our dietary habits have been changing (chemical additives and heavily process foods) which Entia believes is further accelerating Ergo deficiency in the general population around the world and may explain the dramatic increase we are now seeing in diabetes, arthritis, neurodegenerative, and other debilitating diseases.
Ergocalciferol (Vitamin D2) is another genetically-required nutrient found in naturally high concentrations in mushrooms. Considered essential to life, Vitamin D is a powerful antioxidant that can be ingested from vegetation (D2) and/or synthesized by skin exposure to sunshine (D3) to maintain a healthy immune system and regulate cell differentiation and growth. Recognized as a common factor in obesity, which affects more than 25% of the US population and 10% of total US medical spending, Vitamin D deficiency is now being linked with a growing number of serious conditions including diabetes, cancer, heart and bowel disease, mental illness, osteoporosis, and Multiple Sclerosis. Health Canada estimated in 2010 that Vitamin D deficiency affects >85% of all Canadians and normalization could lower the death rate by 16.1% and economic burden by $14 billion/year. Entia acquired the exclusive rights to technology in 2009 that dramatically increases Vitamin D2 levels in mushrooms using pulsed ultraviolet light, naturally boosting IUs/gram by more than 1000% within seconds.
Entias commercialization strategy for this technology is to develop and scientifically validate the benefits of proprietary medical food products, functional ingredients, nutritional supplements and other products containing Ergo and/or Vitamin D2. Unlike Vitamin D, there are currently no commercially available diagnostic tests that can measure Ergo levels. Entia believes that its commercialization strategy will be significantly enhanced if it can help to accelerate introduction of a cost effective method of baseline testing to determine deficiency levels in the general population and confirm the need for supplementation with the companys medical food products.
The non-therapeutic market for consumer wellness (vitamins and nutritional supplements) is booming and expected to continue its healthy growth. Nearly three-quarters of American adults report using dietary supplements, and the market is currently worth nearly $30 billion in the U.S. Entia believes that the emerging therapeutic market for supplementation (medical foods and functional ingredients) could be much larger in the next decade as the benefits of the technology become more broadly understood and accepted. The U.S. nutraceutical market is expected to be worth more than $4 billion by 2015, with compound annual growth of 8% from 2011 to 2015. Additionally, the functional food and drink market is outpacing conventional food and drinks globally by about 4% per year.
Results of Operations for the Three and Nine Months ended September 30, 2012.
Revenues and Cost of Goods Sold:
Revenues. Revenues are generated primarily from the sale of our mushroom-based nutraceutical dietary supplement products. The 33.1% decrease in revenues for the three months ending September 30, 2012 from 2011 was due to the mix of product sales and overall sales decrease during the periods presented. The 14.9% decrease for nine months ended was due to the large decrease in revenues during the first and third quarter of 2012 as compared with the first and third quarter of 2011.
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 the three months ended September 30, 2012 increased from 2011 due to a more accurate costing system being implemented for our product during 2012. The decrease in cost of goods sold for the nine months ending September 30, 2011 is due to increased efficiencies at producing product, inventory management and the ability to produce most of the product in-house instead of subcontracting it to third parties.
The following is a summary of certain consolidated statement of operations data for the periods:
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 decrease from 2011 is due to the decrease in advertising expense by using web-based options that occurred during third quarter 2011.
Sales Commissions/Consulting fees. These expenses are comprised of fees incurred by third-party consultants for the provision of administrative, information technology and marketing management services. The decrease in these expenses from 2011 was due to the smaller amount of costs incurred to compensate third party consultants for services in third quarter 2012 and the reduction in sales persons within the company.
Professional fees. These expenses primarily include accounting/auditing fees, legal fees and stock transfer fees. The decrease in professional fees from 2011 is due primarily to decrease legal and auditing fees in 2012.
General and administrative expenses. These expenses primarily include compensation, costs related to travel, rent and utilities, insurance, depreciation, product development, payroll and bad debt. The increase from 2011 is attributable to an increase in stock based compensation and the addition of employees during 2012. In 2011, Entia had no employees, only consultants.
Inflation has not had a significant impact in the current or prior periods.
Significant changes in the number of employees
As of September 30, 2012, we have seven employees, Marvin S. Hausman, M.D., our Chief Executive Officer, Devin Andres our Vice President, three other full and part-time employees and two paid interns. 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 September 30, 2012, cash totaled $14,698, compared to $16,639 at December 31, 2011. The primary reasons for the net decrease in 2012 are described below. Working capital was $(708,638) at September 30, 2012, compared to $(291,271) at December 31, 2011. The change in working capital was due primarily to the maturity date of most of our debt and decrease in cash. The net change in cash and cash equivalents for the periods presented was comprised of the following:
Operating Activities. The increase in net cash flows used from operating activities was due primarily to a smaller net loss from operating activities and an increase in accounts payable and accrued expenses during the nine months ended September 30, 2012.
Investing Activities. The increase in net cash flows used from investing activities was due primarily to acquisitions of patents and patents pending and purchase of fixed assets.
Financing Activities. The increase in net cash flows from financing activities was due primarily to proceeds from the issuance of Series A Preferred Stock and proceeds from sales of common stock.
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 December 2012.
We expect our revenues to increase in the fourth quarter of 2012. Notwithstanding, we anticipate generating losses in 2012 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 have successfully negotiated an extension on all of our debt that was maturing on June 30, 2012 for one year. We will require additional capital of at least approximately $392,500 to repay debt maturing on June 30, 2013 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, 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.
There have been no subsequent events as of the date of this filing.
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 September 30, 2012, we had cash and cash equivalents of $14,698. 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 December 2012.
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 have no off-balance sheet arrangements.
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 3. Quantitative and Qualitative Disclosures about Market Risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of our Chief Executive Officer who is also our principal financial and accounting officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as of June 30, 2012. Based on that evaluation, our principal executive officer and principal financial officer concluded that the material weaknesses identified in our management report on internal controls and procedures contained in our Form 10-K for the fiscal year ended December 31, 2011, Item 9A filed on March 30, 2012 still exist, and therefore our disclosure controls and procedures were not effective as of September 30, 2012.
Changes in Internal Control Over Financial Reporting
As of September 30, 2012, there have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended September 30, 2012, that materially affected, or are reasonably likely to materially affect, our companys internal control over financial reporting.
Part II.OTHER INFORMATION
Item 1. 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 1A. Risk Factors
See Risk Factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and the discussion above in Part I, Item 2, under " Liquidity and Capital Resources.
We have undertaken a private placement of convertible preferred stock for $1.5 million. During the third quarter 2012, 4,600 shares of preferred stock were issued with a value of $23,000 for cash. During the second quarter 2012, 6,800 shares of preferred stock were issued with a value of $34,000 for cash. 10,000 shares of preferred stock were issued with a value of $50,000 for extinguishment of a $10,000 note, for services valued at $35,000 and $5,000 cash. In addition, 5,000 shares were issued for cash from a related party. Each preferred share is convertible into 10 shares of common stock. The issuance of the preferred shares was exempt from registration based on Regulation D, Rule 506 and Section 4(2) and under the Securities Act.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.