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ERGO > SEC Filings for ERGO > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for ENTIA BIOSCIENCES, INC.

Form 10-K for ENTIA BIOSCIENCES, INC.


31-Mar-2014

Annual Report


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


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


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,


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.

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