Item 1. Business
Background
Entia Biosciences, Inc. (“Entia”) develops patented, pharmaceutical-grade compounds, including a foundational compound called ErgoD2®. We believe that ErgoD2 improves iron homeostasis and mitigates iron-related disorders presenting in anemia, chronic kidney disease and select neurodegenerative diseases. Our goal is to clinically validate and commercialize ErgoD2 through the OTC supplement channels and possibly others, such as medical foods. We also develop and market health-related nutraceuticals and manufacture certain cosmeceuticals.
We have licensed a patent that gives us the exclusive worldwide rights to certain methods for identifying and obtaining compounds, such as ErgoD2, capable of modulating the genetic transporter for L-ergothioneine (“Ergo”). Ergo is a powerful amino acid that is essential to life. Ergo cannot be synthesized by mammals but is acquired exclusively from the diet and, most importantly, must be delivered by this unique and specific ergothioneine transporter (human gene symbol SLC22A4) to cells throughout the body. We have also licensed the exclusive rights to UV light enrichment technology for ergocalciferol, the food-based version of vitamin D2. Vitamin D deficiency, has been linked to a variety of serious medical conditions. We believe that both our licensed patents and patents pending, along with several other elements of our intellectual property portfolio that address a variety of diseases, give us a competitive advantage in the use of ErgoD2 as a dietary supplement, a nutraceutical and/or a cosmeceutical.
Since 2011, we have been conducting pre-clinical and clinical pilot studies evaluating proprietary compounds, such as ErgoD2, that contain elevated concentrations of these two nutrients and other important co-factors found in mushrooms. These and other research studies have confirmed significant transporter activity in anemia/diabetes, arthritis, alopecia areata (hair loss) and other serious non-communicable chronic conditions. These studies have also revealed significant observable improvements in symptoms and disease-associated biomarkers in patients with anemia/diabetes, Parkinson’s disease, and chronic kidney disease. We have also conducted several immunohistochemistry (“IHC”) studies that have confirmed significant ergothioneine transporter ("ETT") activity at the sites of rapidly dividing cells (macrophages and stem cells), suggesting that Ergo is genetically required to prevent/repair damage from free radicals and oxidative stress as well as to support the production/maintenance of healthy cells. All of these results suggest an important physiologic role for Ergo in chronic diseases, particularly iron-related disorders and auto-immune conditions that afflict millions of people worldwide.
We have filed patent applications on the use of ErgoD2 for several therapeutic and non-therapeutic uses and have commenced or will commence follow-on studies to confirm our positive initial clinical results in larger patient populations, with the objective of releasing our branded products for the treatment of a variety of afflictions. We anticipate these afflictions to include chronic kidney disease, autism, Parkinson's disease, multiple sclerosis and psoriasis, to name a few. We plan to explore other important potential therapies as our funding allows.
OTC-strength versions of these formulations and other consumer-oriented products for the general wellness and beauty markets have been offered by us online and through a limited number of resellers. In February of 2017, we entered a licensing agreement with an established beauty industry company, which plans on operating by the name “GROH Beauty Corp,” and under which license we granted certain exclusive worldwide rights to manufacture and distribute GROH beauty products. The License calls for a front-end license fee and royalties over a period of years, until the license is paid in full and thereby becomes an exclusive perpetual license of the GROH Beauty Corp. The License calls for and was accompanied by a separately executed agreement under which we are to manufacture and sell our ErgoD2 compound exclusively to the GROH Beauty Corp for its use in the cosmetic and beauty care markets. As this manufacturing agreement provides for price adjustments and is expected to run for a number of future years concurrent with the license, its positive value to us is inestimable at this time. Additionally, the License calls for a separate agreement with us through which our Chief Science and Technology Officer will provide limited consulting services to the Licensee.
Our Business
ErgoD2 is a proprietary pharmaceutical-grade compound created from whole foods that contain the micro-nutrients L-ergothioneine, an amino acid that responds to a dedicated transporter (SLC22A4) that is present in every human, and vitamin D2 that has been naturally enriched using our licensed, patented technology. These genetically-required nutrients have been implicated by independent scientists in metabolic iron regulation and intracellular iron chelation/transportation, indicating their therapeutic potential. We believe that our ErgoD2 platform may play an essential role in achieving iron homeostasis in various disease states and will be the core of our innovative product offerings. Our clinical studies aim to evaluate the nutritional effects of ErgoD2 in iron homeostasis, red blood cell production, neuronal function, and the immune system. We hope to further prove that our products containing ErgoD2 are applicable to and will aid in the nutritional management of diseases such as chronic kidney disease, autism, Parkinson’s disease, multiple sclerosis, psoriasis and others.
Chronic kidney disease. During 2015, we undertook our first major clinical study focused on a particular disease - chronic kidney disease (“CKD”). In the United States alone, more than one in ten adults or approximately 25 million persons suffer from early to late-stage CKD. Most CKD patients only see a primary care physician and have limited access to therapy beyond suggested lifestyle modifications (dietary restrictions and iron supplementation). The prevalence of anemia is approximately 16% in CKD or four million people. In addition, more than 600,000 U.S. patients are being treated for end-stage renal disease by dialysis or kidney transplantation. We believe that our products will become a widely used, cost-effective companion therapies in treating this disease, reducing mortality risks and improving quality of life. This combinational approach also seeks to reduce the amount of erythropoiesis-stimulating agents ("ESAs") and other expensive drugs needed for treatment, possibly increasing the bottom line for dialysis providers that are subject to capped reimbursement rates. According to the National Kidney Foundation, about $68 billion was spent in treating CKD patients in 2013, not including prescription medications. Accordingly, we believe that CKD offers a significant opportunity for Entia.
Other diseases. Several additional market opportunities in which ErgoD2 may apply are available to Entia in the form of other diseases. For example, autism affects over three million individuals in the U.S. and tens of millions worldwide and U.S. government autism statistics suggest that prevalence rates have increased ten to 17 percent annually in recent years. As other examples, there are more than one million people living with Parkinson’s disease in the U.S. and another 300,000 with multiple sclerosis. In our opinion, ErgoD2 does not just apply in CKD, autism or Parkinson’s, but also potentially in a number of auto-immune conditions in which iron is a factor, including diabetes, rheumatoid arthritis (joints), psoriasis (skin/nails), and alopecia (hair).
Dietary Supplements
Definition. According to the United States Food and Drug Administration (FDA), dietary supplements are products which are not pharmaceutical drugs, food additives like spices or preservatives, or conventional food, and which also meet any of these criteria:
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The product is intended to supplement a person's diet, despite it not being usable as a meal replacement.
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The product is or contains a vitamin, dietary element, herb used for herbalism or botanical used as a medicinal plant, amino acid, any substance which contributes to other food eaten, or any concentrate, metabolite, ingredient, extract, or combination of these things.
3.
The product is labeled as a dietary supplement.
In the United States, the FDA has different monitoring procedures for substances depending on whether they are presented as drugs, food additives, food, or dietary supplements. Dietary supplements are eaten or taken by mouth, and are regulated in United States law as a type of food rather than a type of drug. Like food and unlike drugs, no government approval is required to make or sell dietary supplements; the manufacturer checks the safety of dietary supplements but the government does not; and rather than requiring risk-benefit analysis to prove that the product can be sold like a drug, risk-benefit analysis is only used to petition that food or a dietary supplement is unsafe and should be removed from market.
Medical uses. The intended use of dietary supplements is to ensure that a person receives enough essential nutrients. Dietary supplements should not be used to treat any disease or as preventive healthcare. An exception to this recommendation is the appropriate use of vitamins. We believe that our dietary supplement offerings containing ErgoD2 will allow provision of appropriate amounts of essential nutrients, including L-ergothioneine and vitamin D2.
Medical Foods
We continue to explore integrating into these existing market opportunities by leveraging the regulatory advantages contained in the Orphan Drug Act (21 U.S.C. 360ee (b) (3)) and the 1988 Orphan Drug Act Amendments related to medical foods. Medical foods are foods that are specially formulated and intended for the dietary management of a disease that has distinctive nutritional needs that cannot be met by normal diet alone. Unlike common OTC supplements for general wellness, which are not allowed to make claims of efficacy, medical foods are used under medical supervision to tackle nutritional deficiencies related to a specific medical condition or disease being treated. When used in conjunction with existing medical therapies, medical foods may also reduce required medication dosages and can be effective in preventing or reducing the associated side effects. Although medical foods are regulated by the U.S. Food and Drug Administration (“FDA”) under the Food Drug and Cosmetic Act regulations 21 CFR 101.9(j) (8), they are not required to undergo premarket review or approval by the FDA. Additionally, they are exempted from the labeling requirements for health claims and nutrient content claims under the Nutrition Labeling and Education Act of 1990. Also, this significantly decreases the overall timing, investment, and risks typically associated with bringing a new pharmaceutical to market.
A medical food, as defined in the Orphan Drug Act, is "a food which is formulated to be consumed or administered enternally 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." A food is subject to this exemption only if:
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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.
To bring ErgoD2-based medical foods to market, we plan to clinically validate their efficacy through independent studies that will comprehensively evaluate disease-associated biomarkers and their relationship with markers of iron regulation, and assess the ability to improve quality of life and health. Our upcoming follow-on clinical studies will focus on neurodegenerative and auto-immune conditions, as funding allows.
ErgoD2
Our ErgoD2 formulations utilize specialty mushrooms available from a number of domestic and international suppliers. These mushrooms are a food and are generally regarded as safe ("GRAS"). Our market and scientific research has identified mushroom species and suppliers to provide the superior nutritional profiles for our ErgoD2 formulations. We systematically 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 2,000% 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 FDA certified and are performed in-house by Entia technicians. We intend to expand our manufacturing capacity and efficiency as funding allows, as well as depending upon contract manufacturing, as necessary.
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 delivered 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 regulator 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 employs Ergo to prevent and/or 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 forms, ergocalciferol (vitamin D2) and cholecalciferol (vitamin 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 naturally increases the D2 content in mushrooms by more than 2,000% 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 significant, high dollar-value market opportunities. Although our initial focus will be on dietary supplements, we have developed and marketed both nutraceuticals (supplements) and cosmeceuticals, and continue to explore introduction of products in the medical foods category.
Patent License and Acquisition Agreements
In March 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, U.S. 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. Versions of this patent were issued in the Nation of Canada in 2012, and in the U.S. and Israel in 2013.
In June 2010, Entia acquired from The Penn State Research Foundation (PSRF) an exclusive license to U.S. 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. Corresponding patents were issued in the United States in 2013 and in Canada in 2014.
Under the Exclusive License Agreement with PSRF, Entia undertook to pay a royalty on net sales of dietary supplements and nutraceutical or medical foods, functional ingredients and other products that utilize 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.
The following patent applications were assigned to us by our Chief Science and Technology Officer, Marvin S. Hausman, MD, and where applicable, other inventors:
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U.S. patent application No. 61/277,150, filed September 21, 2009, entitled “Vitamin Fortified Mushrooms and Fungi for Increasing Survivability and Longevity."
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U.S. patent application No. 61/280,578, filed November 5, 2009, entitled “Vitamin Fortified Mushrooms and Fungi for Increasing Resistance to Oxidative Stress."
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U.S. patent application No. 61/335,394, filed 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.”
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U.S. 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.”
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U.S. 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.”
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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.”
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U.S. 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.”
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International application filed December 21,2012, PCT/U.S.12/71170; Entitled: “A Nutritional Approach to the Use of Ergothioneine and Vitamin D2 for Hair, Nail and Skin Growth.”
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PCT/U.S. 2008/056234, Serial number 12/529,859, entitled “Use of Ergothioneine as a Preservative in Foods and Beverages,” issued in Canada in 2011.
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U.S. 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.”
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PCT/U.S. 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.”
On November 10, 2009, we acquired rights to the patent application PCT/U.S. 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.
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 operations center located in Sherwood, Oregon. During 2013, we expanded our production capabilities to include the manufacturing & bottling process related to our GROH-branded soaps, lotions and conditioners, since licensed to a third party.
We utilize several methods of marketing and distribution for our branded products. Consumer products are and will continue to be marketed directly 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 Amazon.com.
Competitive Environment
The dietary supplements and medical foods markets are highly competitive, with many well-known and established suppliers. These industries are subject to rapid change with new products frequently being introduced into 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 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 selection and product development;
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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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appropriate pricing and customer acceptance of new products
We face challenges in developing new products, primarily those of funding development costs and diversion of management time. On a regular basis, we 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
Our markets, particularly the nutritional supplements and beauty industries are intensely competitive.
The dietary supplements, nutritional supplements (nutraceuticals) and medical foods industries include 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 able to educate consumers regarding the effects of certain component ingredients, however, they are subject to many existing and proposed regulations regarding labeling and advertising of such products. See “Government Regulation” below.
Competition
Supplements industry. The dietary and nutritional supplements industry (includes nutraceuticals and medical foods) 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 major players in the global dietary and nutritional supplements industry include Nestlé, Atrium Innovations, Glanbia Plc, NBTY Inc., Herbalife Ltd and others.
These companies market and distribute their products through various channels including: retail, multi-level marketing, e-commerce, and direct to consumer marketing (direct mail, television & radio infomercials, and email).
The market is highly sensitive to the introduction of new products and management has positioned Entia as an emerging dietary and nutraceuticals company with collaborative research projects at major universities, including but not limited to Massachusetts General Hospital, Pennsylvania State University, and the University of Cologne. This position has allowed us to license and build upon a significant portfolio of intellectual property, which is being utilized to secure proprietary nature of our manufacturing process and our intended new products applications. Furthermore, we will align our products, when advantageous, to take advantage the rules of and protections granted under the Dietary Supplement Health and Education Act of 1994 (“DSHEA”), as well as the Orphan Drug Act, which allows for the development of medical foods to aid in dietary conditions related to specific disease conditions. This approach will aid us in introducing specific, innovative products to market.
Government Regulation
Dietary and Nutritional Supplements
DSHEA defines the term "dietary supplement" to mean a product (other than tobacco) intended to supplement the diet that bears or contains one or more of the following dietary ingredients: a vitamin, a mineral, an herb or other botanical, an amino acid, a dietary substance for use by man to supplement the diet by increasing the total dietary intake, or a concentrate, metabolite, constituent, extract, or combination of any of the aforementioned ingredients. Furthermore, a dietary supplement must be labeled as a dietary supplement and be intended for ingestion and must not be represented for use as conventional food or as a sole item of a meal or of the diet. In addition, a dietary supplement cannot be approved or authorized for investigation as a new drug, antibiotic, or biologic, unless it was marketed as a food or a dietary supplement before such approval or authorization. Under DSHEA, dietary supplements are deemed to be food, except for purposes of the drug definition.
Dietary supplements labels. A "label" is a display of written, printed, or graphic material on the supplement container. DSHEA and other federal regulations require the following information to appear on dietary supplement labels:
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a statement of identity that contains the words "dietary supplement." The word "dietary" may be replaced by the name of the dietary ingredient (e.g., "ginseng supplement");
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net quantity of contents (for example, "60 capsules");
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nutrition information in the form of a "Supplement Facts" panel, including the product serving size, the amount, and percent daily value, if established, of each dietary ingredient;
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if a supplement contains a proprietary blend, the net weight of the blend as well as a listing of each ingredient in descending order of weight must be identified;
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the part of the plant used, if an herb or botanical;
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the name and place of business of the manufacturer, packer, or distributor;
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a complete list of ingredients by their common or usual names, either in descending order of prominence or with the source of the dietary ingredient in the "Supplement Facts" panel, following the name of the dietary ingredient;
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safety information that is considered "material" to the consequences that may result from the use of the supplement;
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the disclaimer "This statement has not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure, or prevent any disease" if the supplement bears a claim to affect the structure or function of the body (structure/function claim), a claim of general well-being, or a claim of a benefit related to a classical nutrient deficiency disease; and
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At their discretion, manufacturers may add additional information on labels (such as claims and statements of quality assurance), and may decide on the placement of that information on their labels.
FDA and DSHEA. Under the act, supplement manufacturers do not need to receive FDA approval before marketing dietary supplements that were marketed in the United States before 1994. Dietary ingredients not so grandfathered are defined as New Dietary Ingredients in 21 U.S.C. 350b(d), and notifications of providing reasonable evidence of their safety, or reasonable expectations of their safety, must be reviewed and approved by the FDA prior to their marketing.
Medical Foods
The term “medical food” means a food which is formulated to be consumed or administered 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.
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 Federal Food, Drug and Cosmetic Act (“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:
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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.
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. (See 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.
Employees
We currently have six full-time employees and one part-time employee. Depending upon demand, we occasionally utilize a number of additional part-time employees to manufacture and produce products.
Item 1A.
Item 1A. Risk Factors.
Risk Factors Relating to Our Company
We have significant outstanding interest-bearing debt which we must repay from limited operating and financing cash flows.
We currently have aggregate convertible debt in the principal amount of $1,073,952 at annual interest rates ranging from 0% to 10%. Of this aggregate principal debt, $59,400 was due on April 30, 2017 and $50,000 plus accrued interest is in litigation. $287,300 of this debt plus accrued interest is considered long-term and $45,000 is payable to related parties. Much of the debt is convertible into shares of our Company at the option of the payee and, under certain circumstances, at our option. Given that our revenues have not been sufficient to allow for repayment of this debt, we will likely have to undertake financings involving new debt or equity securities to repay these obligations as they come due or further extend their maturities.
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, pay our significant accounts payable and accrued expenses of $1,359,702 and develop and sustain our operations could result in reducing or ceasing our operations. Additional financing may not be available on acceptable terms, if at all, and our failure to raise sufficient capital in a timely manner could negatively impact our growth strategy or otherwise materially adversely affect our business. Additional equity financing may be dilutive to the holders of our common stock, and debt financing may involve significant cash payment obligations and financial or other business covenants that restrict our ability to operate our business as we might otherwise choose. If we are unable to raise sufficient funds from additional borrowing, private placements or public offerings to meet our debt obligations, we may default on that debt, leaving us unable to continue in business. If we do not pay certain creditors 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.
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, 2016, our revenues decreased substantially from $346,910 for the fiscal year ended December 31, 2015 to $265,466 for the fiscal year ended December 31, 2016 with a net loss decreasing from $(2,260,050) for the fiscal year ended December 31, 2015 to $(1,395,782) for the fiscal year ended December 31, 2016. We are unable to give any assurance 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 be successful, and we can provide investors with no assurance that we will generate substantial 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, 2016 we had a working capital deficit of $(1,871,277). We had a net loss of $(1,395,782) for the year ending December 31, 2016 and an accumulated deficit of $(14,472,774) from inception (on July 19, 2007) through December 31, 2016.
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 sufficient operating cash flow from operations and other financing activities. We may not be successful in addressing these issues. If we cannot continue as a going concern, our stockholders may lose their entire investment in the Company.
Our future profitability is uncertain.
We cannot predict our ability to 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 2016 and 2015, losses and expenses may increase and fluctuate from year to year. There can be no assurance that we will ever achieve profitable operations.
To date, we have been unable to operate profitably. In order to establish our business, we will likely incur additional
expenses for additional personnel, marketing and advertising, information systems, rent and other overhead to support these activities. We therefore expect to incur substantial operating losses for the foreseeable future. Our ability to become profitable depends on our ability to successfully develop and market our products and operations, while maintaining reasonable expense levels, all of which are uncertain in light of our absence of any prior profitable operating history.
We may not be able to successfully put in place the necessary financial, administrative, and managerial structure and the development of such structure will require a significant amount of management's time and other resources.
Our financial results have fluctuated in the past and may fluctuate in the future, which may cause volatility in our valuation.
Our operating results have fluctuated in the past and we expect our future quarterly and annual operating results to fluctuate as we focus on increasing healthcare provider and consumer demand for our products. These fluctuations could cause the value of our enterprise and, accordingly, the value of our common and preferred stock or other securities to decline or significantly fluctuate. Some of the factors that could cause our operating results to fluctuate include:
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limited visibility into and difficulty predicting the level of activity in individual health care providers’ practices from quarter to quarter;
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weakness in consumer spending as a result of the slowdown in the United States economy and global economies;
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changes in relationships with distributors;
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changes in the timing of receipt of product orders during a given quarter which, given our cycle time and the delay between case receipts and case shipments, could have an impact on which quarter revenue can be recognized;
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fluctuations in currency exchange rates against the U.S. dollar;
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changes in product mix;
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our inability to predict from period to period the number of healthcare professionals recommending or otherwise depending on our products as part of a treatment regimen, which may impact the timing of when revenue is recognized;
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seasonal fluctuations in the number of doctors in their offices and their availability to take appointments;
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success of or changes to our marketing programs from quarter to quarter;
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timing of industry tradeshows;
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changes in the timing of when revenue is recognized, including as a result of the introduction of new products or promotions or as a result of changes to critical accounting estimates or new accounting pronouncements;
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changes to our effective tax rate;
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unanticipated delays in production caused by insufficient capacity or availability of raw materials;
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any disruptions in the manufacturing process (external to us), including unexpected turnover in the labor force or the introduction of new production processes, power outages or natural or other disasters beyond our control;
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the development and marketing of directly competitive products by existing and new competitors;
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major changes in available technology or the preferences of customers may cause our current product offerings to become less competitive or obsolete;
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aggressive price competition from competitors;
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costs and expenditures in connection with litigation;
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the timing of new product introductions by us and our competitors, as well as customer order deferrals in anticipation of enhancements or new products;
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disruptions to our business due to political, economic or other social instability, including the impact of an epidemic any of which results in changes in consumer spending habits, consumers unable or unwilling to visit health care professionals, as well as any impact on workforce absenteeism;
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inaccurate forecasting of net revenues, production and other operating costs; and
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investments in research and development to develop new products and enhancements.
To respond to these and other factors, we may need to make business decisions that could adversely affect our operating results such as modifications to our pricing policy, business structure or operations. Most of our expenses, such as employee compensation and lease payment obligations, are relatively fixed in the short term. Moreover, our expense levels are based, in part, on our expectations regarding future revenue levels. As a result, if our net revenues for a particular period fall below our expectations, whether caused by changes in consumer spending, consumer preferences, weakness in the U.S. or global economies, changes in customer behavior related to advertising and prescribing our product, or other factors, we may be unable to adjust spending quickly enough to offset any shortfall in net revenues. Due to these and other factors, we believe that period-to-period comparisons, particularly quarter-to-quarter comparisons, of our operating results may not be meaningful. You should not rely on our results for any one quarter or other period as an indication of our future performance.
Our future success may depend on our ability to develop, gain regulatory approval for and successfully introduce and achieve market acceptance of new products.
Although we are now only subject to limited amounts of government regulation, our future success may depend on our ability to develop, manufacture, market, and obtain regulatory approval or clearance of new products. Complying with future government regulation may be an expensive and time-consuming process, and failure to comply could result in substantial penalties. There can be no assurance that we will be able to successfully develop, sell and achieve market acceptance of these and other new products and applications and enhanced versions of our existing product, related technology and intellectual property. The extent of, and rate at which, market acceptance and penetration are achieved by future products, related technologies and intellectual property is a function of many variables, which include, among other things, our ability to:
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correctly identify customer needs and preferences and predict future needs and preferences;
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include functionality and features that address customer requirements;
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allocate our research and development funding to products with higher growth prospects;
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anticipate and respond to our competitors’ development of new products and technological innovations;
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effectively differentiate our product offerings from our competitors’ product offerings;
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innovate and develop new technologies and applications;
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if and when applicable, effectively communicate the availability of third-party reimbursement of procedures using our products;
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obtain adequate intellectual property rights; and
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encourage customers to adopt new product technologies.
If we fail to accurately predict customer needs and preferences or fail to produce viable technologies, we may invest heavily in research and development of products, related technologies and intellectual property that do not lead to significant revenue. Even if we successfully innovate and develop new products and produce enhancements, the related clinical studies are expensive and time consuming and we may incur substantial costs in undertaking such studies, and our profitability may suffer.
Our ability to market and sell new products may also become subject to government regulation, including approval or clearance by the United States Food and Drug Administration (“FDA”), and foreign government agencies. Any failure in our ability to successfully develop and introduce or achieve market acceptance of our new products or enhanced versions of existing products could have a material adverse effect on our operating results and could cause our net revenues to decline.
A disruption in the operations of freight carriers or higher shipping costs could cause a decline in our net revenues or a reduction in our earnings.
Indirectly, we are dependent on commercial freight carriers to deliver our products. If the operations of these carriers are disrupted for any reason, delivery of our products to our customers may be disrupted or untimely. If our products cannot be delivered in an efficient and timely manner, our net revenues and operating profits could materially decline. In a rising fuel cost environment, freight costs will increase. If freight costs materially increase, our gross margin and financial results could be adversely affected.
Our business is sensitive to perceptions of the public and of the medical community.
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. Additionally, inasmuch as our medical foods target specific diseases whose sufferers are under the care of general practitioners and/or specialists, should our medical foods fail to win the confidence of those health care professionals, our image and operating results could suffer.
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, FTC or other government agencies 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 supplements, nutraceuticals, 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 entities, 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 may 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 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 with which it is difficult for us to compete.
As we grow, we are subject to growth-related risks, including risks related to capacity constraints at our existing facilities.
We are subject to growth-related risks, including capacity constraints and pressure on our internal systems and personnel. In order to manage current operations and future growth effectively, we will need to continue to implement and improve our operational, financial and management information systems and to hire, train, motivate, manage and retain employees. We may be unable to manage such growth effectively. Any such failure could have a material adverse impact on our business, operations and prospects. Expansion can inherently include additional costs and start-up inefficiencies, as well as the inability to successfully integrate additional facilities, equipment, systems or incremental capacity and to realize anticipated synergies, economies of scale or other value. Periods of contraction or reduced net sales, or other factors, create other challenges. Because we cannot always immediately adapt our capacity and related cost structures to changing market conditions, our systems capacity may at times exceed or fall short of our requirements. Any or all of these problems could result in the loss of customers, provide an opportunity for competing products to gain market acceptance and otherwise harm our business and financial results.
We depend upon our executive officers and key personnel.
Our performance depends substantially on the performance of our executive officers. Our Chief Executive Officer, Carl Johnson oversees all Company-related operations. Our Chief Science and Technology Officer, Marvin S. Hausman, M.D., is the inventor of the process and formulas used to 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 and Financial Officer, Timothy Timmins, is responsible for our day-to-day operations. The loss of services of our executives 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 allows.
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 part on our ability to maintain existing intellectual property, both licensed and owned, and to obtain and maintain further intellectual property protection for our products, both in the U.S. and in other countries. Our success will further 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 consumer claims threatened or 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. Although we presently are protected by product liability insurance, there can be no assurance that we will be able to retain coverage in the future and, if not, there can be no assurance that we would be able to replace lost coverage on a cost-justified basis, in a sufficient amount or at all. We may not have sufficient resources to defend against or pay damages from a material lawsuit; this could negatively impact our business.
If we infringe the patents or proprietary rights of other parties or are subject to a patent infringement claim, or if we are required to initiate litigation against others in order to protect or assert our intellectual property rights, our ability to grow our business may be severely limited.
Extensive litigation over patents and other intellectual property rights is common in the healthcare industry. We may be the subject of patent or other litigation in the future. From time to time, we may in the future receive letters from third parties drawing our attention to their patent rights. While we do not believe that we infringe upon any valid and enforceable rights, whether or not these have been brought to our attention, there may be other more pertinent rights of which we are presently unaware. In addition, because patent applications in the United States are maintained in secrecy until patents issue, and because publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we and our licensors are the first creators of inventions covered by any licensed patent applications or patents or that we or they are the first to file. The Patent and Trademark Office may commence interference proceedings involving patents or patent applications, in which the question of first inventorship is contested. Accordingly, the patents owned or licensed to us may not be valid or may not afford us protection against competitors with similar technology, and the patent applications licensed to us may not result in the issuance of patents. The defense and prosecution of intellectual property suits, interference proceedings and related legal and administrative proceedings could result in substantial expense to us and significant diversion of effort by our technical and management personnel. An adverse determination of any litigation or interference proceeding to which we may become a party or which we initiate could subject us to significant liabilities. An adverse determination of this nature could also put our patents at risk of being invalidated or interpreted narrowly or require us to seek licenses from third parties. Licenses may not be available on commercially reasonable terms or at all, in which event, our business would be materially adversely affected.
From time to time, we may maintain single-supply relationships for certain of our business elements and materials technologies, and our business and operating results could be harmed if supply is restricted or ends or the price of raw materials (generally wire) used in our manufacturing process increases.
We purchase substantially all of our key raw material, mushrooms (in various forms), from a single source. If this or other suppliers encounter financial, operating or other difficulties or if our relationship with them changes, we might not be able to quickly establish or qualify replacement sources of supply and could face production interruptions, delays and inefficiencies. Although the bulk of the mushrooms we use are not rare, we cannot give any assurance that they will remain available in plentiful supply or at economically viable prices. Although the raw materials we use are not subjected to extraordinary regulation over and above that normally required by regulatory agencies such as the FDA, nor are unusual environmental legal considerations weighing directly upon our product, we cannot give any assurance that this regulatory status will continue. Our growth may exceed the capacity of one or more of our suppliers to produce the needed materials in sufficient quantities to support our growth. We may in the future, in order to secure supplies for production of our products, enter into non-cancelable purchase commitments with vendors, which could impact our ability to adjust our inventory to reflect declining market demands. If demand for our products is less than we expect, we may experience additional excess and obsolete inventories and be forced to incur additional charges and our profitability may suffer. In the event of technology changes, delivery delays, or shortages of or increases in price for these items, our business and growth prospects may be harmed.
Risks Relating to Our Common Shares and Other Securities
We have incurred significant costs as a result of being a public company.
As a public company, we have incurred significant legal, accounting and other expenses that we would 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 may 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 rights of holders of our existing classes of common and preferred stock.
Our articles of incorporation, as consented to and ratified by our recently completed consent solicitation, authorize us to issue up to 5,000,000 shares of preferred stock. To date, we have issued an aggregate of 306,969 shares of Series A Preferred Stock, of which 188,563 shares remain unconverted and outstanding, with each preferred share convertible into 50 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 other classes of our stock, and the right to the redemption of such preferred shares, together with a premium, prior to the redemption of other classes of our stock. To the extent that we do issue such additional shares of preferred stock, rights of holders of other classes of our stock could be impaired thereby, including, without limitation, dilution of ownership interests in the Company. 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 the interests of holders of other classes of our 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 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.
Through their beneficial ownership, our officers and directors, in the aggregate, have the right to vote approximately 36% of our outstanding common stock. As a result of potential future bonuses and other equity awards, these officers and directors could, in the aggregate, beneficially own or have the right to vote even more 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.
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.
Additionally, our officers/directors, in the aggregate, beneficially own a significant amount of our outstanding preferred stock. As a result, these preferred stockholders, acting together, could influence matters related to our preferred stock including, but not limited to the following:
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Rights and privileges of the preferred class, including anti-dilution provisions; and
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Existence of the class itself, in the case of mandatory or forced conversion to our common shares.
There is a limited public market for our common stock. Historically, the market value for our company has been difficult to determine.
There is a limited public market for our common stock. We cannot assure our investors that a robust public market for our shares will develop in the future. As a result, investors may not be able to realize any return on their investment for a considerable period of time, if ever. Therefore, any investment in our securities should be considered a long-term investment and may be illiquid for an indefinite period of time. Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”) currently requires that the Shares must be held a minimum of six months, and there is no assurance that the Shares will be available for resale under Rule 144 in six months or ever. To effect a sale, all certificates evidencing the common shares that bear a legend restricting transfer, except upon registration under the Securities Act or pursuant to a valid exemption from such registration, must be supported by an opinion of counsel to the Company or a no-action letter issued by the Commission.
If it can at all be determined, the market value of our company and its securities could be subject to wide valuation fluctuations in response to various factors, many of which are beyond our control. The factors include:
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Periodic variations in our results of operations and liquidity;
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Speculation in the press or investment community concerning our business and results of operations;
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Strategic actions by our competitors, such as product announcements or acquisitions;
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Announcements of technological innovations or new products by us, our customers or competitors; and
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General economic market conditions.
In addition, the stock market in general, and the market for healthcare companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated to or disproportionate to the operating performance of those companies. Although only a limited public market for our common stock currently exists, these broad market and industry factors may seriously harm the market value of our company in a private financing or sale, regardless of our operating performance.
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.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Item 2. Properties.
Our corporate headquarters are located at 13565 SW Tualatin-Sherwood Road, Suite #800, Sherwood, Oregon 97140. We believe our current office space is adequate for our immediate needs; however, as our operations expand, we may need to relocate and/or secure additional office space.
Item 3.
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.
At December 31, 2016, we were and continue to be a party to litigation with respect to a note payable, with a face amount of $50,000, the accrued interest thereon and other unspecified monies. The Company will defend itself vigorously and reserves the right to make counter claims against the adversarial party. Although we believe that this situation will be settled in due time, without material effect to the Company or its future operations, we can offer no assurance to that effect.
Item 4.
Item 4. Mine Safety Disclosures.
Not Applicable
PART II
Item 5.
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 QB Board (Other OTC) under the symbol: ERGO. 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.
(b) Holders of Common Stock
As of December 31, 2016, there were approximately 211 registered shareholders of record of our common stock with 28,149,777 total shares outstanding. We believe the total number of our shareholders, when those holding our common shares in “street name” are included, is approximately 1,000.
(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, 2016.
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. Between 2013 and 2015, an additional 150,000 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 4,700,000 shares. On January 1, 2016, another 50,000 shares were automatically added to the shares reserved for issuance, bringing the total to 4,750,000 shares.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities that have not previously been disclosed in our periodic reports, except as follows:
During October 2016, we issued a one-year, 10% convertible promissory note in the amount of $25,000 and convertible at lender’s option into other, yet-to-be-determined securities of a follow-on transaction, if any. Attached to the debenture is a five-year warrant to purchase 100,000 shares of our common stock at $0.10 per share.
During October 2016, we issued a one-year, 10% convertible promissory note in the amount of $250,000 and convertible at lender’s option into other, yet-to-be-determined securities of a follow-on transaction, if any. Attached to the debenture is a five-year warrant to purchase 1,000,000 shares of our common stock at $0.10 per share.
During October 2016, we issued a one-year, 10% convertible promissory note in the amount of $50,000 and convertible at lender’s option into other, yet-to-be-determined securities of a follow-on transaction, if any. Attached to the debenture is a five-year warrant to purchase 200,000 shares of our common stock at $0.10 per share.
During October 2016, we issued a one-year, 10% convertible promissory note in the amount of $50,000 and convertible at lender’s option into other, yet-to-be-determined securities of a follow-on transaction, if any. Attached to the debenture is a five-year warrant to purchase 200,000 shares of our common stock at $0.10 per share.
During December 2016, we issued a one-year, 10% convertible promissory note in the amount of $50,000 and convertible at lender’s option into other, yet-to-be-determined securities of a follow-on transaction, if any. Attached to the debenture is a five-year warrant to purchase 200,000 shares of our common stock at $0.10 per share.
During December 2016, we issued a one-year, 10% convertible promissory note in the amount of $10,000 and convertible at lender’s option into other, yet-to-be-determined securities of a follow-on transaction, if any. Attached to the debenture is a five-year warrant to purchase 40,000 shares of our common stock at $0.10 per share.
During December 2016, we issued a one-year, 10% convertible promissory note in the amount of $20,000 and convertible at lender’s option into other, yet-to-be-determined securities of a follow-on transaction, if any. Attached to the debenture is a five-year warrant to purchase 80,000 shares of our common stock at $0.10 per share.
During December 2016, we issued a one-year, 10% convertible promissory note in the amount of $50,000 and convertible at lender’s option into other, yet-to-be-determined securities of a follow-on transaction, if any. Attached to the debenture is a five-year warrant to purchase 200,000 shares of our common stock at $0.10 per share.
During December 2016, as part of an extension of an existing note and accrued interest of $59,000, we issued a 50,000-share, five-year warrant exercisable at $0.10 per common share.
The proceeds from these sales were used for general corporate purposes.
We believe that these transactions were exempt from registration by relying on Section 4(a)(2) of the Securities Act of 1933.
Registrant Purchases of Equity Securities
We did not repurchase any of our equity securities during the years ended December 31, 2016 or 2015.
Item 6.
Item 6. Selected Financial Data.
Not applicable.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview of Operations
Entia Biosciences, Inc. (“Entia”) develops patented, pharmaceutical-grade compounds, including a foundational compound called ErgoD2R. We believe that ErgoD2 improves iron homeostasis and mitigates iron-related disorders presenting in anemia, chronic kidney disease and select neurodegenerative diseases. Our goal is to clinically validate and commercialize ErgoD2 through the OTC supplement channels and possibly others, such as medical foods. We also develop and market health-related nutraceuticals and manufacture certain cosmeceuticals.
We believe that our formulations, which are highly potent antioxidants, have the nutritional potential to provide multiple health benefits for humans, including improving iron homeostasis, 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.
Results of Operations for the year ended December 31, 2016 and 2015
Revenues and Cost of Goods Sold:
Revenues. Revenues are generated from the sale of our GROH line and mushroom-based nutraceutical dietary supplement products and functional ingredients. The 23.5% decrease in revenues from 2015 was due to the decrease in sales of our GROH products.
Cost of Goods Sold. Cost of goods sold includes raw materials such as mushrooms, as well as production costs for manufacturing our supplement products. Cost of goods sold for 2016 decreased proportionally with the decrease of revenues compared to 2015.
The following is a summary of certain consolidated statement of operations data for the periods indicated:
Operating Expenses:
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 in this expense is due to the reduction of marketing activities during 2016 for the Groh brand.
Professional fees. These expenses primarily include accounting/auditing fees, legal fees and stock transfer fees. The decrease in professional fees from 2015 is due to decreased legal and accounting fees for 2016.
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 2015 to 2016 is due to a reduction in the use of third-party consultants and the attendant decrease in warrants issued to compensate such consultants.
General and administrative expenses. These expenses primarily include compensation, costs related to travel, rent and utilities, insurance, depreciation and product development. The decrease from 2015 is attributable to a reduction in stock-based compensation of $439,000 and a $49,000 reduction of the value of intangible assets that occurred in 2016. During 2015 there was a $110,000 reduction in the value of intangible assets.
Inflation
Inflation has not had a significant impact in the current or prior periods.
Employees
We currently have six full-time employees and one part-time employee. From time to time, we utilize part-time employees to manufacture and produce products. We believe that our employee relations are good.
Liquidity and Capital Resources
At December 31, 2016, cash totaled $76,050 compared to $24,133 at December 31, 2015. The primary reasons for the net increase in 2016 are described below. Our cash is held primarily in general checking accounts. Working capital deficit was $(1,871,277) at December 31, 2016, compared to $(1,111,458) at December 31, 2015. The change in working capital was due primarily to the increase in accounts payable, accrued expenses and the short-term convertible notes payable in 2016. The net change in cash and cash equivalents for the periods presented was comprised of the following (in thousands):
Operating Activities. The increase in net cash flows used in operating activities is due primarily to a decrease in stock-based compensation.
Investing Activities. The decrease in net cash flows used from investing activities is due primarily to a reduction in acquisition of patents and licenses.
Financing Activities. The increase in net cash flows in financing activities is due primarily to additional sales of convertible notes payable.
Future Liquidity. We have a history of incurring net losses and negative operating cash flows. We also continue to develop commercial products and services. Based on our cash on hand, planned financings and results from future operations, we believe that we will have sufficient funds to remain operational through 2017.
We expect our revenues to remain steady in 2017. Notwithstanding, we anticipate generating losses in 2017 and therefore we may experience additional challenges to our ability to continue future operations. In order for us to continue as a going concern and ultimately to achieve profitability, we will be (a) required to obtain capital from external sources; and/or (b) increase revenues; and/or (c) reduce operating costs. We intend to raise additional capital through private financing and or product licensing. 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 funds available for operating costs could jeopardize our ability to launch, market and sell new products necessary to grow and sustain our business.
Subsequent Events
In February 2017, 600,000, 200,000 and 200,000 shares, respectively, were re-issued to our Chairman, Dr. Marvin Hausman, a director, Elliot Shelton and a former director, Philip Sobol, to replace shares previously surrendered to the Company.
In February 2017, 500,000, 600,000, and 550,000 shares were issued to Hausman, Johnson and Timmins, respectively, as compensation pursuant to their 2015 employment contracts, as adjusted by the board of directors.
In February 2017, 1,861,170 shares were issued to Dr. Hausman in conjunction with his forgiveness of $327,285 of unpaid wages from 2014 and 2015. A five-year warrant to purchase 100,000 shares of our restricted Common Stock, exercisable at $0.10 per share was also granted to him as consideration from the disinterested directors. The shares were valued at $18,612 and will be expensed during first quarter 2017.
In February 2017, 250,000 shares were awarded to Mr. Shelton for his service as the sole outside director during 2016 and 250,000 shares each were awarded to Messrs. Hausman, Johnson and Timmins in conjunction with replacement employment contracts being drafted in order to strengthen, to the benefit of the company and its shareholders, the non-competition clauses between these individuals and the company and, further, to remove the "evergreen" aspects of the existing contracts, instead replacing them with a finite, fixed terms.
In February 2017, we entered into an executed, definitive licensing agreement with GROH Beauty Corp, a newly-formed subsidiary of an established beauty industry company, under which we granted certain exclusive worldwide rights to manufacture and distribute our GROH beauty products. The license called for a front-end license fee, half of which is non-refundable and the other half of which is subject to a number of factors during a due diligence period, as well as royalties over a period of years, also subject to the completion of the due diligence period, until the license is paid in full and thereby becomes an exclusive perpetual license of the Licensee. The total value of the license fees and royalties to us was $1,150,000. The License called for and was accompanied by a separate executed agreement under which we will manufacture and sell our ErgoD2 compound exclusively to the licensee for its use in the cosmetic and beauty care markets. As this manufacturing agreement provided for price adjustments and is expected to run for a number of future years concurrent with the License, its positive value to us presently continues to be inestimable. Additionally, the License called for a separate agreement with Entia, through which our Chief Science and Technology Officer will provide consulting services to the licensee.
Going Concern
We have a history of incurring net losses and net operating cash flow deficits. At December 31, 2016, we had cash and cash equivalents of $76,050. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Based on our cash on hand, planned financings, and results from future operations, we believe that we will have sufficient funds to remain operational through 2017.
In order for us to continue as a going concern beyond this point and ultimately to achieve profitability, we likely will be required to obtain capital from external sources, and/or increase revenues and/or reduce operating costs. The issuance of additional equity or convertible debt 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 may 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
Our 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 report 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 procured and manufactured 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. Where reliable, reputable third-party appraisals are available, these are used to determine value or aid in determining value. Absent such appraisals and documentation, 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. Where possible, non-cash compensation expense is recognized on a straight-line basis over the applicable service period, or is otherwise based on the fair value of such share-based awards on the grant date, as documented by appraisal or other suitable documentation.
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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data
Entia Biosciences, Inc.
Index to Consolidated Financial Statements
December 31, 2016 and 2015
Contents
Page(s)
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2016 and 2015
Consolidated Statements of Operations for the Years Ended December 31, 2016 and 2015
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015
Notes to the Consolidated Financial Statements
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 as of December 31, 2016 and 2015, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit 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 financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Entia Biosciences, Inc. and Subsidiary as of December 31, 2016 and 2015, 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. These consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
/S/ PETERSON SULLIVAN LLP
Seattle, Washington
May 19, 2017
ENTIA BIOSCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes to the consolidated financial statements.
ENTIA BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to the consolidated financial statements.
ENTIA BIOSCIENCES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2016 and 2015
See accompanying notes to the consolidated financial statements.
ENTIA BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to the consolidated financial statements
Entia Biosciences, Inc.
Notes to the Consolidated Financial Statements
December 31, 2016 and 2015
NOTE 1 - BUSINESS
We engage in the development, production and distribution of dietary supplements, nutraceuticals and medical foods products, principally 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. At December 31, 2016, we had cash and cash equivalents of $76,050. These conditions raise substantial doubt about our ability to continue as a going concern. Based on our cash on hand, planned financings, and results from future operations, we believe that we will have sufficient funds to continue operations through 2017.
In order for us to continue as a going concern beyond this point and ultimately to achieve profitability, we will likely be required to obtain capital from external sources, and/or increase revenues and/or reduce operating costs. The issuance of equity securities will cause dilution to our shareholders. If external sources of financing are not available or are inadequate to fund our operations, we may 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 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, 2016 and 2015.
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 $5,736 at December 31, 2016 and 2015.
Inventory
Inventory consists of finished goods and 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. The portion of inventory that is not expected to be used in production of our products for more than 12 months is a long-term asset.
Property and equipment
Property and equipment are recorded at cost. Additions and improvements that increase the value or extend the life of an asset are capitalized. Maintenance and repairs are expensed as incurred. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statement of operations. Depreciation is computed on a straight-line basis over the following estimated useful lives of the assets:
Office equipment
3 years
Production equipment
5 to 7 years
Leasehold improvements
Lesser of lease term or useful life of improvement
Patents
Patents, once issued or purchased, are amortized using the straight-line method over their economic remaining useful lives. All internally-developed process costs incurred to the point when a patent application is to be filed are expensed as incurred and classified as research and development costs and reported in the consolidated statements of operations as general and administrative costs. Patent application costs and general 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.
Licenses
Licenses that allow us to use certain technology in the production of our products are amortized on a straight-line basis over their remaining useful life (typically 15-17 years). Long-lived assets, including licenses, property and equipment and 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 licenses in the amount of $49,895 and $110,000 on December 31, 2016 and 2015, respectively. As of December 31, 2016, the carrying value of our licenses are $0.
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 statements 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. Where reliable, reputable third-party appraisals are available, these are used to determine value or aid in determining value. We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1
Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3
Unobservable inputs where there is little or no market data, which require the reporting entity to develop its own assumptions.
We do not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis. Consequently, we did not have any fair value adjustments for assets and liabilities measured at fair value at December 31, 2016 or 2015, 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, 2016 and 2015.
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 patterns, 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 2016 and 2015, we incurred $14,904 and $27,848, 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 $37,750 and $73,394 in 2016 and 2015, respectively and are classified as general and administrative on the consolidated statement 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. However, where reliable, reputable third-party appraisals are available, these are used to determine value or aid in determining value. Such transactions have included both common stock or awards of warrants to purchase common stock.
The fair value of each warrant award is estimated on the date of grant using a Black-Scholes option-pricing valuation model.
The assumptions used to determine the fair value of our warrants are as follows:
-
The expected life of warrants issued represents the period of time the warrants are expected to be outstanding.
-
The expected volatility is generally based on the historical volatility of comparable companies’ stock over the contractual life of the warrant.
-
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the warrant.
-
The expected dividend yield is based on our current dividend yield as the best estimate of projected dividend yield for periods within the contractual life of the warrant.
Income taxes
We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. 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 2013, 2014, 2015 and 2016.
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 2016 and 2015. The following table presents a reconciliation of basic loss per share and excluded dilutive securities:
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 July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory: Topic 330 (ASU 2015-11). Topic 330 currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. ASU 2015-11 requires that inventory measured using either the first-in, first-out (FIFO) or average cost method be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Adoption of ASU 2015-11 is required for fiscal reporting periods beginning after December 15, 2016, including interim reporting periods within those fiscal years. The Company does not expect adoption of ASU 2015-11 to have a material impact on its consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU-2016-09). The updated guidance simplifies and changes how companies account for certain aspects of share-based payment awards to employees, including accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of certain items in the statement of cash flows. Adoption of ASU 2016-09 is required for fiscal reporting periods beginning after December 15, 2016, including interim reporting periods within those fiscal years with early adoption being permitted. The Company does not expect the adoption of ASU 2016-09 to have a material impact on its consolidated financial statements.
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 in the first quarter of 2018, 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.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires organizations to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. This ASU is effective for annual reporting periods beginning on or after December 15, 2018, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual period. We are currently evaluating the impact the adoption of this ASU will have on our consolidated financial statements.
NOTE 3 - INVENTORY
Inventory consists of the following at:
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consists of the following at:
Depreciation expense was $14,401 and $18,512 for the years ended December 31, 2016 and 2015, respectively.
NOTE 5 - PATENTS AND LICENSES, NET
Our identifiable long-lived intangible assets are patents and licenses. During 2016 and 2015, management analyzed our intangibles for possible impairment. We have recorded for 2016 and 2015 an impairment in the amount of $49,895 and $110,000, respectively. We have no amortizable licenses on the financial statements at December 31, 2016.
Prior to being fully impaired, the licenses were 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:
Amortization expense for licenses and amortizable patents were $3,296 and $13,484 for the years ended December 31, 2016 and 2015, respectively.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accrued expenses (included with accounts payable) consisted of the following at:
Executive compensation accrued above includes $327,285 of unpaid wages from 2014 and 2015 that have subsequently been forgiven by our Chairman. See Note 13 - Subsequent Events.
NOTE 7 - NOTES PAYABLE
Notes payable comprise the following at the dates indicated:
Line of Credit
On March 25, 2014, we entered into an unsecured line of credit arrangement that renews annually unless terminated by either party. The line of credit is $60,000 with an interest rate of prime plus 3.00%, resulting in an interest rate of 6.5% at December 31, 2016. There are no loan covenants applicable to this line of credit and the amounts outstanding are $59,945 and $58,195 as of December 31, 2016 and 2015, respectively.
NOTE 8 - RELATED PARTY TRANSACTIONS
Investments and loans from officers or board members
On February 18, 2016, our Chairman and Chief Science and Technology Officer lent us $10,000 in the form of a 10% unsecured note, the due date of which has been extended to August 2017.
On May 20, 2016, our Chief Executive Officer invested $25,000 in our 8% convertible note payable (with an attached warrant), due May 2019.
On December 5, 2016, our Chairman and Chief Science and Technology Officer invested $10,000 in our 10% convertible promissory note (with an attached warrant), due December 2017.
Common stock issued
On April 17, 2015, the board of directors authorized and granted to its executives and board or directors for the year end 2015, restricted common stock bonuses as follows:
·
Marvin Hausman, former CEO and director, 600,000 shares valued at $120,000
·
Devin Andres, former COO, 550,000 shares valued at $110,000
·
Philip Sobol, former director, 200,000 shares valued at $40,000, and
·
Elliott Shelton, director, 200,000 shares valued at $40,000.
During December 2015, Messrs. Hausman, Sobol and Shelton surrendered their stock certificates in the amounts detailed above with the understanding that equity securities in some form would be granted in the future to replace the aforementioned grants. That replacement took place during the first quarter 2017. See Note 13 - Subsequent Events. As of third quarter 2015, Mr. Andres was no longer an officer of the company and, as of fourth quarter 2015, Mr. Sobol was no longer a director.
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 due to an anti-dilution right, is convertible into common stock on a one-for-fifty basis.
Common stock
The Company is authorized to issue 150,000,000 shares of common stock at $0.001 par value.
Stock incentive plan
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. Between 2013 and 2015, in addition to the 150,000 shares that were automatically added, on two separate occasions shareholders approved an additional 1.5 million shares each to be added bringing the total shares reserved to 4,700,000 shares. On January 1, 2016, another 50,000 shares were automatically added to the shares reserved for issuance bringing the total to 4,750,000 shares.
Generally, stock options have been granted at or below the last sale price of our common stock on the date of grant for terms ranging from four to fifteen years and vesting over five-years. The fair value of the option grants was calculated at the date of the grants using the Black-Scholes option pricing model with the following assumptions:
The range of exercise prices for options outstanding under the 2010 Stock Incentive Plan at December 31, 2016 are as follows:
At December 31, 2016, the Company had 1,927,030 unissued shares available under the Plan. Also, at December 31, 2016, the Company had $49,363 of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 5.24 years. The Company issues new shares of common stock to satisfy exercises and vesting of awards granted.
Warrants
Outstanding warrants to purchase common stock are as follows:
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:
At December 31, 2016 and 2015, the weighted-average Black-Scholes value of warrants granted was $0.05 and $0.14, respectively.
NOTE 10 - INCOME TAXES
For the years ended December 31, 2016, and 2015, 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, 2016, we had approximately $5,715,364 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:
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, we believe 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, 2016, and 2015. 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:
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Leases
The Company has a lease agreement with on its headquarters facilities that expires in August 2018. The lease terms include a base monthly rental rate of $3,343 per month, increasing to $3,410 in August 2016, and then $3,478 in August 2017. The Company has analyzed the requirement to straight-line the full value of the lease agreement over the life of the lease and has determined that there is no need to book a deferred rent liability as the amount is immaterial.
Future minimum lease payments for all of our facilities amount to $58,298 for 2017 and $37,974 through August 2018. Rent expense for the years ended December 31, 2016 and 2015 was $56,670 and $55,464, respectively.
Employment Agreements
During 2015, the Company entered into employment agreements with its CEO, COO/CFO and CSO. Commencement of payment of the base salaries under these employment agreements was, and continues to be, conditional on fundraising results. Management determined that no base salary for the CEO or CSO would be accrued or paid for 2015, based primarily upon the financial needs of the Company through the end of that year. Payment of base salary commenced for the COO/CFO in December 2015. We commenced accrual for payment of base salaries commenced for the CEO and CSO on January 1, 2016.
Litigation
During 2016, we were involved in arbitration with a former employee who had made claims against us in connection with his Separation and Release Agreement, along with other potential allegations seeking approximately $93,000, plus punitive damages. The Company was notified on August 21, 2016 that the Company failed to prove that the employee/claimant’s actions would allow the arbitrator to reach the conclusion that such actions constituted a breach of the employee’s Separation and Release Agreement and, accordingly, the Company paid the former employee $93,074 plus accrued interest of 9% per annum, totaling $6,283 through September 30, 2016. This amount is shown in the financial statements as a loss on litigation.
Although we were not party to litigation at December 31, 2016, during the first quarter 2017, we became a party to litigation with respect to a particular note payable, with a face amount of $50,000 and the accrued interest thereon. We had previously been party to litigation with respect to this note, but with a different plaintiff who dropped that lawsuit without prejudice. The Company will defend itself vigorously and reserves the right to make counter claims against the adversarial parties. Although we believe that this situation will be settled in due time, without material effect to the Company or its future operations, we can offer no assurance to that effect.
NOTE 12 - CONCENTRATIONS AND CREDIT RISK
Customers and Credit Concentrations
During 2016 and 2015 approximately 48% and 42%, respectively, of our sales were to 5 customers. Accounts receivable for the top 5 customers accounted for 62% and 57% of total accounts receivable at December 31, 2016 and 2015, respectively.
Vendor Concentrations
During 2016, approximately 78% of our purchases were made from 5 vendors as compared to 64% during 2015. Accounts payable for these vendors accounted for 0.16% and 0.5% of total accounts payable at December 31, 2016 and 2015, respectively.
NOTE 13 - SUBSEQUENT EVENTS
In February 2017, 600,000, 200,000 and 200,000 shares, respectively, were re-issued to our Chairman, Dr. Marvin Hausman, a director, Elliot Shelton and a former director, Philip Sobol, to replace shares previously surrendered to the Company.
In February 2017, 500,000, 600,000, and 550,000 shares were issued to Hausman, Johnson and Timmins, respectively, as compensation pursuant to their 2015 employment contracts, as adjusted by the board of directors.
In February 2017, 1,861,170 shares were issued to Dr. Hausman in conjunction with his forgiveness of $327,285 of unpaid wages from 2014 and 2015. A five-year warrant to purchase 100,000 shares of our restricted Common Stock, exercisable at $0.10 per share was also granted to him as consideration from the disinterested directors. The shares were valued at $18,612 and will be expensed during 2017.
In February 2017, 250,000 shares were awarded to Mr. Shelton for his service as the sole outside director during 2016 and 250,000 shares each were awarded to Messrs. Hausman, Johnson and Timmins in conjunction with replacement employment contracts being drafted in order to strengthen, to the benefit of the Company and its shareholders, the non-competition clauses between these individuals and the Company and, further, to remove the "evergreen" aspects of the existing contracts, instead replacing them with a finite, fixed terms.
In February 2017, we entered into an executed, definitive licensing agreement with GROH Beauty Corp, a newly-formed subsidiary of an established beauty industry company, under which we granted certain exclusive worldwide rights to manufacture and distribute our GROH beauty products. The license called for a front-end license fee, half of which is non-refundable and the other half of which is subject to a number of factors during a due diligence period, as well as royalties over a period of years, also subject to the completion of the due diligence period, until the license is paid in full and thereby becomes an exclusive perpetual license of the Licensee. The total value of the license fees and royalties to us was $1,150,000. The License called for and was accompanied by a separate executed agreement under which we will manufacture and sell our ErgoD2 compound exclusively to the licensee for its use in the cosmetic and beauty care markets. As this manufacturing agreement provided for price adjustments and is expected to run for a number of future years concurrent with the License, its positive value to us presently continues to be inestimable. Additionally, the License called for a separate agreement with Entia, through which our Chief Science and Technology Officer will provide consulting services to the licensee.
Item 9.
Item 9. Changes in and Disagreements With Accountants On Accounting and Financial Disclosure.
None.
Item 9A.
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 and accounting 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, 2016, we initially carried out an evaluation, under the supervision and with the participation of our Principal Executive Officer and Principal Finance and Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Principal Executive Officer and Principal Finance and Accounting Officer concluded that our disclosure controls and procedures were not effective, due to our limited staffing, among other reasons.
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, 2016, our Principal Executive Officer and Principal Finance and Accounting Officer assessed the effectiveness of our internal controls over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control-Integrated Framework (2013) 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 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 Principal Executive Officer and Principal Finance and Accounting Officer in connection with the review of our financial statements as of December 31, 2016. These material weaknesses were also identified in our annual evaluation as of December 31, 2015.
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.
Item 9B. Other Information.
None.
PART III
Item 10.
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.
Biography of Marvin S. Hausman M.D., Chairman and Chief Science and Technology Officer
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 Medco Research, Inc.
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 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.
Biography of Timothy A. Timmins, Executive Vice President, Chief Operating and Financial Officer
Mr. Timmins joined the Company in October of 2015 and serves as Executive Vice President and Chief Operating and Financial Officer. From 2005 to 2015, he operated a consulting practice, providing strategic planning and turnaround services while frequently serving in operating positions with his client companies. From 2013 to 2014, he served as President, Chief Operating Officer and member of the Board of Directors of BioModeling Solutions, Inc. From 1993 to 2005, Mr. Timmins served in a number of capacities, including President, Chief Executive Officer and Director with Metro One Telecommunications, Inc. From 1986 to 1993, he held a number of corporate finance positions with Kemper Securities, an investment banking firm, ultimately Senior Vice President. Mr. Timmins is a Certified Public Accountant (inactive) and is a named inventor in 25 separate telecommunications patents. He holds a Bachelor of Science degree in Business Administration from Portland State University and a Masters of Business Administration degree from the University of Southern California.
Biography of Carl J. Johnson, President, Chief Executive Officer and Director
Mr. Johnson joined Entia Biosciences on August 12, 2015. Mr. Johnson served as President and Chief Executive Officer and as a member of the Board of Directors of Matrixx Initiatives, Inc., a marketer of over-the-counter (“OTC”) healthcare products, from July 2001 until his retirement in October 2008, and again as a member of the Board of Directors of Matrixx Initiatives from February 2011 to February 2014. Previously, from 1993 to 2001, Mr. Johnson was Vice President, Commercial Development with Perrigo Company, a leading manufacturer of OTC pharmaceutical and nutritional products for the store brand market. In that capacity, he was responsible for the procurement of new products and technologies and contract manufacturing services with emphasis on Abbreviated New Drug Applications (ANDA) products. Mr. Johnson worked at Johnson & Johnson from 1973 to 1989, where he held a number of high-level marketing and sales positions, including responsibility for the national launch of the Acuvue® disposable contact lens product. Mr. Johnson provided marketing leadership for a special team tasked to re-engineer Johnson & Johnson’s Consumer Sector sales, administrative and operational functions. He also held the position of Director of Marketing for Johnson & Johnson Baby Products Company. Prior to joining Johnson & Johnson, he was an Account Executive at Compton Advertising, servicing Procter & Gamble business. Mr. Johnson earned a Masters of Business Administration - Marketing from the Fairleigh Dickinson University and a Bachelor’s of Science in Economics from Wagner College. Mr. Johnson is a member of the Board of Directors of Prestige Brands Holdings, Inc. Previously, he was a member of the Board of Directors of Scolr Pharma, Inc. from 2010 to 2013 and Chairman from 2011 to 2013. Mr. Johnson has previously served on the Board of the Consumer Healthcare Products Association and been a member of the Generic Pharmaceutical Association. Mr. Johnson’s experience as the chief executive and director of publicly traded, over-the-counter consumer healthcare products companies, as well as his years of experience at various management levels within other similar companies, served as the basis for his appointment as a director of Entia.
With the exception set forth below, 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.
A former director of the Company, who resigned on December 3, 2015, was subject to a pending criminal proceeding in which he entered a plea agreement with the United States Attorney’s Office for the Central District of California. The proceeding had no relationship to the Company or its operations and the former director’s resignation was not due to any disagreement with the Corporation.
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, 2016, some of our officers and directors may not have timely filed the required reports. The Company is in the process of correcting the situation and ensuring compliance.
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.
Item 11. Executive Compensation.
The following table sets forth summary compensation information for the fiscal year ended December 31, 2016 and 2015 for our executive officers.
Summary Compensation Table
(1) 100% of the salary was accrued.
(2) All other compensation for 2015 was reimbursement of personally paid travel expenses for corporate purposes.
(3) $52,897 of this salary was paid in cash during 2015 while $219,849 was accrued. Dr. Hausman’s employment agreement was terminated in August 2015 and replaced with a new agreement but as of December 31, 2015. Dr. Hausman’s compensation began in first quarter 2016. During the first quarter of 2017, Dr. Hausman forgave $308,673 of his $327,285 of unpaid wages from 2014 and 2015, which included the previously accrued $219,849 and was awarded common stock for the remaining $18,612.
(4) All other compensation for 2015 was reimbursement of personally paid travel expenses for corporate purposes.
(5) $135,000 in salary was paid to Mr. Timmins as compensation per his employment agreement
(6) All other compensation for 2016 was reimbursement for personally paid travel expenses for corporate purposes.
(7) $11,250 in salary was paid during 2015 in cash beginning in December 2015. Mr. Timmins is under agreement to be paid $135,000 per year as stated below.
(8) All other compensation for 2015 was reimbursement of personally paid travel expenses for corporate purposes.
(9) 100% of the salary was accrued.
(10) All other compensation for 2015 was reimbursement of personally paid travel expenses for corporate purposes.
(11) There was no compensation for Mr. Johnson per his employment agreement. Mr. Johnson’s compensation began in January 2016.
(12) All other compensation for 2015 was reimbursement of personally paid travel expenses for corporate purposes.
During 2015, we terminated Dr. Hausman’s employment contract and replaced it with a new one for the position of Chief Science and Technology Officer. The new agreement runs through December 31, 2016 and may be renewed for successive one-year periods. His compensation is as follows: (1) a base salary of $150,000 per year upon an effective close, or any part thereof, of the efforts to raise capital; (2) eligible to earn a cash bonus equal to 90% and up to 150% of the current year base salary; and (3) within 30 days of the execution of the agreement, 200,000 shares of Entia common stock, which has been deferred, pending study by the Board of Directors.
Effective August 12, 2015, we entered into an employment agreement with Carl J. Johnson, our named President, Chief Executive Officer. The agreement runs through December 31, 2016 and may be renewed for successive one-year periods. His compensation is as follows: (1) a base salary of $150,000 per year upon an effective close, or any part thereof, of the efforts to raise capital; (2) eligible to earn a cash bonus equal to 90% and up to 150% of the current year base salary; and (3) within 30 days of the execution of the agreement, 300,000 shares of ERGO common stock, which has been deferred, pending study by the Board of Directors.
Effective October 1, 2015, we entered into an employment agreement with Timothy A. Timmins, our named Executive Vice President, Chief Operating and Financial Officer. The agreement runs through December 31, 2016 and may be renewed for successive one-year periods. His compensation is as follows: (1) a base salary of $135,000 per year upon an effective close, or any part thereof, of the efforts to raise capital; (2) eligible to earn a cash bonus equal to 90% and up to 150% of the current year base salary; and (3) within 30 days of the execution of the agreement, 250,000 shares of Entia common stock, which has been deferred, pending study by the Board of Directors.
We do not maintain key-man life insurance for any our executive officers/directors. We do not have any long-term compensation plans.
Stock Option Grants
Outstanding Equity Awards at Fiscal Year-Ending December 31, 2016:
Potential Payments Upon Termination or Change in Control
Marvin S. Hausman, M.D.
Pursuant to his employment agreement dated October 1, 2015, Dr. Hausman would receive the following compensation following his resignation, retirement or other termination of employment or following a change in control:
Upon termination for “Cause,” all future compensation due to Dr. Hausman under his agreement will cease.
Upon termination by the employer without cause or for good reason or because of a change of control, the company will pay Dr. Hausman a lump sum payment of 200% of his base salary plus the average of the annual incentive bonuses paid to him for the prior two years or, if not applicable, a bonus equivalent to one-half of his base salary.
Carl J. Johnson
Pursuant to his employment agreement dated August 12, 2015, Mr. Johnson would receive the following compensation following his resignation, retirement or other termination of employment or following a change in control:
Upon termination for “Cause,” all future compensation due to Mr. Johnson under his agreement will cease.
Upon termination by the employer without cause or for good reason or because of a change of control, the company will pay Mr. Johnson a lump sum payment of 200% of his base salary plus the average of the annual incentive bonuses paid to him for the prior two years or, if not applicable, a bonus equivalent to one-half of his base salary.
Timothy A. Timmins
Pursuant to his employment agreement dated October 1, 2015, Mr. Timmins would receive the following compensation following his resignation, retirement or other termination of employment or following a change in control:
Upon termination for “Cause,” all future compensation due to Mr. Timmins under his agreement will cease.
Upon termination by the employer without cause or for good reason or because of a change of control, the company will pay Mr. Timmins a lump sum payment of 200% of his base salary plus the average of the annual incentive bonuses paid to him for the prior two years or, if not applicable, a bonus equivalent to one-half of his base salary.
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
We did not pay our directors any cash compensation during fiscal years ending December 31, 2016, and December 31, 2015. We do not compensate our executive management for their services as directors.
Item 12.
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 May 8, 2017 relating to those persons known to beneficially own more than 5% of our capital stock or by our named executive officers and directors. The percentage of beneficial ownership for the following table is based on 33,660,947 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, 2017, pursuant to options, warrants, conversion privileges or other right. The percentage ownership of the outstanding common stock, however, is based on the assumption, expressly required by the rules of the Securities and Exchange Commission, that only the person or entity whose ownership is being reported has converted options or warrants into shares of Entia Biosciences, Inc.’s common stock.
(1) These percentage figures are based upon 33,660,947 shares of our common stock outstanding as of May 8, 2017. 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 7,785,037 shares of common stock, 14,625 shares of preferred stock that converts to 50 shares of common per preferred share or 731,250 common shares, 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, a thirteen-year warrant to purchase 12,500 shares at $0.40 per share issued on December 30, 2009, a, eighteen-year warrant to purchase 138,900 shares at $0.36 per share issued on October 28, 2011, an eighteen-year warrant to purchase 500,000 shares exercisable at $0.40 per share issued on October 28, 2011, a thirteen-year warrant to purchase 100,000 shares at $0.40 per share issued on December 20, 2011, a fifteen-year warrant to purchase 400,000 shares at $0.40 issued on June 21, 2013, an eleven-year warrant to purchase 7,313 shares at $0.40 issued on October 16, 2013, a five year warrant to purchase 40,000 shares at $0.10 per share, issued December 5, 2016 and a five-year warrant to purchase 100,000 shares at $0.10 issued on February 14, 2017. Dr. Hausman’s holdings of 9,743,900 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) Carl Johnson’s holdings include 850,000 shares of common stock and a warrant to purchase 25,000 shares of common stock at $0.125 issued on May 20, 2016; and a $25,000 face value promissory note with accrued interest of $520, convertible at $0.10 per share.
(4) Elliot Shelton’s holdings include 576,250 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 ten-year warrant to purchase 150,000 at $0.40 issued on June 29, 2012 and a twelve-year warrant to purchase 150,000 shares at $0.45 granted on June 21, 2013.
(5) Delta Group Investments, Limited’s (DGI) holdings include 3,042,455 shares of common stock. Their address is Room 2204, 22F, Shun Tak Centre, West Tower 200 Connaught Road Central, Hong Kong.
(6) Devin Andres’ holdings include 922,831 shares of common stock; an eighteen-year non-statutory stock option to purchase 108,342 common shares at $0.40 issued on October 28, 2011; a thirteen-year non-statutory stock option to purchase 5,000 common shares at $0.40 issued on June 29, 2012; a thirteen-year non-statutory stock option to purchase 25,000 common shares at $0.38 issued on February 20, 2013; a fifteen-year non-statutory stock option to purchase 150,000 common shares at $0.40 issued on June 21, 2013; a 12-year non-statutory stock option to purchase 47,999 common shares at $0.40 issued on September 29, 2014, a thirteen-warrant to purchase 5,000 shares of common stock at $0.40 issued on January 1, 2010; an 18-year warrant to purchase 350,000 shares of common stock at $0.40 issued on October 28, 2011, an eighteen-year warrant to purchase 108,342 shares of common stock at $0.36 issued on October 31, 2011; and a fifteen-year warrant to purchase 150,000 shares of common stock at $0.40 issued on June 21, 2013. His address is 10105 Wheatland Rd N, Salem, Oregon 97303.
(7) Elliot Shelton and Marvin Hausman are first cousins.
Unless indicated otherwise, the address of each person or entity listed above is 13565 SW Tualatin-Sherwood Road #800, Sherwood, Oregon 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.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
On December 20, 2011, we entered into an Amendment No. 1 to Promissory Note with Marvin S. Hausman, M.D., our Chief Executive Officer and Philip Sobol, a director, whereby Dr. Hausman and Dr. Sobol agreed to extend the maturity date of the Promissory Note dated December 30, 2009 in the principal amount of $50,000 from December 31, 2011 to December 31, 2013. The interest rate on the note remains 6% per annum. In exchange for the extension of the maturity date, Drs. Hausman and Sobol were each given a five-year warrant to purchase 100,000 shares of common stock at $0.60 per share with warrants to purchase 50,000 shares of common stock to each of Drs. Hausman and Sobol vesting immediately and the remaining warrants to purchase 50,000 shares of common stock each vesting monthly over a two-year period. The other provisions of the Promissory Note remain the same. On June 4, 2013, the note plus accrued interest of $11,812 was converted into Series A Preferred stock at $5.00 per share.
On February 18, 2016, our Chairman and Chief Science and Technology Officer lent us $10,000 in the form of a 10% unsecured note, the due date of which has been extended to August 2017.
On May 20, 2016, our Chief Executive Officer invested $25,000 in our 8% convertible note payable (with an attached warrant), due May 2019.
On December 5, 2016, our Chairman and Chief Science and Technology Officer invested $10,000 in our 10% convertible promissory note (with an attached warrant), due December 2017.
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.
Item 14. Principal Accounting Fees and Services.
Aggregate fees billed for professional services rendered to the Company by Peterson Sullivan LLP for the years ended December 31, 2016 and 2015 were as follows:
(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.
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, 2016 and December 31, 2015
Consolidated Statements of Operations for the Years ended December 31, 2016 and 2015
Consolidated Statement of Stockholders’ Equity (Deficit) for the Years ended December 31, 2016 and 2015
Consolidated Statements of Cash Flows for the for the Year ended December 31, 2016 and 2015
2. Financial Statement Schedules
Not Applicable
3. Exhibits specified by Item 601 of Regulation S-K.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, as amended, the registrant caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in Portland, Oregon on this 19th day of May, 2017.
ENTIA BIOSCIENCES, INC.
By:
/s/ Carl J. Johnson
Carl J. Johnson
President
Chief Executive Officer,
(Principal Executive Officer)
By:
/s/ Timothy A. Timmins
Timothy A. Timmins
Executive Vice President
Chief Operating and Financial Officer,
(Principal Finance 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 19th day of May, 2017.
Signature
Title
/s/ Marvin S. Hausman, M.D.
Chairman of the Board, Director
Marvin Hausman, M.D.
/s/ Carl J. Johnson
Director
Carl J. Johnson
/s/ Elliot L. Shelton, Esq.
Director
Elliot A. Shelton, Esq.