UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2014.
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OR
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TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _______ to _______.
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000-52864
(Commission file number)
Entia Biosciences, Inc.
(Exact name of registrant as specified in its charter)
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Nevada
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26-0561199
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(State or other jurisdiction
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(IRS Employer
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of incorporation or organization)
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Identification No.)
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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 o 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 o 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 o 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 o
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. o
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 o Accelerated filer o Non- accelerated filer o 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 o NO x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant is $3,183,009 based on the stock market price of the company’s shares on June 30, 2014. 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 30, 2015: 16,709,309 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
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PART I
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5
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Item 1.
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Item 1A.
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Item 1B.
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Item 2.
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Item 3.
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Item 4.
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PART II
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Item 5.
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Item 6.
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Item 7.
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Item 7A.
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Item 8.
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Item 9.
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Item 9A.
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Item 9B.
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PART III
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Item 10.
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Item 11.
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Item 12.
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Item 13.
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Item 14.
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PART IV
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Item 15.
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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.”
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 by Entia have confirmed significant transporter activity in diabetes, arthritis, alopecia areata (hair loss) 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 will commence 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). In 2014, the Company signed its first national distribution agreement for GROH®, a boutique medical luxury line of hair and skin care products to be retailed through professional high-end salons and day spas.
Our Business
Entia believes that its ErgoD2® platform may play an essential role in achieving iron homeostasis in various disease states and will be the core of our innovative medical therapies. These therapies, aim to positively affect DNA synthesis, red blood cell production, neuronal function, and the immune system and are proving applicable to diseases such as Chronic Kidney Disease, Parkinson’s, Alzheimer’s, Multiple Sclerosis, Diabetes, Alopecia, Psoriasis and those suffering from hair loss. 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 companion therapy for all three groups in the early stages of the disease and dialysis and erythropoietin stimulating agent (“ESA”) like Epogen® 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 Portobello 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.
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 for ErgoD2® 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 application of our ErgoD2® platform technology and functional ingredients in medical foods and other consumer health and wellness brands that address multi-billion dollar market opportunities. Our primary focus has been on three core products:
GROH® is an emerging line of natural beauty products for the professional salon and spa industry. GROH® is the first product line developed by Entia that utilizes the ErgoD2 technology in topical formulations as well as ingestible supplements. GROH®, is positioned as a boutique medical luxury line and is sold through high-end salon and day spas. GROH® represents an evolution in natural and organic products that target the health conscious consumer looking for natural effective products to support healthy hair, scalp, skin and nails.
Entia began selectively positioning GROH® within the industry’s premier organizations, thought leaders, and trend setters in February of 2014 and include Mario Tricoci (Chicago), Gadabout Salon (Arizona), Visible Changes (Houston), Gene Juarez (Seattle), Anastasia (Portland), and many others.
The successful positioning campaign lead to an agreement with one of the largest independent cosmetic distributors in the US, servicing more than 24,000 salons nation-wide, Star Companies (Star). Star’s companies are known to the industry for their ability to successfully enter new products into the market and currently distribute many professional brands for companies like L’Oreal including Redken and Pureology. The initial order was shipped on December 31, 2014 and represents a significant increase in revenues for the fiscal year 2014. Distribution began on January 12, 2015 and has resulted in more than 100 new resellers, exceeding management’s expectations.
ErgoD2 Hemo™ is a medical food for treatment of anemia and is projected to be commercially available in late 2016 following successful 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 ESA like Epogen®. In a 2013-2014 pilot study involving 20 diabetic patients, 4 months use of ErgoD2 HemoTM showed a statistically significant increase in blood iron levels though no participants were taking iron supplements. In addition, ErgoD2® reduced Total Iron-Binding Capacity and increased Percent Iron Saturation suggesting that ErgoD2® modulates the iron regulatory system in favor of iron export from cells.
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. Entia started a preclinical confirmational Parkinson’s disease (PD) study in a murine model of PD in the 3rd-4th quarter 2014. This study was financed by a grant from the Michael J. Fox Foundation (MJFF) and is designed to build upon an initial study that was successfully conducted in collaboration with Dr. Jack Rogers, Ph.D., at the Massachusetts General Hospital Neurochemistry Laboratory, in which ErgoD2® was shown to increase muscle strength and reduce the toxic buildup of midbrain alpha-synuclein levels. With the successful conclusion of the second study, performed by independent clinical research organizations (CRO’s) we hope to receive more support from the MJFF regarding follow-on scientific studies to advance PD treatments.
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 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 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 and issued in the Nation of 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 like Totalnutraceutical.com and Amazon.com. Our GROH® line of products are primarily marketed to reseller networks 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. The success of managements positioning campaign made it possible to sign an agreement with one of the largest independent cosmetic distributors in the US, servicing more than 24,000 salons nation-wide, Star Companies (Star). Star’s companies are known to the industry for their ability to successfully enter new products into the market and currently distribute many professional brands for companies like L’Oreal including Redken and Pureology.
Competitive Environment
The medical foods, dietary supplements and beauty 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 and beauty industries are intensely competitive.
Beauty Segment - The beauty industry today encompasses far more than cosmetics and skin care products, though they are still a significant portion of the sector. A wide range of services and products are available and the beauty industry now also encompasses hair styling and hair removal, nail and tanning salons, massage parlors, shower and shaving products, perfumes, colognes and more.
Nutritional Supplements - 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 beauty industry is characterized by the skin care, makeup, fragrance and hair care segments and undergoes vigorous competition throughout the world. Brand recognition, quality, performance and price have a significant impact on consumers’ choices among competing products and brands. Advertising, promotion, merchandising, the pace and timing of new product introductions, line extensions and the quality of in-store demonstrations also have a significant impact on consumers’ buying decisions.
The GROH® brand is an emerging boutique medical luxury line which seeks to align itself within the ‘Beauty of Wellness’ category of professional products. The Beauty of Wellness category is becoming more attractive to high-end salons and day spas seeking to increase revenue growth through retail product offerings without having to replace their existing hair and skincare products lines. Consumers within this category are seeking to support their healthy lifestyle changes and are seeking products that are natural and effective but free of dyes, chemicals, parabens, and the like. We compete against a number of companies, some of which have substantially greater resources than we do.
Our principal competitors consist of large, well-known, multinational manufacturers and marketers of skin care, makeup, fragrance and hair care products, most of which market and sell their products under multiple brand names. They include, among others, L’Oreal S.A.; Shiseido Company, Ltd.; LVMH Moët Hennessey Louis Vuitton; Coty, Inc.; The Procter & Gamble Company; and Avon Products, Inc. We also face competition from a number of independent brands, as well as some retailers that have developed their own beauty brands
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.
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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 seven full-time employees. Our Chief Executive Officer and Acting Chief Financial Officer, Marvin S. Hausman, M.D., our Chief Operating Officer Devin Andres (who also serves as President of TNS) have been employees since October 28, 2011. In addition William Meyer, is head of Production, 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 $499,000 with $50,000 of debt at 6% per annum interest, $199,000 of debt at 8% per annum, $235,000 of debt at 10% per annum and $15,000 of debt at 0% per annum. Of this aggregate principal debt, $75,000 plus accrued interest is due on demand, $25,000 plus accrued interest is due in March 2015, $152,500 plus accrued interest is due in April 2015, $53,000 plus accrued interest is due in May 2015, $30,000 plus accrued interest is due in August 2015, $63,500 plus accrued interest is due in September 2015, $35,000 plus accrued interest is due in October 2015, $15,000 is due in November 2015 and $50,000 plus accrued interest is due in December 2015. 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.
Failure to raise adequate capital and generate adequate sales revenues to meet our obligations, including our debt, of which the principal amount of $499,000 is due during 2015, pay our significant accounts payable and accrued expenses of $569,169 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, 2014, our revenues increased substantially from $314,746 for the fiscal year ended December 31, 2013 to $656,342 for the fiscal year ended December 31, 2014 with a net loss decreasing from $(3,192,427) for the fiscal year ended December 31, 2013 to $(2,296,591) for the fiscal year ended December 31, 2014. 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, 2014 we had a working capital deficit of $(502,517). We had a net loss of $(2,296,591) for the year ending December 31, 2014 and an accumulated deficit of $(10,816,942) from inception (July 19, 2007) through December 31, 2014.
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 develop and clinically test new potential products. As evidenced by the substantial net losses during 2014 and 2013, 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.
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 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 Chief Operating Officer, Devin Andres, is responsible for our day-to-day operations. The loss of services of our chief executive officer or our 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.
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 cannot 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 markets 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 45% of our outstanding common stock. As a result, these stockholders, acting together, could influence matters submitted to our stockholders for approval including:
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election of our board of directors;
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removal of any of our directors;
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significant corporate transactions;
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amendment of our Articles of Incorporation or bylaws; and
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adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us.
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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.
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 200,807 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.
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
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: ERGO.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.
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OTC Bulletin Board (Symbol "ERGO")
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Period
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High
(US $)
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Low
(US $)
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First Quarter 2013
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0.50 | 0.33 | ||||||
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Second Quarter 2013
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0.52 | 0.31 | ||||||
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Third Quarter 2013
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0.95 | 0.33 | ||||||
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Fourth Quarter 2013
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0.74 | 0.46 | ||||||
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First Quarter 2014
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0.90 | 0.45 | ||||||
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Second Quarter 2014
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0.75 | 0.28 | ||||||
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Third Quarter 2014
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0.50 | 0.18 | ||||||
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Fourth Quarter 2014
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0.41 | 0.19 | ||||||
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These bid prices are estimates only, based on price graph information.
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(b) Holders of Common Stock
As of December 31, 2014, there were approximately 166 shareholders of record of our common stock with 15,512,927 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, 2014.
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(a)
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(b)
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(c)
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Plan Category
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Number of securities to be issued upon exercise of outstanding options, warrants, and rights.
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Weighted-average exercise price of outstanding options, warrants, and rights
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Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
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Equity compensation plan approved by security holders
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2,866,470 | $ | 1,375,906 | 1,783,530 | ||||||||
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Expired/Forfeited
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110,200 | $ | 52,896 | |||||||||
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. On January 1, 2014, another 50,000 shares were automatically added to the shares reserved for issuance bringing the total to 4.65 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, 2014 or 2013.
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 iron 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, 2014 and 2013
Revenues and Cost of Goods Sold (in thousands, except percentages):
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For the Years Ended,
December 31,
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Change
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2014
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2013
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$ | % | |||||||||||||
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Revenues
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$ | 656,342 | $ | 314,746 | $ | 341,596 | 108.5 | % | ||||||||
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Cost of Goods Sold
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245,471 | 131,123 | 114,348 | 87.2 | % | |||||||||||
Revenues. Revenues are generated primarily from the sale of our GROH® line and mushroom-based nutraceutical dietary supplement products and functional ingredients. The 108.5% increase in revenues from 2013 was primarily due to the increase in sales of our GROH® products due to a rebranding/marketing strategy undertaken in 2013 and from a distributor agreement with a major distributor with a nationwide chain of salons.
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 2014 increased with the increase of revenues compared to 2013.
The following is a summary of certain consolidated statement of operations data for the periods:
Operating Expenses (in thousands, except percentages):
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For the Years Ended,
December 31,
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Change
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2014
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2013
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$ | % | |||||||||||||
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Advertising & promotion expenses
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$ | 125,728 | $ | 171,137 | $ | (45,409 | ) | -26.5 | % | |||||||
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Professional fees
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156,561 | 147,469 | 9,092 | 6.6 | % | |||||||||||
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Consulting fees
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400,352 | 919,710 | (519,358 | ) | -56.5 | % | ||||||||||
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General and Administrative expenses (including impairment of intangible assets)
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1,526,244 | 1,915,327 | (389,083 | ) | -20.3 | % | ||||||||||
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 2013 for these expenses was due to marketing and rebranding for our GROH® product during 2013.
Professional fees. These expenses primarily include accounting/auditing fees, legal fees and stock transfer fees. The increase in professional fees from 2013 is due to increased audit fees for 2014.
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 decrease in these expenses from 2013 was due to the fact that there was a decrease in warrants issued to compensate third party consultants for services in 2014.
General and administrative expenses. These expenses primarily include compensation, costs related to travel, rent and utilities, insurance, depreciation and product development. The decrease from 2013 is attributable to a $195,000 decrease in stock-based compensation in 2014 and during 2013 we recognized a $288,454 impairment expense against our intangibles.
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 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, 2014, cash totaled $99,462 compared to $36,886 at December 31, 2013. The primary reasons for the net increase in 2014 are described below. Our cash is held primarily in general checking accounts. Working capital deficit was $(502,517) at December 31, 2014, compared to $(1,355,230) at December 31, 2013. The change in working capital deficit was due primarily to the ability to convert accrued payroll, conversion of current liabilities and other payables into common stock. The net change in cash and cash equivalents for the periods presented was comprised of the following (in thousands):
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For the Years Ended,
December 31,
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Change
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|||||||||||||||
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2014
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2013
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$ | % | |||||||||||||
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Net cash provided by (used in)
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Operating activities
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$ | (680 | ) | $ | (767 | ) | $ | 87 | -11.3 | % | ||||||
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Investing activities
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(45 | ) | (65 | ) | 20 | -30.8 | % | |||||||||
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Financing activities
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788 | 855 | (67 | ) | -7.8 | % | ||||||||||
Operating Activities. The increase in net cash flows used from operating activities was due primarily to a smaller net loss combined with a reduction of stock-based compensation in the amount of approximately $650,000.
Investing Activities. The increase in net cash flows used from investing activities was due primarily to an decrease in fixed assets purchased.
Financing Activities. The decrease in net cash flows from financing activities was due primarily to a reduction in proceeds from the sale of common and preferred 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 June 2015.
We expect our revenues to increase dramatically in 2015. Notwithstanding, we anticipate generating losses in 2015 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 $499,000 plus accrued interest to repay our current notes payable 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 January 15, 2015, a creditor converted $15,000 of a promissory note in exchange for 170,068 shares of common stock.
On February 4, 2015, a creditor converted the remaining $27,500 of a promissory note plus $1,700 of accrued interest in exchange for 357,843 shares of common stock. In conjunction with this conversion, we wrote-off the remaining $11,968 of debt discount to interest expense during first quarter 2015.
On February 19, 2015, a creditor converted $25,000 of a promissory note in exchange for 318,471 shares of common stock.
On February 24, 2015, we paid off the remaining $28,000 of a promissory note. In addition, we paid $2,171 of accrued interest and $12,329 in a pre-payment penalty in connection with the repayment. In conjunction with this conversion/pay off, we wrote-off the remaining $19,190 of debt discount to interest expense during first quarter 2015.
On January 9, 2015, we received $20,000 for 100,000 shares of common stock and 20,000 warrants to purchase common stock. The warrants are exercisable at $0.30 per share. The term of the warrants are for 5 years and vest immediately.
On January 2, 2015, we received $20,000 for 100,000 shares of common stock and 20,000 warrants to purchase common stock. The warrants are exercisable at $0.30 per share. The term of the warrants are for 5 years and vest immediately.
On January 30, 2015, we received $30,000 for 150,000 shares of common stock and 30,000 warrants to purchase common stock at $0.30 per share. The terms of the warrants are for 5 years and vest immediately.
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 and we have executed an agreement with a distributor that has a nation-wide chain of salons. At December 31, 2014, we had cash and cash equivalents of $99,462. 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 June 2015.
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
Management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of assets and liabilities at the date of the financial statements, as well as reported revenues and expenses during the periods. We have identified below our accounting policies that we use in arriving at key estimates that we consider critical to our business operations and the understanding of our results of operations. This is not a complete list of all of our accounting policies, and there may be other accounting policies that are significant to us. For a detailed discussion on the application of these and our other accounting policies, see Note 2 in Item 8 of this Report.
Inventory
We hold raw materials and finished goods inventories, which are manufactured and procured based on our sales forecasts. We value inventory at the lower of cost or market, which is based on estimated net realizable value, and include adjustments for estimated obsolete or excess inventory. These valuations are subject to customer acceptance, planned and actual product changes, demand for the particular products, and our estimates of future realizable values based on these forecasted demands. We regularly review inventory detail to determine whether a write-down is necessary. We consider various factors in making this determination, including recent sales history and predicted trends, industry market conditions and general economic conditions. The amount and timing of write-downs for any period could change if we make different judgments or use different estimates. We also determine whether a provision for obsolete or excess inventory is required for any changes related to market conditions, slow-moving inventory, or obsolete products.
Share-based Compensation
We account for share-based compensation by estimating the fair value of share-based compensation using the Black-Scholes option pricing model on the date of grant. We utilize assumptions related to stock price volatility, stock option term and forfeiture rates that are based upon both historical factors as well as management's judgment. Non-cash compensation expense is recognized on a straight-line basis over the applicable requester service period, based on the fair value of such share-based awards on the grant date.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Revenue from the sale of products includes shipping and handling revenues. Shipping and handling costs paid by the Company are included in costs of goods sold. Allowances for product returns, primarily in connection with one distribution agreement, are provided at the time the sale is recorded. This accrual is based upon historical return rates for the Company and relevant industry patters, which reflects anticipated returns of unopened product in its original packaging to be received over a period of 120 days following the original sale. Sales returns have historically average 5% or less of our gross sales.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data
Entia Biosciences, Inc.
Index to Consolidated Financial Statements
December 31, 2014 and 2013
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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, 2014 and 2013, 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 audits 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 consolidated 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, 2014 and 2013, 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 30, 2015
ENTIA BIOSCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
|
December 31, 2014
|
December 31, 2013
|
|||||||
| Assets | ||||||||
| Current Assets: | ||||||||
|
Cash
|
$ | 99,462 | $ | 36,886 | ||||
|
Accounts receivable, net
|
243,782 | 11,197 | ||||||
|
Inventory, net
|
95,376 | 138,941 | ||||||
|
Interest income receivable
|
- | 3,965 | ||||||
|
Prepaid expenses
|
46,107 | 34,462 | ||||||
| Total Current Assets | 484,727 | 225,451 | ||||||
| Property and Equipment, net | 43,147 | 62,145 | ||||||
| Patents and license, net | 342,834 | 343,498 | ||||||
| Total Assets | $ | 870,708 | $ | 631,094 | ||||
| Liabilities and Stockholders' Equity (Deficit) | ||||||||
| Current Liabilities: | ||||||||
|
Accounts payable and accrued expenses
|
$ | 569,169 | $ | 1,157,717 | ||||
|
Short-term convertible notes payable, net of discount related-party
|
9,399 | 23,427 | ||||||
|
Short-term convertible notes payable, net of discount
|
357,646 | 373,644 | ||||||
|
Capital lease payable
|
- | 2,105 | ||||||
|
Notes payable
|
51,030 | 23,788 | ||||||
| Total Current Liabilities | 987,244 | 1,580,681 | ||||||
| Total Liabilities | 987,244 | 1,580,681 | ||||||
| Stockholders' Equity (Deficit): | ||||||||
|
Preferred stock, $0.001 par value, 5,000,000 shares authorized,
Series A preferred stock, 350,000 shares designated,
200,807 and 281,969 shares issued and outstanding,
respectively, aggregate liquidation value of $1,004,035
and $1,409,845 respectively
|
201 | 282 | ||||||
|
Common stock, $0.001 par value, 150,000,000 shares authorized,
15,512,927 and 8,297,645 shares issued and outstanding, respectively.
|
15,514 | 8,298 | ||||||
|
Stock subscription receivable
|
- | (49,000 | ) | |||||
|
Additional paid-in capital
|
10,771,035 | 7,793,760 | ||||||
|
Deferred compensation
|
(86,344 | ) | (182,576 | ) | ||||
|
Accumulated deficit
|
(10,816,942 | ) | (8,520,351 | ) | ||||
| Total Stockholders' Equity (Deficit) | (116,536 | ) | (949,587 | ) | ||||
| Total Liabilities and Stockholders' Equity (Deficit) | $ | 870,708 | $ | 631,094 | ||||
See accompanying notes to the consolidated financial statements.
ENTIA BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
For the Year
|
For the Year
|
|||||||
|
Ended
|
Ended
|
|||||||
|
December 31, 2014
|
December 31, 2013
|
|||||||
|
REVENUES
|
$ | 656,342 | $ | 314,746 | ||||
|
COST OF GOODS SOLD
|
245,471 | 131,123 | ||||||
|
GROSS PROFIT
|
410,871 | 183,623 | ||||||
|
OPERATING EXPENSES
|
||||||||
| Advertising and promotion | 125,728 | 171,137 | ||||||
| Professional fees | 156,561 | 147,469 | ||||||
| Consulting fees | 400,352 | 919,710 | ||||||
| Impairment of intangible asset | 27,080 | 288,454 | ||||||
| General and administrative | 1,499,164 | 1,626,873 | ||||||
| Total Operating Expenses | 2,208,885 | 3,153,643 | ||||||
|
LOSS FROM OPERATIONS
|
(1,798,014 | ) | (2,970,020 | ) | ||||
|
OTHER INCOME (EXPENSES)
|
||||||||
| Interest income | - | 9,882 | ||||||
| Interest expense | (339,709 | ) | (144,689 | ) | ||||
| Other income (expense) | 7,298 | - | ||||||
| Loss on write-off of debt discount | (100,000 | ) | - | |||||
| Loss on conversion of notes payable | (169,187 | ) | - | |||||
| Gain on settlement of accounts payable | 103,021 | - | ||||||
|
NET LOSS
|
$ | (2,296,591 | ) | $ | (3,104,827 | ) | ||
|
DEEMED DIVIDEND RELATED TO BENEFICIAL
CONVERSION FEATURE OF CONVERTIBLE |
- | (87,600 | ) | |||||
|
NET LOSS PER SHARE ALLOCABLE TO COMMON
STOCKHOLDERS |
$ | (2,296,591 | ) | (3,192,427 | ) | |||
|
NET LOSS PER COMMON SHARE
- BASIC AND DILUTED: |
$ | (0.24 | ) | $ | (0.42 | ) | ||
|
Weighted common shares outstanding
- basic and diluted
|
9,442,352 | 7,533,540 | ||||||
See accompanying notes to the consolidated financial statements.
ENTIA BIOSCIENCES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2014 and 2013
|
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 | ) | ||||||||||||||||
(continued on the next page)
ENTIA BIOSCIENCES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2014 and 2013
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Additional
|
Stock
|
Stockholders'
|
||||||||||||||||||||||||||||||||||
|
Preferred Stock
|
Common Stock
|
Paid
|
Deferred
|
Subscriptions
|
Accumulated
|
Equity
|
||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
In Capital
|
Compensation
|
Receivable
|
Deficit
|
(Deficit)
|
||||||||||||||||||||||||||||
|
Issuance of warrants in connection with convertible notes payable
|
- | - | - | - | 88,600 | - | - | - | 88,600 | |||||||||||||||||||||||||||
|
Beneficial conversion feature in connection with convertible notes payable
|
- | - | - | - | 188,300 | - | - | - | 188,300 | |||||||||||||||||||||||||||
|
Issuance of common stock for cash
|
- | - | 525,000 | 525 | 224,475 | - | - | - | 225,000 | |||||||||||||||||||||||||||
|
Issuance of common stock for conversion of preferred stock
|
(81,162 | ) | (81 | ) | 811,620 | 812 | (731 | ) | - | - | - | - | ||||||||||||||||||||||||
|
Issuance of common stock and warrants for conversion of convertible debt
|
- | - | 2,633,579 | 2,634 | 930,650 | - | - | - | 933,284 | |||||||||||||||||||||||||||
|
Issuance of common stock for conversion of accounts payable
|
- | - | 344,530 | 345 | 132,583 | - | - | - | 132,928 | |||||||||||||||||||||||||||
|
Issuance of common stock for conversion of accrued salary
|
- | - | 2,592,570 | 2,592 | 775,178 | - | - | - | 777,770 | |||||||||||||||||||||||||||
|
Stock compensation
|
- | - | - | - | 227,570 | - | - | - | 227,570 | |||||||||||||||||||||||||||
|
Issuance of common stock for future services
|
- | - | 68,283 | 68 | 44,182 | (44,250 | ) | - | - | - | ||||||||||||||||||||||||||
|
Issuance of common stock for services
|
- | - | 239,700 | 240 | 121,595 | - | - | - | 121,835 | |||||||||||||||||||||||||||
|
Receipt of stock subscription receivable, less write-off of $9,000
|
- | - | - | - | - | - | 49,000 | - | 49,000 | |||||||||||||||||||||||||||
|
Issuance of warrants for conversion of accrued salary
|
- | - | - | - | 91,863 | - | - | - | 91,863 | |||||||||||||||||||||||||||
|
Issuance of warrants for services
|
- | - | - | - | 153,010 | (153,010 | ) | - | - | - | ||||||||||||||||||||||||||
|
Amortization of deferred compensation
|
- | - | - | - | - | 293,492 | - | - | 293,492 | |||||||||||||||||||||||||||
|
Net loss
|
- | - | - | - | - | - | - | (2,296,591 | ) | (2,296,591 | ) | |||||||||||||||||||||||||
|
Balance - December 31, 2014
|
200,807 | $ | 201 | 15,512,927 | $ | 15,514 | $ | 10,771,035 | $ | (86,344 | ) | $ | - | $ | (10,816,942 | ) | $ | (116,536 | ) | |||||||||||||||||
See accompanying notes to the consolidated financial statements.
ENTIA BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
For the Years
|
For the Years
|
|||||||
|
Ended
|
Ended
|
|||||||
|
December 31, 2014
|
December 31, 2013
|
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net loss
|
$ | (2,296,591 | ) | $ | (3,104,827 | ) | ||
|
Adjustments to reconcile net loss to net cash
used in operating activities:
|
||||||||
|
Bad debt expense
|
30,022 | - | ||||||
|
Depreciation/amortization
|
38,047 | 35,990 | ||||||
|
Gain on settlement of accounts payable
|
(103,021 | ) | - | |||||
|
Impairment of intangible asset
|
27,080 | 288,454 | ||||||
|
Loss on write-off of debt discount
|
100,000 | - | ||||||
|
Amortization of discount on convertible notes
|
120,387 | 107,455 | ||||||
|
Loss on conversion of debt
|
169,187 | - | ||||||
|
Stock-based compensation
|
642,897 | 1,293,363 | ||||||
|
Loss on sale of stock subscription receivable
|
12,965 | - | ||||||
|
Changes in operating assets and liabilities:
|
||||||||
| Accounts receivable | (262,607 | ) | (30,725 | ) | ||||
| Inventory | 43,565 | (15,808 | ) | |||||
| Prepaid expenses | 31,668 | (1,920 | ) | |||||
| Other current assets | - | 118 | ||||||
| Accounts payable and accrued expenses | 766,117 | 661,167 | ||||||
|
NET CASH USED IN OPERATING ACTIVITIES
|
(680,284 | ) | (766,733 | ) | ||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchase of property and equipment
|
(4,607 | ) | (52,548 | ) | ||||
|
Acquisition of patents and patents pending (net)
|
(40,857 | ) | (12,056 | ) | ||||
|
NET CASH USED IN INVESTING ACTIVITIES
|
(45,464 | ) | (64,604 | ) | ||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Proceeds from issuance of common stock, preferred stock and warrants
|
225,000 | 700,875 | ||||||
|
Proceeds from convertible notes payable and notes payable
|
591,500 | 151,099 | ||||||
|
Payment on notes payable, net
|
(43,176 | ) | (36,832 | ) | ||||
|
Payment on convertible note payable - related party
|
(40,000 | ) | - | |||||
|
Proceeds from sale of stock subscription receivable
|
40,000 | - | ||||||
|
Proceeds from convertible note payable-related party
|
15,000 | 40,000 | ||||||
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
788,324 | 855,142 | ||||||
|
NET CHANGE IN CASH
|
62,576 | 23,805 | ||||||
|
Cash at beginning of period
|
36,886 | 13,081 | ||||||
|
Cash at end of period
|
$ | 99,462 | $ | 36,886 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: | ||||||||
|
Interest paid
|
$ | 843 | $ | 1,064 | ||||
|
SUPPLEMENTAL DISCLOSURE OF NONCASH FLOWS FINANCING AND INVESTING ACTIVITIES:
|
||||||||
|
Stock issued for accounts payable
|
$ | 132,928 | $ | - | ||||
|
Deemed distribution
|
$ | - | $ | 87,600 | ||||
| Conversion of accrued compensation, notes payable and accrued interest to preferred and common stock | $ | 1,711,054 | $ | 414,404 | ||||
|
Stock & warrant issued for inventory
|
$ | - | 9,000 | |||||
|
Stock & warrant issued for license
|
$ | - | $ | 215,529 | ||||
|
Issuance of note payable for insurance
|
$ | 43,313 | $ | - | ||||
|
Issuance of warrants for accrued salary
|
$ | 91,863 | $ | - | ||||
|
Debt issued for license
|
$ | - | $ | 140,000 | ||||
See accompanying notes to the consolidated financial statements.
Entia Biosciences, Inc.
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
NOTE 1 – ORGANIZATION AND OPERATIONS
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.
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 and we have executed an agreement with a distributor that has a nation-wide chain of salons. At December 31, 2014, we had cash and cash equivalents of $99,462. 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 June 2015.
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, a wholly-owned subsidiary, as of December 31, 2014 and 2013.
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.
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 generally consider 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 $30,022 and $2,526 at December 31, 2014 and 2013, respectively.
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:
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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 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 $27,080 and $288,454 on December 31, 2014 and 2013, respectively.
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:
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Level 1
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Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
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|
|
Level 2
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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.
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|
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Level 3
|
Unobservable inputs where there is little or no market data, which require the reporting entity to develop its own assumptions.
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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, 2014 or 2013, 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, 2014 and 2013.
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 and distributors. 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. Allowances for product returns, primarily in connection with one distribution agreement, are provided at the time the sale is recorded. This allowance is based upon historical return rates for the Company and relevant industry patters, which reflects anticipated returns of unopened product in its original packaging to be received over a period of 120 days following the original sale.
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 2014 and 2013, we incurred $34,286 and $31,996, 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 $24,523 and $27,804 in 2014 and 2013, respectively and are classified as general and administrative on the consolidated statements of operations.
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:
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-
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The expected life of warrants issued represents the period of time the warrants are expected to be outstanding.
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|
-
|
The expected volatility is generally based on the historical volatility of comparable companies’ stock over the contractual life of the warrant.
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|
-
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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.
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-
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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.
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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 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 2011, 2012, 2013 and 2014.
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 2014 and 2013. The following table presents a reconciliation of basic loss per share and excluded dilutive securities:
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For the Years Ended
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||||||||
|
2014
|
2013
|
|||||||
|
Numerator:
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||||||||
|
Net loss allocable to common stockholders
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$ | (2,296,591 | ) | $ | (3,192,427 | ) | ||
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Denominator:
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||||||||
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Weighted-average common shares outstanding
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9,442,352 | 7,533,540 | ||||||
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Basic and diluted net loss per share
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$ | (0.24 | ) | $ | (0.42 | ) | ||
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Common stock warrants
|
7,111,027 | 4,058,050 | ||||||
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Series A convertible preferred stock
|
2,008,070 | 2,819,690 | ||||||
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Stock options
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2,976,670 | 2,352,099 | ||||||
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Convertible debt including interest
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1,317,604 | 932,332 | ||||||
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Excluded dilutive securities
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13,413,371 | 10,162,171 | ||||||
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
In May 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for Entia beginning January 1, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are evaluating the impact of adopting this new accounting standard on our financial statements.
NOTE 3 – INVENTORY
Inventory consists of the following at:
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December 31, 2014
|
December 31, 2013
|
|||||||
|
Raw materials
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$ | 202,591 | $ | 240,750 | ||||
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Finished goods
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43,849 | 49,255 | ||||||
| 246,440 | 290,005 | |||||||
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Less: reserve for excess and obsolete inventory
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(151,064 | ) | (151,064 | ) | ||||
| $ | 95,376 | $ | 138,941 | |||||
We recorded a reserve adjustment of $0 for excess inventory in 2014 and 2013.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consists of the following at:
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December 31, 2014
|
December 31, 2013
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|||||||
|
Office equipment
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$ | 27,507 | $ | 26,284 | ||||
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Production equipment
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86,999 | 83,615 | ||||||
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Leasehold improvements
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16,328 | 16,328 | ||||||
| 130,834 | 126,227 | |||||||
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Less: accumulated depreciation
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(87,687 | ) | (64,082 | ) | ||||
| $ | 43,147 | $ | 62,145 | |||||
Depreciation expense was $23,605 and $25,327 for the years ended December 31, 2014 and 2013, 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. 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. During 2014, management analyzed our intangibles for possible impairment. We have recorded for 2014 an impairment in the amount of $27,080.
The licenses are being amortized over an economic useful life of 15-17 years. The gross carrying amounts and accumulated amortization related to these intangible assets consist of the following at:
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December 31, 2014
|
December 31, 2013
|
|||||||
|
Licenses and amortizable patents
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$ | 207,244 | $ | 234,324 | ||||
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Unamortized patents
|
166,159 | 125,301 | ||||||
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Accumulated amortization
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(30,569 | ) | (16,127 | ) | ||||
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Patents and Licenses, net
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$ | 342,834 | $ | 343,498 | ||||
License amortization expense was $14,442 and $10,663 for the years ended December 31, 2014 and 2013, respectively. Annual aggregate amortization expense for our licenses for each of the next five years through December 31, 2019, is $13,488 per year and for years 2020 and later it is estimated to be $109,235.
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accrued expenses (included with accounts payable) consisted of the following at:
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December 31, 2014
|
December 31, 2013
|
|||||||
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Executive compensation
|
$ | 153,432 | $ | 476,368 | ||||
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Other accruals
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19,725 | 60,671 | ||||||
| $ | 173,157 | $ | 537,039 | |||||
During third quarter, 2014, we negotiated agreements with our employees to accept either warrants or shares of common stock for conversion of their accrued payroll. The conversion rate for the warrants or common stock would be at $0.30 per share. During third quarter, we issued 2,592,570 shares of common stock to our key employees for conversion of $777,770 of accrued compensation. In addition, we granted 10 year warrants to purchase 306,208 of common stock exercisable at $0.0001 per share. These warrants fully vested on date of grant and had a grant date fair value of $91,863.
NOTE 7 – NOTES PAYABLE
Notes payable consists of the following at:
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December 31, 2014
|
December 31, 2013
|
|||||||
|
Notes payable - current
|
||||||||
|
7.85% unsecured, $781 due monthly
|
$ | 2,304 | $ | 1,964 | ||||
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4.15% unsecured, $2,678 due monthly
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- | 21,824 | ||||||
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4.15% unsecured, $3,436 due monthly
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23,726 | - | ||||||
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10.00% unsecured, interest only, due on demand
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25,000 | - | ||||||
| $ | 51,030 | $ | 23,788 | |||||
|
December 31, 2014
|
December 31, 2013
|
|||||||
|
Convertible notes payable, net
|
||||||||
|
8%, unsecured due on demand (net of discount related to beneficial conversion feature of $0 in 2014 and $49,004 in 2013), convertible into common stock at $0.45 per share. This note was converted into common stock during December 2014.
|
$ | - | $ | 263,496 | ||||
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8% secured due on December 26, 2015 (net of discount related to beneficial conversion feature of $7,746 in 2014 and $12,300 in 2013), convertible into preferred stock at $5.00 per share.
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42,254 | 37,700 | ||||||
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6% unsecured, convertible into common stock at $2.00 per share, due on demand
|
50,000 | 50,000 | ||||||
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8% unsecured due August 2014 (net of discount related to beneficial conversion feature of $0 in 2014 and $40,552 in 2013), convertible into common stock at an average price of $0.205 per share This note was converted into 419,355 shares of common stock during August 2014.
|
- | 22,448 | ||||||
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10% unsecured due March 2015 (net of discount related to warrants of $2,362 in 2014 and $0 in 2013) convertible price not yet determined
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22,638 | - | ||||||
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10% unsecured due April 2015 (net of discount related to warrants of $9,800 in 2014 and $0 in 2013) convertible price not yet determined
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90,200 | - | ||||||
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10% unsecured due April 2015 (net of discount related to warrants of $1,377 in 2014 and $0 in 2013) convertible price not yet determined
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8,623 | - | ||||||
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8% unsecured due April 2015 (net of discount related to beneficial conversion feature of $11,968 in 2014 and $40,552 in 2013), convertible price not yet determined
|
30,532 | - | ||||||
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8% unsecured due May 2015 (net of discount related to beneficial conversion feature of $19,190 in 2014 and $0 in 2013), convertible price not yet determined
|
33,810 | - | ||||||
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10% unsecured due December 2015 (net of discount related to warrants of $4,620 in 2014 and $0 in 2013) convertible price not yet determined
|
25,380 | - | ||||||
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10% unsecured due December 2015 (net of discount related to warrants of $1,727 in 2014 and $0 in 2013) convertible price not yet determined
|
8,273 | - | ||||||
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10% unsecured due October 2015 (net of discount related to warrants of $1,805 in 2014 and $0 in 2013) convertible price not yet determined
|
8,195 | - | ||||||
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10% unsecured due October 2015 (net of discount related to warrants of $4,512 in 2014 and $0 in 2013) convertible price not yet determined
|
20,488 | - | ||||||
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8% unsecured due September 2015 (net of discount related to beneficial conversion feature of $36,247 in 2014 and $0 in 2013), convertible price not yet determined
|
17,253 | - | ||||||
| $ | 357,646 | $ | 373,644 | |||||
|
December 31, 2014
|
December 31, 2014
|
|||||||
|
Convertible notes payable, net related party
|
||||||||
|
0% unsecured due March 30, 2014 (net of discount related to beneficial conversion feature of $0 in 2014 and $16,573 in 2013) convertible into common stock at $0.65 per share. This note was paid off on March 31, 2014.
|
$ | - | $ | 23,427 | ||||
|
0% unsecured due November 2015 (net of discount related to beneficial conversion feature of $2,738 in 2014 and $0 in 2013 and net of discount related to warrants of $2,863 in 2014 and $0 in 2013 and convertible into common stock at $0.30 per share.
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$ | 9,399 | $ | - | ||||
| $ | 9,399 | $ | 23,427 | |||||
In 2010, we entered into a promissory note for $312,500. We have been successful at negotiating extensions each year on this note by granting warrants to purchase shares of common stock at various prices. On December 31, 2014, we were successful in negotiating a conversion of the note plus accrued interest in the amount of $76,427 into 864,282 shares of common stock. In addition to the stock, we agreed to issue new warrants valued at $374,464. We also agreed to modify the terms of the existing warrants to the investor. Original terms of the warrants were an exercise price of $0.45 and a term of five years. Under the new terms, the exercise price was reduced to $0.01. We calculated a loss of $164,934 on the conversion of the debt. This loss is recorded in other income/(expense) on the consolidated statements of operations.
On August 13, 2013, we 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 we granted the creditor warrants to purchase 50,000 shares of Entia’s common stock at $2.00 per share. This note was due in August 2014 and, on December 26, 2014 we were successful in extending this note through December 2015. We granted the creditor 50,000 warrants to purchase 50,000 shares of Entia’s common stock at $0.50 per share. We calculated and posted a discount of $8,450 on the expense related to the warrants. We will amortize this discount over the life of the note to interest expense. During 2014, we expensed $704 on this discount.
During first quarter 2014, we entered into a promissory note for $25,000 at 10% interest due on December 30, 2014. This note is not convertible and is listed with notes payable as a short-term liability on the balance sheet. This note is currently being negotiated for an extension.
On August 28, 2014, we entered into a convertible promissory note for $100,000. The note was convertible into common stock at $0.25 per share. The investor converted the notes right away and received 400,000 shares of common stock. Following the conversion, we wrote off the debt discount for a loss of $100,000. We have recorded this as an expense on our consolidated statements of operations.
During 2014, we entered into the following debenture agreements that accrue interest at 10%, mature between 1 year and eighteen months and grant the investor on a one warrant per dollar basis that are exercisable for 3 years at $1 per share and vest immediately:
|
o
|
On October 16, 2014, we entered into two agreements totaling $35,000. We calculated the fair value of the warrants as $7,980.
|
|
o
|
On September 2, 2014, we entered into an agreement for $10,000. We calculated the fair value of the warrants at $2,590.
|
|
o
|
On August 28, 2014, we entered into an agreement for $30,000. We calculated the fair value of the warrants at $7,920.
|
|
o
|
On April 15, 2014, we entered into an agreement for $10,000. We calculated the fair value of the warrants at $4,130,
|
|
o
|
On April 27, 2014, we entered into an agreement for $100,000. We calculated the fair value of the warrants at $39,200, and
|
|
o
|
On March 28, 2014, we entered into an agreement for $25,000. We calculated the fair value of the warrants at $9,450.
|
We posted the fair value of the warrants as a discount on the notes and amortize them over the life of the debenture.
In addition to the debentures, during 2014, we entered into the following convertible promissory notes with an interest rate of 8% per annum, compounded annually. If the note remains unpaid after one hundred 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 and will be amortized over the life of the loan.
|
o
|
On February 3, 2014, $42,500 due on November 3, 2014,
|
|
o
|
On April 17, 2014, $32,500 due on January 17, 2015,
|
|
o
|
On June 13, 2014, $32,500 due on March 13, 2015,
|
|
o
|
On July 14, 2014, $42,500 due on April 13, 2015,
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|
o
|
On August 11, 2014, $53,000 due on May 10, 2015, and
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|
o
|
On December 15, 2014, $53,500 due on September 14, 2015.
|
On March 25, 2014, we entered into a line of credit arrangement. The line of credit is $60,000 with an interest rate of prime plus 3.00%, resulting in an interest rate of 6.25% at December 31, 2014. There are no loan covenants applicable to this line of credit and the amount outstanding as of December 31, 2014 is $16,179. This is reported as a current liability on the balance sheet.
NOTE 8 – RELATED PARTY TRANSACTIONS
Debt agreements from board member
In December 2013, we entered into a promissory note due on March 31, 2014 at 0% in the principal amount of $40,000 with Dr. Philip Sobol, a member of our board of directors. The note was paid off on March 31, 2014.
On July 1, 2014, we entered into a promissory note due on October 31, 2014 at 0% in the principal amount of $15,000 with Dr. Philip Sobol, a member of our board of directors. In conjunction with the note, we granted Dr. Sobol a five year warrant to purchase 15,000 shares of common stock at $0.50 per share and fully vests upon receipt of monies. We calculated a discount on the granting of the warrants in the amount of $5,445 and expensed this during the third quarter to interest expense. The note also contained a conversion feature where Dr. Sobol can convert the note into common stock at $0.50 per share. We calculated and posted a discount related to this conversion feature of $7,545 and amortized it during the third quarter 2014. During third quarter 2014, we agreed to an extension of the note until November 2015. In exchange for the extension, we issued a seven year warrant to purchase 15,000 shares of Entia’s common stock at $0.20 per share. The extension also changed the conversion price on the note from $0.50 per share to $0.30 per share. We posted a discount related to the new warrants of $3,435 and will amortize this over the life of the loan to interest expense. In addition, we also calculated the difference in fair value related to the modification of the conversion price. We calculated a $27 difference and management decided not to post this loss.
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 2014, 5 investors converted a total of 81,162 share of Series A Preferred stock for 811,620 shares of common stock.
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.
Common stock
During 2014, we issued shares of common stock per the following:
|
·
|
2,633,579 shares with a value of $933,284 in exchange for conversion of notes payable in the amount of $590,882 and accrued interest of $83,247;
|
|
·
|
811,620 shares were issued from conversion of 81,162 shares of Series A Preferred stock;
|
|
·
|
344,530 shares were issued for settlement of accounts payable in the amount of $132,928;
|
|
·
|
2,592,570 shares were issued in exchange for converting $777,770 of accrued salary to two key employees;
|
|
·
|
68,283 shares were issued with a value of $44,250 for services to be performed in the future;
|
|
·
|
189,700 shares were issued with a value of $100,335 for services rendered;
|
|
·
|
50,000 shares were issued in conjunction with a distributor agreement valued at $21,500. This amount is posted as a reduction in revenues; and
|
|
·
|
525,000 shares were issued for cash with a value of $225,000.
|
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;
|
|
·
|
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.
|
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, 2014
|
December 31, 2013
|
|||||||
|
Expected dividend yield
|
- | - | ||||||
|
Expected stock price volatility
|
182.94%-216.96 | % | 216.96% - 236.55 | % | ||||
|
Risk-free interest rate
|
0.28% - 1.91 | % | 0.95% - 2.47 | % | ||||
|
Expected term (in years)
|
3 - 7 years
|
5 - 10 years
|
||||||
|
Weighted-average granted date fair value
|
$ | 0.52 | $ | 0.45 | ||||
A summary of option activity under the stock option plan as of December 31, 2014, and changes during the year then ended is presented below:
|
Weighted
|
||||||||||||||||||||
|
Weighted
|
Average
|
|||||||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||||||
|
Number of
|
Exercise Price
|
Exercise
|
Contractual Term
|
Intrinsic
|
||||||||||||||||
|
Shares
|
Range
|
Price
|
(Years)
|
Value
|
||||||||||||||||
|
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 | |||||||||||||
|
Granted
|
624,571 | $ | 0.40-$0.75 | $ | 0.52 | 6.49 | - | |||||||||||||
|
Exercised
|
- | - | $ | - | - | - | ||||||||||||||
|
Expired/Forfeited
|
110,200 | $ | 0.40-$0.50 | $ | 0.48 | 9.51 | - | |||||||||||||
|
Outstanding, December 31, 2014
|
2,866,470 | $ | 0.30 - $1.00 | $ | 0.48 | 8.96 | - | |||||||||||||
|
Exercisable, December 31, 2014
|
2,321,001 | $ | 0.38 - $1.00 | $ | 0.47 | 9.50 | - | |||||||||||||
The range of exercise prices for options outstanding under the 2010 Stock Incentive Plan at December 31, 2014 are as follows:
|
Number of
|
Exercise
|
|||||
|
shares
|
Price
|
|||||
| 300,000 | $ | 0.30 | ||||
| 55,000 | $ | 0.38 | ||||
| 1,176,670 | $ | 0.40 | ||||
| 30,000 | $ | 0.42 | ||||
| 20,000 | $ | 0.44 | ||||
| 10,000 | $ | 0.45 | ||||
| 731,800 | $ | 0.50 | ||||
| 160,000 | $ | 0.60 | ||||
| 15,000 | $ | 0.62 | ||||
| 120,000 | $ | 0.75 | ||||
| 10,000 | $ | 0.81 | ||||
| 200,000 | $ | 0.85 | ||||
| 38,000 | $ | 1.00 | ||||
| 2,866,470 | ||||||
At December 31, 2014, the Company had 1,783,530 unissued shares available under the Plan. Also, at December 31, 2014, the Company had $303,349 of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 9 years.
Warrants
Outstanding warrants to purchase common stock are as follows:
|
Date of Issue
|
December 31, 2014
|
Exercise Price |
Expiration
|
||||||||
|
December-14
|
2,183,867 | $ | 0.01 - $0.30 | 12/2019 | |||||||
|
November-14
|
1,875 | $ | 0.20 | 11/2021 | |||||||
|
October-14
|
636,126 | $ | 0.01 - $1.00 |
10/2017 - 10/2021
|
|||||||
|
September-14
|
316,208 | $ | 0.001 - $1.00 |
09/2017 - 09/2024
|
|||||||
|
August-14
|
80,000 | $ | 0.50 - $1.00 |
8/2017 - 8/2019
|
|||||||
|
June-14
|
15,000 | $ | 0.50 | 06/2019 | |||||||
|
April-14
|
110,000 | 1 | 04/2017 | ||||||||
|
March-14
|
38,332 | $ | 0.40 - $1.00 |
03/2017 - 02/2024
|
|||||||
|
January-14
|
33,943 | $ | 0.60 - $0.80 |
01/2019 - 01/2021
|
|||||||
|
As of December 2013
|
4,500,896 | $ | 0.36 - $10.00 |
05/2015 - 10/2024
|
|||||||
|
Total
|
7,916,247 | ||||||||||
|
Less:
|
|||||||||||
|
Expired
|
805,220 | ||||||||||
|
Exercised
|
- | ||||||||||
|
Total
|
7,111,027 | ||||||||||
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:
|
December 31, 2014
|
December 31, 2013
|
|||||||
|
Risk-Free interest rate
|
0.28% - 2.97 | % | 0.95% - 3.32 | % | ||||
|
Expected dividend yield
|
0 | % | 0 | % | ||||
|
Volatility
|
182.81% - 222.30 | % | 216.48% - 239.20 | % | ||||
|
Expected life
|
3 - 10 years
|
3 - 10 years
|
||||||
At December 31, 2014 and 2013, the weighted-average Black-Scholes value of warrants granted was $0.39 and $0.45, respectively.
NOTE 10 – INCOME TAXES
For the years ended December 31, 2014, and 2013, 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, 2014, we had approximately $4,382,132 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:
|
2014
|
2013
|
|||||||
|
Deferred tax assets:
|
||||||||
|
Reserves and accruals
|
$ | 114,000 | $ | 188,000 | ||||
|
Net operating loss carryforwards
|
1,472,000 | 1,149,000 | ||||||
|
Total deferred tax assets:
|
1,586,000 | 1,337,000 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Depreciation and amortization
|
8,000 | 11,000 | ||||||
|
Net deferred tax assets before valuation allowance
|
1,578,000 | 1,326,000 | ||||||
|
Less: Valuation allowance
|
(1,578,000 | ) | (1,326,000 | ) | ||||
|
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, 2014, and 2013. 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:
|
2014
|
2013
|
|||||||
|
Federal Statutory Rate
|
$ | (781,000 | ) | $ | (1,056,000 | ) | ||
|
Nondeductible expenses
|
529,000 | 683,000 | ||||||
|
Change in allowance on deferred tax assets
|
(252,000 | ) | (373,000 | ) | ||||
| $ | - | $ | - | |||||
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 2014 is $1,279 and $6,555 for 2013.
Future minimum lease payments for all of our facilities amount to $47,988 each year through 2014 and $27,992 for 2015. Rent expense for the years ended December 31, 2014 and 2013 was $47,988 and $43,497, respectively.
NOTE 12 – CONCENTRATIONS AND CREDIT RISK
Customers and Credit Concentrations
During 2014, approximately 47% of our sales were to 5 customers as compared to approximately 50% during 2013. Accounts receivable for these customers accounted for 81% and 31% of total accounts receivable at December 31, 2014 and 2013, respectively.
Vendor Concentrations
During 2014, approximately 46% of our purchases were made from 5 vendors as compared to 54% during 2013. Accounts payable for these vendors accounted for 4% and 1% of total accounts payable at December 31, 2014 and 2013, respectively.
NOTE 13 – SUBSEQUENT EVENTS
On January 15, 2015, a creditor converted $15,000 of a promissory note in exchange for 170,068 shares of common stock.
On February 4, 2015, a creditor converted the remaining $27,500 of a promissory note plus $1,700 of accrued interest in exchange for 357,843 shares of common stock. In conjunction with this conversion, we wrote-off the remaining $11,968 of debt discount to interest expense during first quarter 2015.
On February 19, 2015, a creditor converted $25,000 of a promissory note in exchange for 318,471 shares of common stock.
On February 24, 2015, we paid off the remaining $28,000 of a promissory note. In addition, we paid $2,171 of accrued interest and $12,329 in a pre-payment penalty in connection with the repayment. In conjunction with this conversion/pay off, we wrote-off the remaining $19,190 of debt discount to interest expense during first quarter 2015.
On January 9, 2015, we received $20,000 for 100,000 shares of common stock and 20,000 warrants to purchase common stock. The warrants are exercisable at $0.30 per share. The term of the warrants are for 5 years and vest immediately.
On January 2, 2015, we received $20,000 for 100,000 shares of common stock and 20,000 warrants to purchase common stock. The warrants are exercisable at $0.30 per share. The term of the warrants are for 5 years and vest immediately.
On January 30, 2015, we received $30,000 for 150,000 shares of common stock and 30,000 warrants to purchase common stock at $0.30 per share. The terms of the warrants are for 5 years and vest immediately.
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, 2014, 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, 2014, 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.
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, 2014. These material weaknesses were also identified in our annual evaluation as of December 31, 2013.
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.
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
|
73 |
Chief Executive Officer and Chairman since August 28, 2008,
Acting Principal Accounting and Financial Officer
|
||
|
Elliot L. Shelton, Esq.
|
65 |
Secretary, Director since August 28, 2008.
|
||
|
Devin Andres
|
39 |
Vice President for Marketing and Sales since October 22, 2010
Chief Operating Officer since March 12, 2013
|
||
|
Philip A. Sobol, MD
|
60 |
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.
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 President of Total Nutraceutical Solutions, Inc.
Devin Andres 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:
|
1.
|
any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
|
|
|
2.
|
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
|
|
|
3.
|
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
|
|
|
4.
|
being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
|
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, 2014, 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 September 25, 2014, but later reported the acquisition in a Form 4 on November 12, 2014. Devin Andres failed to timely file a Form 4 reporting his acquisition of shares of common stock on September 25, 2014, but later reported the acquisition in a Form 4 on November 12, 2014. Marvin Hausman also failed to timely file a Form 4 reporting his acquisition of incentive stock options, but later reported the acquisitions in a Form 5 on February 17, 2015. Devin Andres failed to timely file a Form 4 reporting his acquisition of incentive stock options, but later reported the acquisitions in a Form 5 on February 17, 2015.
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 auditor’s 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, 2014 and 2013 for our Chief Executive Officer who is also our Acting Chief Financial Officer, who was appointed on August 28, 2008 and Devin Andres, our Chief Operating Officer, who was appointed March 12, 2013 (our “Named Executive Officers”). We did not have any other executive officers during the fiscal years ended December 31, 2014 and 2013 who received compensation in excess of $100,000.
Summary Compensation Table
|
Non-
|
||||||||||||||||||||||||||||||||||||
|
Qualified
|
||||||||||||||||||||||||||||||||||||
|
Non-Equity
|
Deferred
|
|||||||||||||||||||||||||||||||||||
|
Name and
|
Stock
|
Option
|
Incentive Plan
|
Compensation
|
All other
|
|||||||||||||||||||||||||||||||
|
Principal
|
Salary
|
Bonus
|
Awards
|
Awards
|
Compensation
|
Earnings
|
Compensation
|
|||||||||||||||||||||||||||||
|
Position
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
|||||||||||||||||||||||||||
|
Marvin
|
||||||||||||||||||||||||||||||||||||
|
Hausman
|
||||||||||||||||||||||||||||||||||||
|
CEO, Dir
|
2014
|
$ | 350,000 | 1 | $ | - | $ | - | $ | 70,817 | $ | - | $ | - | $ | 25,428 | 2 | $ | 446,245 | |||||||||||||||||
|
Marvin
|
||||||||||||||||||||||||||||||||||||
|
Hausman
|
||||||||||||||||||||||||||||||||||||
|
CEO, Dir
|
2013
|
$ | 308,333 | 3 | $ | - | $ | 79,814 | $ | - | $ | - | $ | 187,212 | 4 | $ | 575,359 | |||||||||||||||||||
|
Devin
|
||||||||||||||||||||||||||||||||||||
|
Andres
|
||||||||||||||||||||||||||||||||||||
|
COO, Pres
|
2014
|
$ | 175,000 | 5 | $ | - | $ | - | $ | 19,424 | $ | - | $ | - | $ | 49,990 | 6 | $ | 244,414 | |||||||||||||||||
|
Devin
|
||||||||||||||||||||||||||||||||||||
|
Andres
|
||||||||||||||||||||||||||||||||||||
|
COO, VP
|
2013
|
$ | 175,000 | 7 | $ | - | $ | - | $ | 69,036 | $ | - | $ | - | $ | 63,109 | 8 | $ | 307,145 | |||||||||||||||||
(1) $19,046 of this salary was paid during 2014 with cash while $250,211 was paid in stock. There is currently $80,743 of salary accrued at the end of 2014. Under the terms of the Employment Agreement dated October 28, 2011, after the third year of the agreement, there are no more increases to the base salary paid. No new agreement has been entered into between Dr. Hausman and Entia.
(2) All other compensation for 2014 is the reimbursement of personally paid travel expenses for corporate purposes.
(3) $30,221 of this salary was paid during 2013 and the remaining $278,112 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 $53,301 represented compensation for the months of November and December at $29,167 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.
(4) 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.
(5) $91,638 of this salary was paid during 2014 in cash. $65,268 was paid in stock and there is currently $18,094 of salary accrued at the end of 2014. Under the terms of the Employment Agreement dated October 28, 2011, there are no increases to the base salary paid. No new agreement has been entered into between Mr. Andres and Entia
(6) All other compensation for 2014 is reimbursement of travel expenses for corporate purposes.
(7) $86,687 of the salary was paid during 2013, $63,836 was accrued and $24,477 was paid in common stock.
(8) 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. In September, 2014, in consideration of converting all of his then accrued salary into stock, the Company extended all stock option and warrant agreements by 3 years and changed the exercise price on all stock options and warrant agreements to $0.40, unless the exercise price was already lower.
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.
We have an employment agreement with Devin Andres, our President and Chief Operating Officer, dated October 28, 2011 pursuant to which Mr. Andres was to be compensated as follows: (1) a base salary of $175,000 of which $72,000 was to be paid in cash and the remaining $103,000 to be paid in the form of $6,250 in common stock in four equal quarterly installments at $0.36 per share, and the first installment of 17,363 shares was issued on October 28, 2011, an option to purchase 108,342 shares at $0.47 per share, and a ten year warrant to purchase 108,347 shares at $0.36 per share; (2) as a retention incentive, a warrant to purchase 350,000 shares at $0.55 per share that vests monthly over three years, and (3) an annual bonus which Mr. Andres may be awarded at the discretion of the board of directors based on his performance and the financial condition of the corporation. Mr. Andres will also receive employee benefits, including family health and dental insurance coverage and short and long term disability insurance coverage. 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 Mr. Andres’ death, or upon his termination for cause, disability or his resignation for good reason. In the case of Mr. Andres’ death, all compensation under the agreement shall cease. Entia or Mr. Andres may elect not to renew the employment agreement by giving at least 90 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 Mr. Andres 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, Mr. Andres shall receive an amount equal to 12 months of base salary for the then current term. In September, 2014, in consideration of converting all of his then accrued salary into stock, the Company extended all stock option and warrant agreements by 3 years and changed the exercise price on all stock options and warrant agreements to $0.40, unless the exercise price was already lower.
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.
Stock Option Grants
On September 29, 2014, Dr. Hausman was granted 175,000 7-year stock options at $0.40 per share vesting equally over 7 months. At the same time, Dr. Hausman’s option price the June 2013 options were modified to $0.40 per share. On June 21, 2013, Dr. Hausman was granted 200,000 7-year stock options at $0.45 per share vesting immediately.
On February 20, 2013, Mr. Andres was granted 25,000 8-year stock options at $0.38 per share vesting immediately. On June 21, 2013, Mr. Andres was granted 150,000 10-year stock options at $0.40 per share vesting immediately. On September 29, 2014, Mr. Andres was granted 47,999 7-year stock options at $0.40 per share vesting equally over 7 months.
Outstanding Equity Awards at Fiscal Year-Ending December 31, 2014:
|
Options Awards
|
Stock Awards
|
||||||||||||||||||||||||||||||||
| Name |
Number of
Securities
Underlying
UnexercisedOptions (#)
Exercisable
|
Number of
Securities
Underlying
UnexercisedOptions (#)
Unexercisable
|
Equity
Incentive
Plan Awards
Number ofSecurities
Underlying
Unexercised
Unearned
Options (#)
|
Option
Exercise
Price
$ |
Option
Expiration
Date |
Number of
Shares or
Units Stock
That Have
Not Vested
|
Market Value
of Shares
Or Units thatHave Not Vested (#)
|
Equity
Incentive Plan
Awards:Number of
Unearned Shares,
Units or
Other Rights
That Have
Not Vested (#)
|
Equity
Incentive Plan
Awards: Marketor Payout Value
of Unearned
Shares, Units,
Or Other Rights
That Have Not
Vested ($)
|
||||||||||||||||||||||||
|
(a)
|
(b)
|
( c)
|
(d)
|
( e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
||||||||||||||||||||||||
|
Dr. Marvin S. Hausman
|
138,900 | - | - | $ | 0.40 |
10/27/2024
|
- | - | - | - | |||||||||||||||||||||||
|
Dr. Marvin S. Hausman
|
200,000 | - | - | $ | 0.40 |
6/20/2023
|
- | - | - | - | |||||||||||||||||||||||
|
Dr. Marvin S. Hausman
|
175,000 | - | - | $ | 0.40 |
9/28/2021
|
100,000 | 21,000 | - | - | |||||||||||||||||||||||
|
Devin Andres
|
25,000 | - | - | $ | 0.38 |
2/20/2021
|
- | - | - | - | |||||||||||||||||||||||
|
Devin Andres
|
150,000 | - | - | $ | 0.40 |
6/20/2023
|
- | - | - | - | |||||||||||||||||||||||
| - | |||||||||||||||||||||||||||||||||
|
Devin Andres
|
47,999 | - | - | $ | 0.40 |
9/28/2021
|
27,428 | 5,760 | - | - | |||||||||||||||||||||||
Potential Payments Upon Termination or Change in Control
Marvin Hausman, M.D.
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.
Upon Entia’s final termination of the term for “Cause”, all compensation due to Dr. Hausman under his Employment Agreement will cease. Moreover, any unvested and unexercised portions of the warrants issued initially with the Employment Agreement and the stock option grants to Dr. Hausman by Entia shall expire upon such termination.
Devin Andres
Pursuant to his employment agreement dated October 28, 2011, Devin Andres 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 a change of control Devin Andres shall receive payment of 12 months of his base salary, full vesting of his equity awards.
In the event Devin Andres 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, Devin Andres shall receive an amount equal to 12 months of base salary for the then current term.
Upon Entia’s final termination of the term for “Cause”, all compensation due to Devin Andres under his Employment Agreement will cease. Moreover, any unvested and unexercised portions of the warrants issued initially with the Employment Agreement and the stock option grants to Devin Andres by Entia shall expire upon such termination.
We have not entered into any other compensatory plans or arrangements with respect to our named executive officers, 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.
Director Compensation
|
Non-Equity
|
|||||||||||||||||||||||||||
|
Fees earned
|
Incentive
|
All
|
|||||||||||||||||||||||||
|
or Paid in
|
Stock
|
Option
|
Plan
|
Other
|
|||||||||||||||||||||||
|
Cash
|
Awards
|
Awards
|
Compensation
|
Compensation
|
Total
|
||||||||||||||||||||||
|
Name
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
||||||||||||||||||||
|
Elliot Shelton
|
2014
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
|
Philip Sobol
|
2014
|
$ | - | $ | - | $ | - | $ | - | $ | 13,009 | 1 | $ | 13,009 | |||||||||||||
|
Elliot Shelton
|
2013
|
$ | - | $ | - | $ | - | $ | - | $ | 59,860 | $ | 59,860 | ||||||||||||||
|
Philip Sobol
|
2013
|
$ | - | $ | - | $ | - | $ | - | $ | 83,757 | $ | 83,757 | ||||||||||||||
|
(1)
|
All other compensation includes value of warrants granted and vested during 2014. 15,000 warrants were granted as part of an extension of a promissory note entered into with Entia.
|
We did not pay our directors any cash compensation during fiscal years ending December 31, 2014, and December 31, 2013.
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 31, 2015 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 31, 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.
|
Name and Address of
Beneficial Owner
|
Amount and Nature of
Beneficial Ownership
|
Percentage
of Class (1)
|
||||||
|
Marvin S. Hausman, M.D., CEO & Dir. (2)
|
6,019,119 shares | 33.6 | % | |||||
|
Devin Andres, COO (3)
|
1,550,171 shares | 9.1 | % | |||||
|
Phil A. Sobol, M.D., Director (4)
|
1,010,341 shares | 6.0 | % | |||||
|
Elliot L. Shelton, Esq., Secretary, Director (5)
|
476,250 shares | 2.9 | % | |||||
|
Total Officers and Directors
|
9,046,794 shares | 45.0 | % | |||||
(1) These percentage figures are based upon 16,040,838 shares of our common stock outstanding as of February 8, 2015. 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 4,157,200 shares of common stock, 14,625 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 $0.40 per share issued on October 28, 2011, a non-statutory stock option to purchase 200,000 shares at $0.40 per share issued on June 21, 2013, a non-statutory stock option to purchase 175,000 shares at $0.40 per share issued on September 29, 2014, an eight year warrant to purchase 25,000 shares at $0.40 per share, a thirteen year warrant to purchase 138,900 shares at $0.36 per share issued on October 28, 2011, a thirteen year warrant to purchase 500,000 shares exercisable at $0.40 per share issued on October 28, 2011, an eight year warrant to purchase 100,000 shares at $0.40 per share issued on December 20, 2011 in conjunction with extending a convertible note payable, a ten year warrant to purchase 400,000 shares at $0.40 issued on June 21, 2013 and a six year warrant to purchase 7,313 shares at $0.40 issued on October 16, 2013. Dr. Hausman’s holdings of 6,019,119 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 154,400 shares of common stock owned by the adult children of Marvin S. Hausman, M.D.
(3) Devin Andres’ holdings include 621,671 shares of common stock, an eight year warrant to purchase 5,000 shares of common stock at $0.40 per share, a thirteen year warrant to purchase 108,342 shares at $0.36 per share issued on October 28, 2011, a thirteen year warrant to purchase 350,000 shares exercisable at $0.40 per share issued on October 28, 2011, a ten year warrant to purchase 150,000 shares at $0.40 issued on June 21, 2013, a non-statutory stock option to purchase 108,342 shares at $0.40 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, a non-statutory stock option to purchase 150,000 shares at $0.40 per share issued on June 21, 2013 and a non-statutory stock option to purchase 47,999 shares at $0.40 per share issued on September 29, 2014.
(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, an eight year warrant to purchase 25,000 shares at $0.40 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, a seven year warrant to purchase 20,000 shares at $0.65 issued on December 13, 2013, a five year warrant to purchase 15,000 shares at $0.30, a seven year warrant to purchase 5,625 vested shares out of 15,000 shares at $0.20 pursuant to a promissory note and a non-statutory stock option to purchase 100,000 shares at $0.85 issued on January 24, 2011. Dr. Sobol also has 50,000 shares of stock that can be converted pursuant to an extension of a promissory note entered into during November 2014.
(5) Elliot Shelton’s holdings include 126,250 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 July 1, 2014, we entered into a promissory note due on October 31, 2014 at 0% in the principal amount of $15,000 with Dr. Philip Sobol, a member of our board of directors. In conjunction with the note, we granted Dr. Sobol a five year warrant to purchase 15,000 shares of common stock at $0.50 per share and fully vests upon receipt of monies.
On November 3, 2014 Entia entered into an Promissory Note Extension agreement with Philip Sobol, M.D., a director of Entia, under which the Promissory Note issued on July 1, 2014 in the principal amount of $15,000 with no interest maturing on October 31, 2014 and convertible into common stock at $0.50 per share was modified to extend the maturity date to November 3, 2015 and reduce the conversion rate of the Note from $0.50 per share to $0.30 per share. In return for the extension, Entia agreed to issue Dr. Sobol a seven year warrant to purchase 15,000 shares of common stock exercisable at $0.20 per share and to reduce the exercise price from $0.50 to $0.30 per share the five year warrant to purchase 15,000 shares of common stock issued to Dr. Sobol on June 30, 2014 in conjunction with the original promissory note.
On September 25, 2014 Marvin S. Hausman, our CEO, Acting CFO and Chairman of Entia Biosciences, Inc., elected to convert $648,879 of accrued salary pursuant to his employment agreement into 2,162,930 shares of common stock at $0.30 per share.
On September 25, 2014 Devin Andres, COO of Entia Biosciences, Inc., elected to convert $128,892 accrued salary pursuant to his employment agreement into 429,640 shares of common stock at $0.30 per share.
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, 2014 and December 31, 2013 and reviewed our quarterly reports for our fiscal year ended December 31, 2014 and 2013. Aggregate fees billed to us by Peterson Sullivan LLP for the 2014 and 2013 audit and review of our quarterly reports in 2014 were as follows:
|
For the Years Ended
December 31,
|
||||||||
|
2014
|
2013
|
|||||||
|
Fee Category
|
||||||||
|
Audit fees (1)
|
$ | 50,906 | $ | 41,339 | ||||
|
Tax Fees
|
- | - | ||||||
|
All other fees
|
- | - | ||||||
|
Total Fees
|
$ | 50,906 | $ | 41,339 | ||||
|
(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.
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:
|
Consolidated Balance Sheets at December 31, 2014 and December 31, 2013
|
25
|
|
Consolidated Statements of Operations for the Years ended December 31, 2014 and 2013
|
26
|
|
Consolidated Statement of Stockholders’ Equity (Deficit) for the Years ended December 31, 2014 and 2013
|
27-28
|
|
Consolidated Statements of Cash Flows for the for the Year ended December 31, 2014 and 2013
|
29
|
| 2. Financial Statement Schedules |
Not Applicable
3. Exhibits specified by Item 601 of Regulation S-K.
|
Exhibit Number
|
Description of Exhibit
|
Filed Herewith
|
Form
|
Exhibit
|
Filing Date
|
|
3.1
|
Amended and Restated Articles of Incorporation of Registrant
|
8-K
|
3.1
|
10/29/2010
|
|
|
3.2
|
Amended and Restated Bylaws of Registrant
|
8-K
|
3.2
|
09/22/2010
|
|
|
3.3
|
Amended Articles of Merger Incorporation as currently in effect
|
8-K
|
3.3
|
10/13/2008
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
10.9
|
$50,000 Promissory Note between Entia and Mark C. Wolf dated February 18, 2010
|
10-K
|
10.9
|
4/15/2010
|
|
|
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
|
|
|
10.11
|
Form of Common Stock and Warrant Agreement 2010
|
8-K
|
10.1
|
12/20/2010
|
|
|
10.12
|
$312,500 Promissory Note between Entia and Delta Group Investments Limited dated January 21, 2011
|
8-K
|
10.2
|
2/22/2010
|
|
|
10.13
|
Termination of Profit Sharing Agreement dated February 21, 2011
|
8-K
|
10.1
|
2/22/2011
|
|
|
10.14
|
Lease Agreement between Entia and Sherwood Venture LLC dated March 15, 2011
|
8-K
|
10.1
|
4/6/2011
|
|
|
10.15
|
Form of Warrant A Agreement 2010
|
8-K
|
10.2
|
12/22/2010
|
|
|
10.16
|
Form of Warrant B Agreement 2010
|
8-K
|
10.3
|
12/22/2010
|
|
|
10.17
|
10.17
|
||||
|
10.18
|
10.18
|
||||
|
31.1
|
X
|
||||
|
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
|
|||
|
32.1
|
X
|
||||
|
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
|
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 30th day of March, 2015.
|
ENTIA BIOSCIENCES, INC.
|
||
|
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)
|
||
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 30th day of March, 2015.
|
Signature
|
Title
|
|
|
/s/ Marvin S. Hausman, M.D.
|
Chief Executive Officer, Chairman of the Board, Director
|
|
|
Marvin Hausman, M.D.
|
(Principal Executive Officer)
|
|
|
(Principal Financial and Accounting Officer)
|
||
|
/s/ Philip A. Sobol, M.D.
|
Director
|
|
|
Philip A. Sobol, M.D.
|
||
|
/s/ Elliot L. Shelton, Esq.
|
Director
|
|
|
Elliot A. Shelton, Esq.
|
56