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ENTIA BIOSCIENCES, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 15, 2014

Overview of Current Operations

Entia Biosciences, Inc. (Entia) is an emerging biotechnology company engaged in the discovery, formulation, production and marketing of functional ingredients that can be used in branded medical foods, nutraceuticals, cosmetics and other products developed and sold by Entia and third parties. Our current portfolio of formulations contains ERGO D2, vitamin D2, L-Ergothioneine and curcumin.

Through our wholly owned subsidiary Total Nutraceutical Solutions, Inc. (TNS), we currently market nutraceutical products under the GROH® and SANO™ brands direct to consumers online and through leading hair salons and other resellers in North America. TNS currently offers three natural organic nutraceutical mushroom dietary supplement products, ImmuSANO®, GlucoSANO®, and GROH®, which has been designed to nutritionally support hair follicles and nail beds.

ImmuSANOTM is designed to nutritionally address the needs of the immune system by balancing cellular function and promoting a stronger immune system.

GlucoSANOTM is designed to assist in maintaining more normal cellular metabolism and stabilizing blood sugar levels.

Our formulations, which contain highly potent antioxidants, have the nutritional potential to provide multiple health benefits, including balancing iron homeostasis, reducing inflammation, supporting the immune system, promoting healthy joints, increasing stamina, and reducing stress and anxiety. These naturally occurring dietary substances and products have not been chemically altered, and we believe these products have both health benefits and mass appeal to people wanting natural and non-toxic nutritional-based healthcare. We utilize novel clinical models, biomarkers, and analytical tools to validate the nutritional and clinical efficacy of our formulations and the products that incorporate them. Research and development of new formulations and nutraceutical products are also performed under contract with outside laboratories, such as the Department of Food Science, Pennsylvania State University.

Material Changes in Results of Operations for the Three and Six Months ended June 30, 2014 and 2013.

Revenues and Cost of Goods Sold:

For the Three Months Ended June 30, December 31, Change 2014 2013 $ % $ $ $ Revenues 104,693 73,887 30,806 41.7% Cost of Goods Sold 36,202 29,408 6,794 23.1% For the Six Months Ended June 30, Change 2014 2013 $ % $ $ $ Revenues 267,261 170,143 97,118 57.1% Cost of Goods Sold 96,024 57,987 38,037 65.6%



Revenues. Revenues are generated primarily from the sale of our ERGO D2® ingredients and our GROH® ERGO Boost line of beauty and wellness products as well as our mushroom-based nutraceutical dietary supplement products. The increase in revenues for the three and six months ending June 30, 2014 from 2013 was due to increased product sales from the expansion of the Groh® product line.

Cost of Goods Sold. Cost of goods sold includes raw materials such as nutraceutical mushrooms, as well as production costs for manufacturing our supplement products. Cost of goods sold for the three and six months ended June 30, 2014 increased from 2013 due to increased product sales and the result of changes in our product mix.

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The following is a summary of certain consolidated statement of operations data for the periods: Operating Expenses: For the Three Months Ended June 30, December 31, Change 2014 2013 $ % $ $ $ Advertising & promotion expenses 13,136 81,878 (68,742) -84.0% Professional fees 38,454 30,302 8,152 6.6% Consulting fees 191,063 441,401 (250,338) -56.7% General and Administrative expenses 342,938 493,896 (150,958) -30.6% For the Six Months Ended June 30, Change 2014 2013 $ % $ $ $ Advertising & promotion expenses 35,086 128,273 (93,187) -72.6% Professional fees 87,216 77,239 9,977 12.9% Consulting fees 293,592 528,739 (235,147) -44.5% General and Administrative expenses 717,148 805,814 (88,666) -11.0%



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 these expenses is attributed to the re-branding campaign we went through in 2013. So far in 2014, we have not incurred any of these expenses.

Professional fees. These expenses primarily include accounting/auditing fees, legal fees and stock transfer fees. The increase in professional fees from 2013 is due primarily to increased accounting fees during 2014.

Consulting fees. These expenses are comprised of fees incurred by third-party consultants for the provision of administrative, information technology and marketing management services. The decrease in these expenses from 2013 is due to decreased consultants fees for their services during 2014 and the decrease in warrants granted.

General and administrative expenses. These expenses primarily include compensation, costs related to travel, rent and utilities, insurance, depreciation, product development, payroll and bad debt. The decrease from 2013 is attributable to a decrease in stock based compensation and travel during 2014.

Material Changes in Financial Condition

At June 30, 2014, cash totaled $15,484, compared to $36,186 at December 31, 2013. The primary reasons for the net decrease in 2014 are described below.

Working capital deficit was $(1,740,442) at June 30, 2014, compared to $(1,355,230) at December 31, 2013. The change in working capital was due primarily to the accrual of the increase in compensation for executive officers and issuance of short-term debt. The net change in cash and cash equivalents for the periods presented was comprised of the following:

For the Six Months Ended June 30, Change 2014 2013 $ % Net cash provided by (used in) $ $ $ Operating activities (257) (314) 57 -18.2% Investing activities (10) (43) 33 -76.7% Financing activities 246 357 (111) -31.1% 21



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Operating Activities. The decrease in net cash flows used from operating activities was due primarily to a larger amortization of debt discount and a reduction in accounts payable.

Investing Activities. The increase in net cash flows used from investing activities was due primarily to lack of acquisitions of patents and patents pending.

Financing Activities. The decrease in net cash flows from financing activities was due primarily to the lack of proceeds from the issuance of Series A Preferred Stock.

Future Liquidity. We have a history of incurring net losses and negative operating cash flows. We are also deploying new technologies and continue to develop commercial products and services. Based on our cash on hand, income from operations and the degree to which our burn rate can be reduced while continuing operations, management believes it has sufficient funds to remain operational through September 2014.

We expect our revenues to increase in the third quarter of 2014.

Notwithstanding that expected increase in revenues, we anticipate that we will continue to generate losses in 2014 and therefore we may be unable to continue operations in the future. In order for us to continue as a going concern and ultimately to achieve profitability, we may be required to obtain capital from external sources, increase revenues or reduce operating costs or take all of these actions. We will require additional capital of at least approximately $412,500 to repay debt principal and accrued interest maturing on September 30, 2014 and we intend to raise the monies by undertaking one or more equity private placements. We may also pursue re-negotiation and re-structuring of the debt.

However, there can be no assurances that our operations will become profitable or that external sources of financing, including the issuance of debt and/or equity securities, will be available at times and at terms acceptable to us, or at all. The issuance of additional equity or convertible debt securities will also cause dilution to our shareholders. If external financing sources are not available or are inadequate to fund our operations, we will be required to reduce our operating costs, which could jeopardize our future strategic initiatives and business plans. For example, a reduction in operating costs could jeopardize our ability to launch, market, and sell new nutraceutical supplement products necessary to grow and sustain our operations.

Subsequent Events

On July 14, 2014, we were notified by the Michael J Fox Foundation that we had been awarded a grant to conduct a pre-clinical study of our ErgoD2® medical food formulation as a potential therapy for Parkinson's Disease.

On July 14, 2014, we entered into a debt agreement with an investor for $42,500.

The note is convertible after 180 days and is due in April 2015. The conversion price is not set for 180 days. Interest accrues at 8%. We have calculated a discount related to the beneficial conversion in the amount of $30,776 and will amortize over the life of the loan.

In July 2014, an investor converted the remaining $33,000 from a note due in August 2014 for 226,530 shares of common stock.

On July 1, 2014, we entered into a promissory note with Dr. Sobol (a board member) for $15,000. The note matures on October 31, 2014 and does not accrue interest. In conjunction with the note, we granted Dr. Sobol a five year warrant to purchase 15,000 shares of common stock at $0.50 per share and fully vests upon receipt of monies. We calculated a discount on the granting of the warrants in the amount of $5,445 and will expense this in July. The note also contained a conversion feature where the member can convert the note into common stock at $0.50 per share. We calculated and posted a discount related to this beneficial conversion of $7,545 and will amortize this over the life of the loan.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

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Revenue Recognition: We recognize revenue from product sales once all of the following criteria for revenue recognition have been met: pervasive evidence that an agreement exists; the services have been rendered; the fee is fixed and determinable and not subject to refund or adjustment; and collection of the amount due is reasonable assured.


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Source: Edgar Glimpses


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