FORM 10-Q

For the Quarterly Period ended September 30, 2013

Commission File Number:  000-52864

Entia Biosciences, Inc.

 (Exact name of Registrant as specified in its charter)

13565 SW Tualatin-Sherwood Rd #800, Sherwood, OR 97140

 (Address of principal executive offices)

(503) 334-3575

 (Registrant’s telephone number)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive DataFile required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).YES [X] NO [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ] No [X]

On November 8, 2013, 7,944,999 shares of the registrant's common stock, par value $0.001 per share, were outstanding.

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Part 1: FINANCIAL INFORMATION

Item 1. Financial Statements

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND OPERATIONS

On January 9, 2012, the Nevada Secretary of State accepted an amendment to our Articles of Incorporation to change the name to Entia Biosciences, Inc. (Entia, the Company, us, we or our) and to form a wholly owned subsidiary named Total Nutraceutical Solutions, Inc. (TNS).  Entia is an emerging biotechnology company engaged in the discovery, formulation and marketing of natural compounds and whole foods that can be used in branded medical foods, nutraceuticals, cosmetics and other products sold by us, our TNS subsidiary and by third parties.

On May 15, 2012, Entia moved to its current location in order to increase its in-house research and manufacturing capability, increase its warehouse storage capacity, and accommodate anticipated increases in order fulfillment and staffing.  By moving to the larger facility, Entia was able to vertically integrate its Vitamin D enhancement technology and the milling, blending, encapsulating, bottling, labeling, packaging and fulfillment of its products. This move resulted in a significant improvement in production efficiencies and the cost of its final products.  During second quarter of 2013, we added five new clean rooms and integrated the production and manufacturing of our cosmetic products which will significantly increase efficiencies while reducing costs.

We have a history of incurring net losses and net operating cash flow deficits.  We are continually researching and developing new technologies related to our organic nutraceutical products, including the production of medical foods for clinical studies in diabetes, anemia and Parkinson’s, which includes the completion of an ErgoD2 study on a diabetic population in Curacao.  At September 30, 2013, we had cash and cash equivalents of $45,355.  These conditions raise substantial doubt about our ability to continue as a going concern.  As a result, we anticipate that our cash and cash equivalent balances, anticipated cash flows from operations and anticipated operating cash flows will be sufficient to meet our cash requirements through December 31, 2013.

In order for us to continue as a going concern beyond this point and ultimately to achieve profitability, we may be required to obtain capital from external sources, increase revenues and reduce operating costs.  The issuance of equity securities will also cause dilution to our shareholders.  If external sources of financing are not available or are inadequate to fund our operations, we will be required to reduce operating costs including personnel costs, which could jeopardize our future strategic initiatives and business plans.  The accompanying consolidated financial statements have been prepared assuming that the company continues as a going concern.  

The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the matters discussed herein.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation and principles of consolidation

The accompanying consolidated unaudited interim financial statements and related notes have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.  Unaudited interim results are not necessarily indicative of the results for the full year.  These unaudited interim financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2012 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC.  

All intercompany accounts have been eliminated for the purpose of the consolidated financial statement presentation.

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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 consider all accounts greater than 30 days old to be past due.  Account balances are charged off against allowance after all means of collection have been exhausted and the potential for recovery is considered remote.  The allowance for doubtful accounts was $2,526 at both September 30, 2013 and December 31, 2012.

Inventory

Inventory, which consists primarily of raw materials to be used in the production of our dietary supplement products, is stated at the lower of cost or market using the first-in, first-out method. We regularly review our inventory on hand and, when necessary, record a provision for excess or obsolete inventory.   

Property and equipment

Property and equipment are recorded at cost. Additions and improvements that increase the value or extend the life of an asset are capitalized. Maintenance and repairs are expensed as incurred.  Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statement of operations.  Depreciation is computed on a straight-line basis over the following estimated useful lives of the assets:

Patents

Patents, once issued or purchased, are amortized using the straight-line method over their economic remaining useful lives. All internally developed process costs incurred to the point when a patent application is to be filed are expensed as incurred and classified as research and development costs.  Patent application costs, generally legal costs, are capitalized pending disposition of the individual patent application, and are subsequently either amortized based on the initial patent life granted, generally 15 to 20 years for domestic patents and 5 to 20 years for foreign patents, or expensed if the patent application is rejected.  The costs of defending and maintaining patents are expensed as incurred.  Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

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Impairment of long-lived assets

Our long-lived assets, which include property and equipment, patents and licenses of patents, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

We assess the recoverability of our long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.  Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.  If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.  

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 because of the short maturity of these instruments.  Due to conversion features and other terms, it is not practical to estimate the fair value of notes payable and convertible notes.

Fair value measurements

We measure fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

We do not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis. Consequently, we did not have any fair value adjustments for assets and liabilities measured at fair value at September 30, 2013 or December 31, 2012, nor any gains or losses reported in the consolidated statement of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the periods ended September 30, 2013 and September 30, 2012.

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Revenue recognition

We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been performed, (iii) amounts are fixed or determinable and (iv) collectibility of amounts is reasonably assured.

Revenues from the sale of products, including shipping and handling fees but excluding statutory taxes collected from customers, as applicable, are recognized when shipment has occurred. We sell our products directly to customers. Persuasive evidence of an arrangement is demonstrated via order and invoice, product delivery is evidenced by a bill of lading from the third party carrier and title transfers upon shipment, the sales price to the customer is fixed upon acceptance of the order and there is no separate sales rebate, discount, or volume incentive.

Shipping and handling costs

Amounts charged to customers for shipping products are included in revenues and the related costs are classified in cost of goods sold as incurred.  

Advertising and promotion costs

Costs associated with the advertising and promotion of our products are expensed as incurred.

Equity instruments issued to parties other than employees for acquiring goods or services

We account for all transactions in which goods or services are the consideration received for the issuance of equity instruments based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.  Currently such transactions are primarily awards of warrants to purchase common stock.

The fair value of each warrant award is estimated on the date of grant using a Black-Scholes option-pricing valuation model.  

The assumptions used to determine the fair value of our warrants are as follows:

Income taxes

We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax

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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.

We did not record an income tax provision for the three and nine months ended September 30, 2013 and 2012 because we had a net taxable loss in the period.

Net loss per common share

Basic and diluted net loss per share has been computed by dividing our net loss by the weighted average number of common shares issued and outstanding. Convertible preferred stock, options and warrants to purchase our common stock as well as debt which are convertible into common stock are anti-dilutive and therefore are not included in the determination of the diluted net loss per share for three months ended September 30, 2013 and 2012 and the nine months ended September 30, 2013 and 2012.   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

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NOTE 3 – INVENTORY

Inventory consists of the following:

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment, stated at cost, consists of the following:

NOTE 5 - PATENTS AND LICENSES, NET

Our identifiable long-lived intangible assets are patents and prepaid licenses.  Patent and license amortization is $3,578 and $803 for the three months ended September 30, 2013 and 2012, respectively and $6,824 and $2,383 for the nine months ended September 30, 2013 and 2012, respectively.  

The licenses are being amortized over an economic useful life of 17 years. The gross carrying amounts and accumulated amortization related to these intangible assets consist of the following at:

On July 23, 2013, we were issued a patent in the United States.  We have begun amortizing this patent on this date for a period of 15 years.  The amount capitalized and amortized is $31,325.

On May 1, 2013, we entered into an exclusive license agreement with Penn State Research Foundation (PSRF) for 15 years to market and sell product under a patent issued to PSRF in the United States.  We incurred a license fee of $150,000 for this agreement and we are amortizing it over the life of the agreement.

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NOTE 6 – ACCRUED EXPENSES

Accrued expenses (included with accounts payable) consists of the following at:

NOTE 7 – NOTES PAYABLE

Notes payable consists of the following:

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Entia has debt in the principal amount of $412,500 in the form of three convertible notes payable; $50,000 is due on December 31, 2013, $312,500 that matures on June 30, 2014 and $50,000 that matures on August 13, 2014.  

On June 20, 2013, Entia entered into an Amendment and Transfer of Promissory Note agreement with Mark Wolf to extend the maturity date on a promissory note dated February 18, 2010 in the principal amount of $50,000 with interest accruing at 6% per annum from December 31, 2011 to December 31, 2013.  Mr. Wolf also received consent from Entia to transfer ownership of the Promissory Note to Larry Johnson.

On July 1, 2013, Entia was successful in negotiating an extension on the note for $312,500 at a rate of 8% due on June 30, 2014.  This note had accrued interest in the amount of $41,010 as of June 30, 2013.  In exchange for the extension, we issued 200,000 warrants with an exercise price of $0.45 per share with a 3-year term.  All of the warrants vested on July 1, 2013 and were valued using the Black-Scholes valuation model.  The fair value of the warrants was valued at $98,006 and is being amortized over the life of the loan as interest expense.

During the second quarter of 2013, Entia negotiated a conversion of $28,000 of debt and $1,840 of accrued interest that was due on June 30, 2013 and $75,000 of its debt and $11,812 of accrued interest that was due to mature on December 31, 2013 into Series A Preferred stock at $5.00 per share.  

On August 13, 2013, Entia entered into a promissory note for one year at 8% in the principal amount of $50,000.  The note is convertible into the Series A Preferred stock at $5.00 per share and the company granted the creditor warrants to purchase 50,000 shares of Entia’s common stock at $2.00 per share.  We deemed there was no beneficial conversion feature related to the conversion option into the Series A Preferred stock but did post a discount for the value of the warrants and will amortize this expense to interest expense over the life of the note.  The discount of $16,400 is classified as a reduction in the debt and is netted with the debt on the balance sheet.  In addition, the note is secured by corporate property valued at $103,000.

Entia entered into an exclusive license agreement with PSRF for 15 years to market and sell product under a patent issued to PSRF in the United States.  We incurred a license fee of $150,000 for this agreement where we paid $10,000 upfront and we owe $70,000 during fourth quarter of 2013 and another $70,000 due during second quarter of 2014.  This debt does not accrue interest and is classified as a short-term liability on the balance sheet.

NOTE 8 – RELATED PARTY TRANSACTIONS

Debt agreements from board member

Entia issued 131,579 shares of common stock as payment for $50,000 of accrued compensation to its chief executive officer and board member.  The shares were valued at $0.38 per share which resulted in a discount of $15,790 which was posted as a period expense.  

Entia entered into a promissory note with a board member during 2012, for a 6% note for $75,000 maturing on December 31, 2013.  These notes plus accrued interest of $11,812 were converted on June 4, 2013, into Series A preferred stock at $5.00 per share.   

On June 11, 2013, a board member executed a convertible promissory note in the amount of $40,000.  The note stated no interest and was due on July 1, 2013.  We granted the board member a five year warrant to purchase 10,000 shares of common stock at $0.45.   The warrants are to vest 100% on July 1, 2013.  This note was paid off prior to June 30, 2013.

Preferred stock purchase from board member

During the first quarter 2013, a board member purchased 1,000 shares of Series A preferred stock for $5,000 cash.

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NOTE 9 – STOCKHOLDERS’ EQUITY (DEFICIT)

Preferred Stock

On May 26, 2011, our board of directors designated 350,000 shares of preferred stock as Series A preferred stock, $0.001 par value.  The Series A preferred stock is entitled to a liquidation preference in the amount of $5 per share, votes on an as converted basis with the common stock on all matters as to which holders of common stock shall be entitled to vote, and is currently convertible into common stock on a one-for-ten basis.  

During the third quarter 2013, we issued 38,775 shares of Series A preferred stock for $193,875 cash.  One investor immediately converted 10,000 shares of the Series A preferred stock into 100,000 shares of common stock.

During the second quarter 2013, we issued 90,732 shares of Series A preferred stock for the following:

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37,000 shares for $185,000 cash

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30,400 shares for converting of $152,001 of accounts payable

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23,332 shares for converting $116,652 of debt and accrued interest

During the first quarter of 2013, we issued 37,400 shares of Series A preferred stock for $187,000 cash and a note holder converted their $15,000 note along with $750 of accrued interest for 3,162 shares of Series A Preferred stock.  The note was unsecured, accruing interest at 5% per annum and was due to mature on June 30, 2013.

Common stock

During the third quarter 2013, we issued shares of common stock per the following:

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131,579 shares with a value of $65,790 in exchange for accrued payroll by one of our officers

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100,000 shares as converted from 10,000 shares of Series A preferred stock

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11,250 shares to a vendor in association with a consulting agreement signed May 1, 2013

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We rescinded 10,000 shares with a value of $5,000 from an employee as part of her amended employment agreement that instead granted her stock options.

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4,000 shares with a value of $1,920 in association with a consulting agreement signed August 1, 2013.

During the second quarter 2013, we issued 131,579 shares of common stock with a value of $59,211 in exchange for accrued payroll by one of our officers.  We also issued 10,000 shares with a value of $5,000 to an employee as part of her employment agreement and another 10,000 shares to a vendor in association with a consulting agreement signed May 1, 2013.

Stock incentive plan

On September 17, 2010, our Board of Directors adopted the 2010 Stock Incentive Plan (“Plan”). The Plan provides for the grant of options to purchase shares of our common stock, and stock awards consisting of shares of our common stock, to eligible participants, including directors, executive officers, employees and consultants of the Company.  We have reserved 1,600,000 shares of common stock for issuance under the Plan with an annual increase in shares of 50,000 as of January 1 of each year; commencing January 1, 2012.  On April 29, 2013, the stockholders of Entia approved an increase in the number of shares of common stock for issuance under the Plan by 1,500,000.  This brought the number of options available under the Plan to 3,100,000 authorized.  Stock options are granted at or below the closing price of our stock on the date of grant for terms ranging from four to fifteen years and generally vest over a five year period.  The fair value of option grants were calculated at the date of the grants using the Black-Scholes option pricing model with the following assumptions:

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A summary of option activity under the stock option plan as of September 30, 2013 and changes during the quarter then ended is presented below:

The range of exercise prices for options outstanding under the 2010 Stock Incentive Plan at September 30, 2013 are as follows:

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At September 30, 2013, the Company had 762,901 unissued shares available under the Plan.  Also, at September 30, 2013, the Company had $294,690 of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 7 years.

Warrants – Consulting Agreements

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 September 30, 2013 and 2012, the weighted-average Black-Scholes value of warrants granted was $1.52 and $0.56, respectively.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

Leases

On April 4, 2012, Entia Biosciences, Inc. entered into a Commercial Lease agreement with Lanz Properties, LLC for 13,081 square feet of office and warehouse space located at 13565 S.W. Tualatin-Sherwood Road, Suite 800, Sherwood, Oregon 97140.  The new lease commenced May 15, 2012 and will terminate on July 31, 2015.  No rent was payable until October 2012.  The base monthly rental rate started at $3,160, increasing to $3,260 in October 2013, and then $3,343 in June 2014.  

Management believes that the new facility offers a better location and configuration for its biotechnology activities and provides significantly more space for manufacturing, fulfillment, and administration over the next three years.

Entia calculated the deferred rent amount related to the long-term lease agreement and recorded additional rent expense of $3,197 and $0 for the three months ended September 30, 2013 and 2012, respectively and $10,283

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and $0 for the nine months ended September 30, 2013, respectively and deferred rent accrual of $18,782 and $8,499 at September 30, 2013 and December 31, 2012, respectively.

NOTE 11 – CONCENTRATIONS AND CREDIT RISK

Customers and Credit Concentrations

For the three months ended September 30, 2013, approximately 68% of our net sales were to four customers compared to 46% for the three months ended September 30, 2012.  For the nine months ended September 30, 2013, approximately 41% of our net sales were to four customers compared to approximately 53% for the nine months ended September 30, 2012.  Accounts receivable at September 30, 2013 for these customers accounted for approximately 92% of total accounts receivable compared to 68% at September 30, 2012.

Vendor Concentrations

During the third quarter 2013, approximately 71% of our purchases were from three vendors as compared to 46% from four vendors during third quarter 2012.

NOTE 12 – SUBSEQUENT EVENTS

During the fourth quarter of 2013, Entia issued 19,500 shares of Series A preferred stock to four investors for $97,500 cash.  10,000 shares were immediately converted into 100,000 shares of common stock.

For consideration of waiving the anti-dilution feature of the Series A Preferred Stock, Entia’s board authorized and issued one warrant for one share of common stock for each 2 shares of Series A Preferred Stock issued and outstanding.  This resulted in the issuance of 137,985 warrants to purchase common stock with a 3 year term vesting immediately.

We issued 12,000 shares of common stock in association with two consulting agreements.  The agreements were signed on August 1, 2013 for 2,000 shares and 10,000 shares on October 2, 2013.  

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Entia Biosciences, Inc. (also referred to as “Entia” ) is an emerging biotechnology company that has acquired the exclusive world-wide rights to the genetic transporter for Ergothioneine (Ergo), a powerful amino acid.  Initially discovered in the early 1900’s, Ergo is a little known antioxidant that is found in naturally high concentrations almost exclusively in mushrooms and other fungi.  In the second quarter of 2013, we received Notices of Issuance for the Ergothionene Transporter patent from the United States, Canada and Israel.  Ergo cannot be synthesized by mammals but is acquired exclusively from the diet and carried by this unique and specific transporter to cells throughout the body.  Research studies started during 2011 by Entia have confirmed significant transporter activity in diabetes, arthritis and other serious non-communicable chronic conditions, suggesting an important physiologic roll for Ergo in diseases afflicting millions of people world-wide.  As of the third quarter of 2013, we completed a pre-clinical and clinical study using our formulated medical food, ErgoD2®, containing increased concentrations of the antioxidants Vitamin D2 and Ergo.  Significant results from these studies are expected to be submitted for publication in peer-reviewed medical journals during fourth quarter 2013.

Ergocalciferol (Vitamin D2) is another genetically-required nutrient found in naturally high concentrations in mushrooms.  Considered essential to life, Vitamin D is a powerful antioxidant that can be ingested from vegetation (D2) and/or synthesized by skin exposure to sunshine (D3) to maintain a healthy immune system and regulate cell differentiation and growth.   Entia acquired from the Penn State Research Foundation (PSRF) the exclusive rights to technology in 2009 that dramatically increases Vitamin D2 levels in mushrooms using pulsed ultraviolet light, naturally boosting IUs/gram by more than 1000% within seconds.  The patent was issued by the U.S. Patent-Trademark Office to PSRF in December 2012 and, in May 2013, we expanded the commercialization rights for the technology to all ingestible and non-ingestible applications worldwide.  Specifically excluded in this agreement are U.S. supermarket sales of fresh, frozen or canned Agaricus bisporus and any pre-existing rights created by the use of U.S. government funding.

Entia’s commercialization strategy for this technology is to develop and scientifically validate the benefits of proprietary medical food products, high-end cosmetics, functional ingredients, nutritional supplements and other products containing Ergo and/or Vitamin D2.   Unlike Vitamin D, there are currently no commercially available diagnostic tests that can measure Ergo levels.  Entia believes that its commercialization strategy will be significantly enhanced with the development of a cost effective method of baseline testing to determine deficiency levels in the general population and confirm the need for supplementation with the company’s medical food products.  

The non-therapeutic market for consumer “wellness and health and beauty” (cosmetics, vitamins and nutritional supplements) is booming and expected to continue its healthy growth.  Nearly three-quarters of American adults report using dietary supplements, and the market is currently worth nearly $30 billion in the U.S.   Entia believes that the emerging therapeutic market for supplementation (medical foods and functional ingredients) could be much larger in the next decade as the benefits of the technology become more broadly understood and accepted.  The U.S. nutraceutical market is expected to be worth more than $4 billion by 2015, with compound annual growth of 8% from 2011 to 2015.  Additionally, the functional food and drink market is outpacing conventional food and drinks globally by about 4% per year.

Entia’s extraction technologies facilitate the production of two unique organic compounds.  These compounds are utilized in the production of a new line of cosmetic products, to be launched under the GROH® Ergo Boost brand in fourth quarter of 2013.  Initially these products will be launched exclusively through high-end retail salons and spas as Professional Products.  In order to avoid brand and channel conflict during the launch, management ceased marketing GROH® Healthy Hair & Nail supplements directly to the consumer in second quarter 2013 which resulted in an anticipated decrease in revenue that we feel will rebound starting in fourth quarter 2013.   

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Results of Operations for the Three and Nine Months ended September 30, 2013 and 2012.

Revenues and Cost of Goods Sold: