UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period ended June 30, 2012

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 (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   

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 August 20, 2012, 7,221,841 shares of the registrant's common stock, par value $0.001 per share, were outstanding.

TABLE OF CONTENTS

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Part I: FINANCIAL INFORMATION

Item 1. Financial Statements

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND OPERATIONS

Generic Marketing Services, Inc. was incorporated on July 19, 2007 under the laws of the State of Nevada as a subsidiary of Basic Services, Inc., also a Nevada corporation.  On December 31, 2007, Basic Services spun off Generic Marketing Services and on October 8, 2008, Generic Marketing Services changed its name to Total Nutraceutical Solutions, Inc.  On January 9, 2012, the Nevada Secretary of State accepted an amendment to our Articles of Incorporation to change the name again 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 from its current location to a larger building 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.  Production of cosmetic products and certain nutraceuticals are still being outsourced.

On February 15, 2012 a 10:1 reverse stock split became effective after we received authorization from Financial Industry Regulatory Authority (FINRA) for the corporate action that was approved by the shareholders on December 19, 2011.  

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 disease.  At June 30, 2012, we had cash and cash equivalents of $17,963.  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 September 2012.

In order for us to continue as a going concern beyond this point and ultimately to achieve profitability, we may be required to obtain capital from external sources, increase revenues and reduce operating costs.  The issuance of equity securities will also cause dilution to our shareholders.  If external financing sources of financing are not available or are inadequate to fund our operations, we will be required to reduce operating costs including personnel costs, which could jeopardize our future strategic initiatives and business plans.  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 accruals) 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, 2011 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC.  

Investments for which we possess the power to direct or cause the direction of the management and policies, either through majority ownership or other means, are accounted for under the consolidation method. The consolidated financial statements include the accounts of Entia and TNS.  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 and $2,526 at June 30, 2012 and December 31, 2011, respectively.

Inventory

Inventory, which consists primarily of raw materials to be used in the production of our dietary supplement products, is stated at the lower of cost or market using the 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.

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

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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 statement of operations.

Fair value of financial instruments

The carrying amounts of our financial assets and liabilities, such as cash, accounts receivable and accounts payable, approximate their fair values 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 June 30, 2012 or December 31, 2011, 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 June 30, 2012 and December 31, 2011.

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.

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Advertising costs

Costs associated with the advertising 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 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.

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 ending June 30, 2012 and 2011 and the six months ending June 30, 2012 and 2011.  The following table presents a reconciliation of basic loss per share and excluded dilutive securities:

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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

NOTE 3 – INVENTORY

Inventory consists of the following:

NOTE 4 – PROPERTY AND EQUIPMENT

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

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NOTE 5 - PATENTS AND LICENSES, NET

Our identifiable long-lived intangible assets are patents and prepaid licenses.  Patent and license amortization is $790 and $178 for the three months ended June 30, 2012 and 2011, respectively and $1,580 and $251 for the six months ended June 30, 2012 and 2011, 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:

NOTE 6 – CAPITAL LEASE

In April 2012, we entered into a capital lease agreement totaling $7,021 for the lease of an encapsulating machine used to encapsulate our powdered product.  The lease is payable over 30 months interest free.

The following is a schedule by years of future minimum lease payments under capital leases.

NOTE 7 – NOTES PAYABLE

Notes payable consists of the following:

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Entia had debt in the principal amount of $392,500 in the form of convertible notes payable of which $377,500 was to mature on June 30, 2012.  Entia was successful in renegotiating all but one of these notes to extend their maturity dates to June 30, 2013, and as such are now classified as long term liabilities on the balance sheet.  $50,000 of the debt was extended month-to-month, and as such, is classified as short-term on the balance sheet.  In consideration for extending the maturity date, Entia issued 50,000 warrants valued at $48,533 and modified an existing conversion feature for one of the notes.

For one of the convertible notes payable, we deemed the terms of the note modification to be substantially different due to the change in the conversion rate and treated the convertible note payable as extinguished and exchanged for a new note.  We recorded a gain of $75,315 on the extinguishment.  

NOTE 8 – RELATED PARTY TRANSACTIONS

Consulting services from Chairman and CEO

Expense for consulting services provided by the Chairman/CEO were zero and $30,000 for the three months ended June 30, 2012 and 2011, respectively.  The Chairman/CEO was converted to an employee in October 2011.

Debt agreements from board member

Entia entered into a promissory note with a board member for a 6% note for $25,000 maturing on December 31, 2013.  The note is reflected on the balance sheet, net of discount in the long term liabilities.

NOTE 9 – STOCKHOLDERS’ EQUITY (DEFICIT)

Preferred Stock

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

During the second quarter 2012, Entia issued shares of Series A preferred stock for the following:

o

12,800 shares were issued for cash proceeds of $64,000.  The fair value of the common stock into which the Series A preferred stock is convertible exceeded the allocated purchase price of the Series A preferred stock by $21,139 on the date of issuance, resulting in a beneficial conversion feature.  Entia recognized the beneficial conversion feature as a one-time, non-cash deemed dividend to the holders of the Series A preferred stock on the date of issuance;

o

1,000 shares were issued in exchange for cancellation of a note payable totaling $10,000; and

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7,000 shares valued at $35,000 were issued in exchange for consulting services provided.

During the first quarter 2012, 19,000 shares of Series A preferred stock were issued with a value of $95,000.

Common stock

During the second quarter of 2012, 50,000 shares of common stock valued at $50,000 were issued in exchange for a license agreement.

During the first quarter 2012, 666 shares of common stock were issued to two employees as compensation.  This stock had a fair market value of $400.  

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 1,500,000 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.  The fair value of the option grants were estimated at the date of the grants using the Black-Scholes option pricing model with the following assumptions: expected volatility of 183.17% - 187.30%, a risk free rate of 1.27% - 2.80%, and an expected life of 4 - 10 years for the period ended March 31, 2012.  

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There were 123,513 authorized shares available under the Plan, and there were options to purchase 713,957 shares of stock exercisable, with a remaining contractual term of 10 years at June 30, 2012.  The weighted average grant date fair value of stock options granted during the quarter ended June 30, 2012 was $0.53.  The weighted average exercise price of stock options granted and exercisable is $0.57 on June 30, 2012.  The aggregate fair value of options vested on June 30, 2012 is $117,786.  Unvested options amounted to $309,524 at June 30, 2012 and there were 20,000 options forfeited with a value of $7,655, none exercised, or expired during the quarter ended June 30, 2012.

At June 30, 2012 there was $587,265 of aggregate intrinsic value of outstanding stock options, including $317,449 of aggregate intrinsic value of exercisable stock options.  Intrinsic value is the total pretax intrinsic value for all “in-the-money” options (i.e., the difference between the Company’s closing stock price on the last trading day of second quarter 2012 and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised their options as of June 30, 2012.  This amount changes based on the fair market value of the Company’s stock.

The Company had $309,524 of total unrecognized compensation cost related to unvested stock options at June 30, 2012, which is expected to be recognized over a weighted average period of 7 years.

Warrants – Consulting Agreements

During the second quarter 2012, we issued warrants to purchase 30,496 shares of common stock under agreements for consulting services and warrants to purchase 308,750 shares of common stock under debt agreements to raise capital.  These warrants have an exercise price ranging from $0.45 to $5.00 per share and have an average term of 5.75 years.

During first quarter 2012, we issued warrants to purchase 152 shares of common stock under agreements for consulting services.  These warrants have an exercise price of $5.00 per share and have a term of 7 years.

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 during the periods ended June 30:

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 commences June 1, 2012 and will terminate on July 31, 2015.  No rent will be payable until October 2012.  The base monthly rental rate will start at $3,160, increasing to $3,260 in October 2013, and then $3,343 in June 2014.

Entia’s prior two leases for 3,400 square feet at 14889 S.W. Tualatin-Sherwood Road #205, Sherwood, Oregon 97140, had a base monthly rent of $2,400 and ended on May 31, 2012.  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.

NOTE 11 – CONCENTRATIONS AND CREDIT RISK

Customers and Credit Concentrations

During second quarter 2012, approximately 73.6% of our net sales were to four customers compared to approximately 65.3% of our net sales at June 30, 2011.  As of June 30, 2012, accounts receivable for these customers accounted for approximately 93% of total accounts receivable as compared to 90% at June 30, 2011.

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Vendor Concentrations

57% of our purchases were made from one vendor during second quarter 2012 as compared to approximately 62% in the quarter ended June 30, 2011. 

NOTE 12 – SUBSEQUENT EVENTS

On June 29, 2012 the board of directors of Entia approved a “Warrant & Option Holders Special Exercise Incentive” program in order to raise capital.  The program allowed existing warrant and option holders on record as of June 1, 2012 to exercise their warrants (vested and unvested) through the month of July 2012 for $0.40 per share.  For all holders who exercise a portion of their warrants/options, an equivalent number of remaining warrants/options would be extended for one year beyond their original expiration date at their original exercise price.  During the month of July, warrant holders exercised warrants to purchase 50,000 shares for $20,000 cash and warrants to purchase 147,500 shares for $59,000 in promissory notes.  The promissory notes are for six months, maturing January 26, 2013 and carry interest rates of up to 10% semi-annually and no less than 6% annually.

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

Entia Biosciences, Inc. (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 Entia and by third parties.  Our current portfolio of natural ingredients includes ERGO D2^TM, vitamin D, L-Ergothioneine, Chitin-glucans and curcumin.  Enhancement of Vitamin D content within our ingredients and whole foods is accomplished at our Sherwood, Oregon facility using our patent pending UV light enrichment process.  By moving to a 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.  Production of cosmetic products and certain nutraceuticals are outsourced.  In addition, Entia will also continue to outsource, as dictated by over-capacity production requirements, some of our manufacturing to third party contractors, including Columbia Nutritional Services, Inc. of Vancouver, Washington and NHK Laboratories, Inc. of Santa Fe Springs, California.

Through our wholly owned subsidiary Total Nutraceutical Solutions, Inc. (TNS), we currently market nutraceutical/dietary supplement products under the Groh™ and SANO™ brands directly 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.  ImmuSANO^TM is designed to nutritionally address the needs of the immune system by balancing cellular function and promoting a stronger immune system.  GlucoSANO^TM is designed to assist in maintaining more normal cellular metabolism and stabilizing blood sugar levels

Our formulations, which contain highly potent natural antioxidants, have the nutritional potential to provide multiple health benefits for humans, including 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, including but not limited to alpha-synuclein, glutathione, C-reactive protein, hemoglobin A1C and analytical tools to validate the nutritional and clinical efficacy of our formulations and the products that incorporate them.  Research and development of new products are also performed under contract with outside laboratories, clinicians and medical institutions.

Results of Operations for the Three and Six Months ended June 30, 2012.

Revenues and Cost of Goods Sold:

Revenues.  Revenues are generated primarily from the sale of our mushroom based nutraceutical dietary supplement products.  The 6.5% increase in revenues for the three months ending June 30, 2012 from 2011 was primarily due to the mix of product sales during the periods presented.  The 5% decrease for six months ended was due to a larger decrease in revenues during the first quarter of 2012 as compared with the first quarter of 2011.

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 2012 decreased from 2011 due to increased efficiencies in manufacturing and the distribution process during 2012.  Another factor was the mix of products sold during 2012.

The following is a summary of certain consolidated statement of operations data for the periods:

Operating Expenses:

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Advertising and promotional expenses.  These costs include costs for promotional products, production fees for marketing materials, costs associated with fulfillment, fees for advertising programs such as ad placement fees, and postage fees for mailing marketing materials.  The decrease from 2011 is due to the decrease in advertising expense by using web-based options.

Sales Commissions/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 increase in these expenses from 2011 was due to the larger amount of costs incurred to compensate third party consultants for services in second quarter 2012.

Professional fees.  These expenses primarily include accounting/auditing fees, legal fees and stock transfer fees.  The decrease in professional fees from 2011 is due primarily to decrease legal and auditing fees in 2012.

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 increase from 2011 is attributable to an increase in stock based compensation and the addition of employees during 2012.  In 2011, Entia had no employees, only consultants.

Inflation

Inflation has not had a significant impact in the current or prior periods.

Significant changes in the number of employees

As of June 30, 2012, we have seven employees, Marvin S. Hausman, M.D., our Chief Executive Officer, Devin Andres our Vice President, three other full and part-time employees and two paid interns.  As our operations expand we anticipate the need to hire additional employees, and contract with additional consultants; however, the exact number is not quantifiable at this time.

Liquidity and Capital Resources

At June 30, 2012, cash totaled $17,963, compared to $16,639 at December 31, 2011.  The primary reasons for the net increase in 2012 are described below.  Working capital was $(308,965) at June 30, 2012, compared to $(291,271) at December 31, 2011.  The change in working capital was due primarily to the maturity date of most of our debt and increase in cash.  The net change in cash and cash equivalents for the periods presented was comprised of the following:

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Operating Activities.  The decrease in net cash flows used from operating activities was due primarily to a gain on extinguishment of a note payable during second quarter 2012.

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

Financing Activities.  The increase in net cash flows from financing activities was due primarily to 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 2012.

We expect our revenues to increase in 2012.  Notwithstanding, we anticipate generating losses in 2012 and therefore we may be unable to continue operations in the future.   In order for us to continue as a going concern and ultimately to achieve profitability, we may be required to obtain capital from external sources, increase revenues and reduce operating costs.  We have successfully negotiated an extension on all of our debt that was maturing on June 30, 2012 for one year.  We will require additional capital of at least approximately $392,500 to repay debt maturing on June 30, 2013 and we intend to raise the monies by undertaking one or more equity private placements.  We may also pursue re-negotiation and re-structuring of the debt.  However, there can be no assurances that our operations will become profitable or that external sources of financing, including the issuance of debt and/or equity securities, will be available at times and at terms acceptable to us, or at all.  The issuance of additional equity or convertible debt securities will also cause dilution to our shareholders.  If external financing sources are not available or are inadequate to fund our operations, we will be required to reduce operating costs, which could jeopardize our future strategic initiatives and business plans.  For example, a reduction in operating costs could jeopardize our ability to launch, market, and sell new nutraceutical supplement products necessary to grow and sustain our operations.

Subsequent Events

On June 29, 2012 the board of directors of Entia approved a “Warrant & Option Holders Special Exercise Incentive” program in order to raise capital.  The program allowed existing warrant and option holders on record as of June 1, 2012 to exercise their warrants (vested and unvested) through the month of July 2012 for $0.40 per share.  For all holders who exercise a portion of their warrants/options, an equivalent number of remaining warrants/options would be extended for one year beyond their original expiration date at the original exercise price.  During the month of July, warrant holders exercised warrants to purchase 50,000 shares for $20,000 cash and warrants to purchase 147,500 shares for $59,000 in promissory notes.  The promissory notes are for six months, maturing January 26, 2013 and carry interest rates up to 10% semi-annually and no less than 6% annually.

Going Concern

We have a history of incurring net losses and net operating cash flow deficits.  We are also developing new technologies related to our organic nutraceutical products.  At June 30, 2012, we had cash and cash equivalents of $17,963.  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 September 2012.

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

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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Critical Accounting Policies and Estimates

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of our Chief Executive Officer who is also our principal financial and accounting officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2012.  Based on that evaluation, our principal executive officer and principal financial officer concluded that the material weaknesses identified in our management report on internal controls and procedures contained in our Form 10-K for the fiscal year ended December 31, 2011, Item 9A filed on March 30, 2012 still exist, and therefore our disclosure controls and procedures were not effective as of June 30, 2012.

Changes in Internal Control Over Financial Reporting

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Part II.  OTHER INFORMATION

Item 1.  Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business.  However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

We are not presently a party to any material litigation, nor to the knowledge of management is any litigation threatened against us, which may materially affect us.

Item 1A.  Risk Factors

See Risk Factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and the discussion above in Part I, Item 2, under " Liquidity and Capital Resources.”

We have undertaken a private placement of convertible preferred stock for $1.5 million.  During the second quarter 2012, 6,800 shares of preferred stock were issued with a value of $34,000 for cash.  10,000 shares of preferred stock were issued with a value of $50,000 for extinguishment of a $10,000 note, for services valued at $35,000 and $5,000 cash.  In addition, 5,000 shares were issued for cash from a related party.  Each preferred share is convertible into 10 shares of common stock.  The issuance of the preferred shares was exempt from registration based on Regulation D, Rule 506 and Section 4(2) and under the Securities Act.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not Applicable.

Item 5.  Other Information

None.

Item 6.  Exhibits 

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