KonaRed Corp - FORM 10-Q - November 16, 2015

Attached files

file	filename
EX-32.1 - KONARED 10Q, CERTIFICATION 906, CEO/CFO - KonaRed Corp	konaredexh32_1.htm
EX-31.1 - KONARED 10Q, CERTIFICATION 302, CEO - KonaRed Corp	konaredexh31_1.htm
EX-31.2 - KONARED 10Q, CERTIFICATION 302, CFO - KonaRed Corp	konaredexh31_2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________________________

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2015

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _______________________ TO _______________________

Commission File # 000-55208

KONARED CORPORATION

(Exact name of registrant as specified in its charter)

NEVADA

(State or other jurisdiction of incorporation or organization)

99-0366971

(IRS Employer Identification Number)

1101 Via Callejon #200

San Clemente, California 92673-4230

(Address of principal executive offices) (Zip Code)

Tel. (808) 212-1553

(Registrant’s telephone no., including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated file, or a smaller reporting company.

	Large accelerated filer	o	Accelerated filer	o
	Non-accelerated filer	o	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes o No x

The issuer had 104,041,391 shares of common stock issued and outstanding as of November 16, 2015.

Table of Contents

KONARED CORPORATION

Table of Contents

			Page
PART I. Financial Information

	Item 1. Financial Statements.

		Balance Sheets at September 30, 2015 (unaudited) and December 31, 2014	1

		Unaudited Statements of Operations for the three and nine month periods ended September 30, 2015 and September 30, 2014	2

		Unaudited Statement of Stockholders’ Equity (Deficit) for the period from January 1, 2014 through September 30, 2015	3

		Unaudited Statements of Cash Flows for the nine month periods ended September 30, 2015 and September 30, 2014	4

		Unaudited Supplementary Disclosure of Cash Flow Information	5

		Notes to Unaudited Financial Statements	6

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		36

	Item 3. Quantitative and Qualitative Disclosures about Market Risk		54

	Item 4. Controls and Procedures		54

PART II. Other Information			56

	Item 1. Legal Proceedings		56

	Item 1a. Risk Factors		56

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		56

	Item 3. Defaults Upon Senior Securities		58

	Item 4. Mine Safety Disclosures		58

	Item 5. Other Information		58

	Item 6. Exhibits		59

Signatures			60

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (unaudited)

KONARED CORPORATION

BALANCE SHEETS

	September 30, 2015 (unaudited)			December 31, 2014

ASSETS

CURRENT ASSETS
Cash	$	297,607		$	39,987
Accounts receivable		128,442			278,240
Inventory		477,746			508,338
Prepaid expenses		—			16,000
Other current assets		—			652
TOTAL CURRENT ASSETS		903,795			843,217

OTHER ASSETS
Fixed assets (net of accumulated depreciation)		54,928			12,691
TOTAL ASSETS	$	958,723		$	855,908

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	317,952		$	195,183
Short term debt - related party		253,534			—
Short term debt, net of discounts		77,212			—
Unearned revenue		950			3,443
Derivative liability		10,407			9,168
TOTAL CURRENT LIABILITIES		660,055			207,794

LONG TERM LIABILITIES
Convertible notes payable, net of discounts		402,710			140,001
TOTAL LONG TERM LIABILITIES		402,710			140,001
TOTAL LIABILITIES		1,062,765			347,795

COMMITMENTS AND CONTINGENCIES		—			—

STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred shares, 10,000 shares with par value $0.001 authorized; no shares issued and outstanding at September 30, 2015 and December 31, 2014		—			—
Common shares, 877,500,000 shares with par value $0.001 authorized; 97,901,432 and 83,496,530 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively		97,905			83,497
Additional paid in capital		18,626,040			16,705,636
Accumulated deficit		(18,827,987	)		(16,281,020	)
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)		(104,042	)		508,113
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$	958,723		$	855,908

The accompanying notes are an integral part of these financial statements

Table of Contents

KONARED CORPORATION

STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30, 2015			Three Months Ended September 30, 2014 (re-stated)			Nine Months Ended September 30, 2015			Nine Months Ended September 30, 2014 (re-stated)

REVENUE:
Product sales	$	168,148		$	270,831		$	572,358		$	973,781
Shipping and delivery		6,270			8,397			15,347			85,027
Total sales		174,418			279,228			587,705			1,058,808

Cost of Goods Sold		131,419			234,855			472,954			875,115
GROSS MARGIN		42,999			44,373			114,751			183,693

OPERATING EXPENSES:
Research and development		—			—			4,610			3,300
Advertising and marketing		70,500			296,400			269,047			861,955
General and administrative expenses		804,230			562,494			2,098,375			2,473,013
Total operating expenses		874,730			858,894			2,372,032			3,338,268
Loss from operations		(831,731	)		(814,521	)		(2,257,281	)		(3,154,575	)

OTHER INCOME (EXPENSE):
Interest expense		(38,100	)		—			(212,343	)		—
Change in fair market value of derivative liability		1,866			—			(35,590	)		—
Loss on equity modification		—			—			(41,753	)		—
Total other income (expense)		(36,234	)		—			(289,686	)
Loss before income taxes	$	(867,965	)	$	(814,521	)		(2,546,967	)		(3,154,575	)
Provision for income taxes		—			—			—			—
Net Loss	$	(867,965	)	$	(814,521	)	$	(2,546,967	)	$	(3,154,575	)

Basic and diluted loss per common share	$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.04	)

Basic and diluted weighted average shares outstanding		92,620,379			78,272,336			87,237,372			76,143,393

The accompanying notes are an integral part of these financial statements

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KONARED CORPORATION

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(Unaudited)

	Common Stock				Additional			Accumulated			Total Shareholders'
	Shares		Amount		Paid In Capital			Deficit			Equity Deficit)

Ending balance, December 31, 2013		72,366,667		72,367		11,969,774			(11,678,393	)		363,748
Additional paid-in capital related to option grants		—				807,161			—			807,161
Common shares issued for cash		1,818,182		1,818		998,182			—			1,000,000
Common shares issued under equity line		3,697,889		3,698		1,696,303			—			1,700,001
Common shares issued for equity line underwriting fees		903,633		904		(904	)		—			—
Common shares issued as compensation		657,400		657		397,465			—			398,122
Common shares issued for services		4,052,759		4,053		837,654			—			841,708
Net loss – year ended December 31, 2014		—		—		—			(4,602,627	)		(4,602,627	)
Balance – December 31, 2014		83,496,530	$	83,497	$	16,705,636		$	(16,281,020	)	$	508,113
Common shares issued for cash		7,083,334		7,084		688,036			—			695,120
Common shares issued for equity line underwriting fees		2,689,675		2,692		(2,692	)		—			—
Common shares issued as compensation		2,517,368		2,517		229,843			—			232,360
Common shares issued for services		2,114,525		2,115		330,521			—			332,636
Additional paid-in capital related to option grant		—		—		165,266			—			165,266
Additional paid-in capital related to warrant issuances		—		—		285,645			—			285,645
Additional paid-in capital related to convertible note issuance		—		—		107,143			—			107,143
Additional paid-in capital related to convertible debenture redemption		—		—		74,889			—			74,889
Additional paid-in capital related to loss on equity modification		—		—		41,753			—			41,753
Net loss – period ended September 30, 2015		—		—		—			(2,546,967	)		(2,546,967	)
Balance – September 30, 2015		97,901,432	$	97,905	$	18,626,040		$	(18,827,987	)	$	(104,042	)

The accompanying notes are an integral part of these financial statements

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KONARED CORPORATION

STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30, 2015			Nine Months Ended September 30, 2014 (re-stated)

OPERATING ACTIVITIES:
Net loss	$	(2,546,967	)	$	(3,154,575	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		6,729			1,005
Stock issued for compensation & services		564,996			378,325
Option grants expense		165,266			797,258
Change in fair market value of derivative liability		35,590			—
Amortization of notes payable discounts		68,467			—
Loss on equity modification		41,753			—
Change in operating assets and liabilities:
Accounts receivable		149,798			(168,815	)
Inventory		30,593			23,581
Prepaid expenses		16,000			6,848
Other current assets		652			—
Accounts payable and accrued liabilities		122,769			(183,647	)
Accrued interest		23,314			—
Unearned revenue		(2,494	)		1,988
NET CASH USED IN OPERATING ACTIVITIES		(1,323,534	)		(2,298,032	)

INVESTING ACTIVITIES:
Purchase of fixed assets		(48,966	)		(14,674	)
NET CASH USED IN INVESTING ACTIVITIES		(48,966	)		(14,674	)

FINANCING ACTIVITIES:
Proceeds from long term convertible notes payable		225,000			—
Proceeds from short term convertible notes payable		650,000			—
Repayments on short term convertible notes payable		(440,000	)
Proceeds from short term debt		250,000			—
Proceeds from short term debt - related party		500,000			—
Repayments on short term debt - related party		(250,000	)
Proceeds from issuance of common stock for cash		695,120			2,700,000
NET CASH PROVIDED BY FINANCING ACTIVITIES		1,630,120			2,700,000

NET INCREASE (DECREASE) IN CASH		257,620			387,294

CASH, Beginning of Period		39,987			213,156

CASH, End of Period	$	297,607		$	600,450

The accompanying notes are an integral part of these financial statements

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KONARED CORPORATION

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

(Unaudited)

	Nine Months Ended September 30, 2015		Nine Months Ended September 30, 2014

Cash paid during the year for:
Interest	$	174,243	$	—
Taxes	$	—	$	—

NON CASH INVESTING AND FINANCING ACTIVITIES

(Unaudited)

	Nine Months Ended September 30, 2015		Nine Months Ended September 30, 2014

Discount from beneficial conversion feature	$	107,143	$	—
Equity line common stock issued as commitment shares		2,692		—
Settlement of derivative liability related to convertible debenture redemption		274,108		—
Discount from warrants		285,645		—
Discount from Derivative		239,757		—

The accompanying notes are an integral part of these financial statements

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KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – Nature of Organization

KonaRed Corporation (“KonaRed”, "KonaRed Corporation", "us", “we”, the “Registrant”, or the “Company”) was incorporated in the State of Nevada on October 4, 2010 as TeamUpSport Inc. Prior to, and in anticipation of, closing of an asset purchase agreement (the "Asset Agreement") with Sandwich Isles Trading Co, Inc., on September 9, 2013 our company effected a name change by merging with our wholly-owned Nevada subsidiary named “KonaRed Corporation” with our company as the surviving corporation under the new name “KonaRed Corporation”. On October 4, 2013 pursuant to the terms the Asset Agreement, we acquired substantially all of the assets, property and undertaking of the health beverage and food business (the "Business") operated under the name “KonaRed” from Sandwich Isles Trading Co., Inc. ("SITC") which was a private company incorporated in Hawaii on August 22, 2008 and dissolved on May 23, 2014. As a result of October 4, 2013 acquisition of the Business from Sandwich Isles Trading Co., Inc. ("SITC") we ceased to be a “shell company” as defined in Rule 12b-2 of the Securities Exchange Act of 1934 (the “Exchange Act”).

NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Fiscal Year

These financial statements have been presented by the Company in accordance with accounting principles generally accepted in the United States and are expressed in U.S. dollars. The Company’s fiscal year-end is December 31st.

Restatement of some information previously reported for the period ended September 30, 2014

At year end December 31, 2014 it was determined some statement of operations items should be reclassified and this change was reflected in the financial statements reported on Form 10-K for the year ended December 31, 2014. To ensure consistency in the financial statements included in this Form 10-Q, data for the prior period ended September 30, 2014 has been adjusted to reflect these changes for the three and nine months periods. This had the effect of decreasing product sales from $332,867 to $270,831 and $1,175,829 to $973,781, respectively; COGS from $278,851 to $234,855 and $1,022,761 to $875,115, respectively; and increasing advertising and marketing expenses from $252,404 to $296,400 and $714,309 to $861,955, respectively for the period ended September 30, 2014.

Use of Estimates

The preparation of these financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to recoverability of long-lived assets, and deferred income tax asset valuations. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between estimates and the actual results, future results of operations will be affected.

Financial Instruments

The Company’s financial instruments consist principally of cash, accounts receivable, inventory, accounts payable, notes payable and related party debt. The Company believes that the recorded values of all of these financial instruments approximate their current fair values because of the short term nature and respective maturity dates or durations.

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KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)

Cash and Cash Equivalents

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. There were no cash equivalents recorded for the periods ended September 30, 2015 and December 31, 2014.

Accounts Receivable

Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. Bad debts expense or write offs of receivables are determined on the basis of loss experience, known and inherent risks in the receivable portfolio and current economic conditions. During the periods ended September 30, 2015 and September 30, 2014, the Company wrote off accounts receivable totaling $5,508 and $0, respectively. There were no allowances for doubtful accounts recorded for the periods ended September 30, 2015 and December 31, 2014.

Inventories

Inventories are composed of raw materials and finished goods. Our raw materials inventory is comprised of dried coffee fruit and other input components, such as labels, caps, and packaging materials. Our finished goods inventory process begins when we take possession of dried coffee fruit from coffee growers in Hawaii. We then ship the raw material to our California warehouse for storage and then send required quantities to subcontractors for value-added processing; or we ship the raw materials directly from Hawaii to the processors. For our beverage products, value-added processing then occurs whereby the dried coffee fruit is converted to liquid extract through water based extraction. The extracts are then shipped from the raw materials processors to our California warehouse or directly to our bottling contractors. The bottling contractors then add our proprietary extract to other ingredients to produce our finished goods. Finished goods are shipped back to either our Company’s warehouse or third party transit agents and subsequently disseminated to either distributors or shipped directly to retailers. The process for production of our nutritional wellness products follows a similar manufacturing chain, but does not involve a bottling process.

Inventories are valued at the lower of cost, as determined on an average basis, or market. Market value is determined by reference to selling prices at, or around, balance sheet date or by management’s estimates based on prevailing market conditions. Management writes down the inventories to market value if it is below cost. Management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required. If a valuation allowance is required, an offsetting entry is made which expenses the reserved inventory to cost of goods sold during the period in which the valuation was required. Subsequently, if this reserved inventory is used in future periods, an offset is entered to cost of goods sold which decreases cost of goods sold during that subsequent period. Costs of raw material and finished goods inventories include purchase and related costs incurred in bringing the products to their present location and condition. Labor, direct and indirect overhead, and the processing, bottling and shipping costs incurred during 3rd party manufacturing are factored into the costs of our inventories.

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KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)

Revenue Recognition

Sales revenue consists of amounts earned from customers through the sales of its finished products via wholesale and direct online retail channels. The Company also operates a branded ingredients division that sells raw material fruit powder and extracts to wholesale customers. Sales revenue is recognized when persuasive evidence of an arrangement exists, price is fixed or determinable, title to and risk of loss for the product has passed, which is generally when the products are received by the customers, and collectability is reasonably assured. Customers accept goods FOB shipping point. Goods are sold on a final sale basis and in the normal course of business the Company does not accept sales returns. In exceptional circumstances when negotiated, sales returns which are accepted goods are returned to inventory and deducted from sales revenue.

Cost of goods sold

Cost of goods sold ('COGS') primarily consist of raw materials purchases and third party processing costs. COGS also include: warehousing and distribution costs for inbound freight charges; shipping and handling costs; purchasing and receiving costs; costs for our labor; direct and indirect overhead costs; and the processing, bottling and shipping costs charged by 3rd party manufacturers.

Income Taxes

In accordance with ASC 740 - Income Taxes, the provision for income taxes is computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.

The Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in these financial statements is the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

No liability for unrecognized tax benefits was recorded as of September 30, 2015 and December 31, 2014.

Stock Based Payments

We account for share-based awards to employees in accordance with ASC 718 “Stock Compensation”. Under this guidance, stock compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the estimated service period (generally the vesting period) on the straight-line attribute method. Share-based awards to non-employees are accounted for in accordance with ASC 505-50 “Equity”, wherein such awards are expensed over the period in which the related services are rendered.

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KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)

Derivative financial instruments

In accordance with ASC 820–10–35–37 Fair Value in Financial Instruments; ASC 815 Accounting for

Derivative Instruments and Hedging Activities; and ASC 815–40 (formerly Emerging Issues Task Force (“EITF”) Issue No. 00–19 and EITF 07–05), the Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations.

As of December 31, 2014, the Company had outstanding a senior convertible note with a balance of $140,001, net of a discount of $10,790 which the Company determined had an embedded derivative liability valued at $9,168 due to the senior convertible note agreement providing for adjustments to the conversion price. During the period ended September 30, 2015, $225,000 of principal was added to this note and interest totaling $11,893 was accrued to the note which brought the balance on the note to $371,591, net of a discount of $16,093. At September 30, 2015, the Company determined the mark-to-market value of the embedded derivative liability was $10,407. The net change in the embedded derivative of $1,239 during the period ended September 30, 2015, which included the valuation of the embedded derivatives resulting from $225,000 of additional principal being added to the note, was added to the Other Loss detailed for the note below, to bring the net Change in Fair Value - Derivatives to $(35,590) for the period ended September 30, 2015.

On January 20, 2015 the Company also issued an unsecured subordinate convertible debenture with a face value of $440,000, which after deducting a $40,000 original issue discount ('OID'), provided funds of $400,000. This debenture was initially valued as having a balance of $207,074, net of a discount of $232,926. The Company determined this note initially had an embedded derivative liability valued at $232,926 due to the convertible note agreement providing for adjustments to the conversion price. On June 5, 2015, the Company redeemed this note and paid the lender a prepayment premium of $68,929, calculated as 15% of face value principal of $440,000 plus accrued interest of $19,529, for a total redemption payment of $528,458. Because there was a derivative liability recorded for this note, the derivative component of the note was marked-to-market at time of redemption and the resulting net loss of $41,182 was included as an Other Loss on the statement of operations (which as noted above, netted to a net Other Loss of $37,456 for all convertible note valuations). $5,788 of the OID was amortized to interest expense over the life of the note and the repayment of the remaining balance of $34,212 OID was recorded as an interest expense at time of redemption.

Research and Development

Costs incurred in developing the ability to create and manufacture products for sale are included in research and development. Once a product is commercially feasible and starts to sell to third party customers, the classification of such costs as development costs stops and such costs are recorded as costs of production, which are included in cost of goods sold. Research and development costs are expensed when incurred.

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KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)

Basic and Diluted Net Loss per Share

The Company computes loss per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock warrants and options, using the treasury stock method; and convertible preferred stock and convertible debt using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. The Company currently has options, warrants and convertible debt outstanding. Common stock equivalents pertaining to the options, warrants and convertible debt were not included in the computation of diluted net loss per common share in these financial statements because the effect would have been anti-dilutive due to the net losses for the periods ended September 30, 2015 and September 30, 2014.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and trade receivables. The Company places its cash with high credit quality financial institutions. At times such cash may be in excess of the FDIC limit. With respect to trade receivables, the Company routinely assesses the financial strength of its customers and, as a consequence, believes that the receivable credit risk exposure is limited.

Related parties

A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

Fair Value Measurements

As defined in ASC 820 “Fair Value Measurements”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

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KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)

The three levels of the fair value hierarchy defined by ASC 820 are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The Company's Level 1 assets and liabilities consist of cash, accounts receivable, inventories net, of any inventory allowance, prepaid expenses, other current assets, accounts payable and accrued liabilities, note payable, short term debt and unearned revenue. Pursuant to ASC 820, the fair value of these assets and liabilities is determined based on Level 1 inputs, which consist of quoted prices in active markets for identical assets. Level 2 assets and liabilities consist of a derivative liability arising from a convertible note payable. Pursuant to ASC 820, the fair value of this liability is determined based on Level 2 inputs, which consisted of a valuation by an accredited third party expert. We do not currently have any assets or liabilities which are classified under the criterion of Level 3.

Amounts in each Level include:

	As of September 30, 2015	As of December 31, 2014
Level 1	$1,956,153	$1,181,844
Level 2	$10,407	$9,168
Level 3	$0	$0

It is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)

Advertising

Costs for advertising are expensed when incurred. Advertising costs totaled $108,498 and $78,774 for the nine month periods ended September 30, 2015 and September 30, 2014, respectively. The Company also incurs marketing expenses for product promotion which are combined with advertising to form the advertising and marketing line item in our statement of operations. Excluding advertising, these other promotional costs totaled $160,547 and $635,068 for the nine month periods ended September 30, 2015 and September 30, 2014, respectively.

Fixed Assets

Fixed assets are recorded at cost. Depreciation is calculated on a straight line method over the estimated useful lives of the various assets as follows:

ASSET	Depreciation Term

Furniture and equipment	5 - 7 years
Warehouse fixtures	10 years
Vehicles	5 years

During the periods ended September 30, 2015 and September 30, 2014, depreciation of $3,039 and $1,467, respectively, was recorded for furniture and Equipment; and depreciation of $777 and $516, respectively, was recorded for warehouse fixtures; and depreciation of $4,896 and $0, respectively, was recorded for vehicles. Accumulated depreciation for all fixed assets totaled $8,712 at September 30, 2015.

Maintenance and repairs will be expensed as incurred while renewals and betterments will be capitalized.

Recent Accounting Pronouncements

In July , 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-11, Simplifying the Measurement of Inventory, which requires that inventory be measured within the scope of the Update 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. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this Update are to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. This ASU conforms with the Company's current protocol for evaluating inventory and the Company will prospectively implement adoption of this ASU. The Company does not expect the adoption of the ASU to have a significant impact on our consolidated financial statements.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)

On April 7, 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The ASU is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted. The ASU requires retrospective application to all prior periods presented in the financial statements. The Company has elected not to early adopt ASU 2015-03.

In January 2015, the FASB issued ASU 2015-01, Income Statement –Extraordinary and Unusual Items, as part of its initiative to reduce complexity in accounting standards. This Update eliminates from GAAP the concept of extraordinary items. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern. The new standard requires management of public and private companies to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern and, if so, disclose that fact. Management will also be required to evaluate and disclose whether its plans alleviate that doubt. The standard requires management to evaluate, for each reporting period, whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from the date the financial statements are issued. The new standard is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of the ASU to have a significant impact on our consolidated financial statements.

On June 10, 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-10, which eliminates development stage reporting requirements under FASB ASC 915, as well as amends provisions of existing variable interest entity guidance under ASC 810. Additionally, the ASU indicates that the lack of commencement of principal operations represents a risk and uncertainty and, accordingly, is subject to the disclosure requirements of FASB ASC 275. As a result of the changes, existing development stage entity presentation and disclosure requirements are eliminated. The presentation and disclosure changes to FASB ASC 915 are effective for public entities for annual periods beginning after December 15, 2014, and the revisions to the consolidation standards are effective for annual periods beginning after December 15, 2015. We are not a development stage enterprise and have adopted this provision as required.

On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on or after July 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect

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NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)

of the standard on its ongoing financial reporting. In April 2015, the FASB tentatively decided to defer for one year the effective date of ASU 2014-09. The FASB also tentatively decided to permit entities to early adopt the standard. The tentative decision will be exposed in an upcoming proposed ASU.

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization's operations and financial results and include disposals of a major geographic area, a major line of business, or a major equity method investment. The new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. Additionally, the new guidance requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company has adopted this pronouncement as required.

Management does not anticipate that the adoption of these standards will have a material impact on the financial statements.

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations.

NOTE 3 – Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Since inception, the Company has incurred losses totaling $18,827,987 as of September 30, 2015; and has a incurred a net loss for the current period of $2,546,967. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. The Company will pursue additional equity and/or debt financing while managing cash flows from operations in an effort to provide funds to meet its obligations on a timely basis and to support future business development. The financial statements do not contain any adjustments to reflect the possible future effects on the classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. To address these issues, on June 5, 2015 the Company entered into a new equity line share purchase agreement (the “2015 Purchase Agreement”), pursuant to which we may make sales of shares of our common stock, subject to certain limitations set forth in the 2015 Purchase Agreement, if our share price is trading at or above a stipulated floor price.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 4 – Inventory

Inventory includes raw materials and finished goods. Finished goods contain direct materials and other manufacturing costs charged directly by third party manufacturing vendors. Inventory consists of the following:

	September 30, 2015		December 31, 2014

Raw materials	$	114,788	$	157,839
Finished goods		362,958		350,499
Total	$	477,746	$	508,338

As of September 30, 2015 and December 31, 2014, the Company had $0 and $0, respectively, of reserved inventory and all inventory was valued at full cost.

NOTE 5 – Prepaid Expenses and Other Current Assets

There were no prepaid expenses at September 30, 2015. Prepaid expenses totaled $16,000 at December 31, 2014 and were comprised of prepayments to two service providers.

There were no other current assets at September 30, 2015. Other current assets at December 31, 2014 totaled $652 and were comprised of a manufacturing deposit of $652 which was applied to production costs during the first quarter of 2015.

NOTE 6 – Fixed Assets

Fixed assets at September 30, 2015 were comprised of: (a) furniture and equipment totaling $8,163, net of accumulated depreciation of $3,039; (b) warehouse fixtures totaling $2,695, net of accumulated depreciation of $777; and (c) vehicles totaling $44,070, net of accumulated depreciation of $4,846. Fixed assets at December 31, 2014 were comprised furniture and equipment totaling $9,735, net of accumulated depreciation of $1,467; and warehouse fixtures totaling $2,956, net of accumulated depreciation of $516.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 – Short Term Convertible Notes Payable

Unsecured subordinate convertible debenture

On January 20, 2015, we entered into a Convertible Debt Purchase Agreement with a third party, for the issuance of up to $1,100,000 of unsecured subordinated convertible debentures (the “Unsecured Subordinate Debenture”) maturing 18 months from each issuance date and the Company issued to the lender an Unsecured Subordinate Debenture with a face value principal amount of $440,000 (which includes $40,000 in original issue discount) for $400,000 in cash. Due to its term, the Unsecured Subordinate Debenture was classified as short term debt. The Unsecured Subordinate Debenture was initially valued as having a balance of $207,074, net of a discount of $232,926. The Company determined this note initially had an embedded derivative liability valued at $232,926 due to the convertible note agreement providing for adjustments to the conversion price. On June 5, 2015, the Company redeemed this note and paid the lender a prepayment premium of $68,929, calculated as 15% of face value principal of $440,000 plus accrued interest of $19,529, for a total redemption payment of $528,458. Because there was a derivative liability recorded for this note, the derivative component of the note was marked-to-market at time of redemption and the resulting net loss of $41,182 was included as an Other Loss on the statement of operations. $5,788 of the OID was amortized to interest expense over the life of the note and the repayment of the remaining balance of $34,212 OID was recorded as an interest expense at time of redemption. Repayment of the Unsecured Subordinate Debenture effected a termination of the Convertible Debt Purchase Agreement. This variable rate convertible debenture is now repaid in full and extinguished.

Senior convertible note

On August 18, 2015, we issued a Senior Convertible Note (the “Convertible Note”) to a third party in the amount of $250,000. The Convertible Note was issued pursuant to the terms of a Securities Purchase Agreement dated as of the same date. The Convertible Note bears interest at the rate of 5% per annum (or 18% upon the occurrence of an event of default) and the principal and interest is due and payable in full on December 31, 2016 (the “Maturity Date”). Due to its term, the Convertible Note is classified as short term debt. Interest may be paid in the Company’s common stock if the Company meets certain conditions that would allow the issuance of the Company’s common stock without any trading restrictions. The Convertible Note included a $25,000 original issuance discount. As a result, the net amount received in connection with the sale of the Convertible Note was $225,000. The Company has the right to prepay the Convertible Note, pursuant to the terms thereof, at any time, provided it pays a prepayment amount of 120% of the then outstanding balance, accrued interest and interest payable from the date of prepayment to the Maturity Date. The Convertible Note provides for customary events of default such as failing to timely make payments under the Convertible Note when due and the occurrence of certain fundamental defaults, as described in the Convertible Note. The principal amount of the Convertible Note and all accrued interest is convertible at the option of the lender into shares of our common stock at any time. The fixed conversion price of the Convertible Note is $0.07, as adjusted for stock splits, stock dividends, stock combinations or other similar transactions as provided in the Convertible Note. At no time may the Convertible Note be converted into shares of our common stock if such conversion would result in the lender and its affiliates owning an aggregate of shares of our common stock in excess of 4.99% of the then outstanding shares of our common stock, provided such percentage may increase to 9.99% upon not less than 61 days prior written notice.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 – Short Term Convertible Notes Payable (continued)

As additional consideration for the loan, the Company granted the lender a six-year warrant to purchase 3,750,000 shares of our common stock at an exercise price of $0.10 per share valued at $277,014. This warrant includes the same ownership limitation described above in connection with the Convertible Note. This warrant includes cashless exercise rights. At September 30, 2015, the balance due on the Convertible Note was $31,119, including accrued interest of $1,667 and net of unamortized discounts totaling $220,548 related to a beneficial conversion feature initially valued at $(107,143), issuance of warrants for the loan initially valued at $(117,857), the original issue discount initially valued at $(25,000), and amortization of $29,452 which was recorded during the period ended September 30, 2015.

NOTE 8 – Short Term Debt, and Short Term Debt - Related Party

Short Term Debt

On September 30, 2015 ("Issuance Date"), we issued Subordinated Promissory Notes (the “Promissory Notes”) to two investors (the “Investors”) in the aggregate amount of $250,000 (the "Original Principal"). The Promissory Notes were issued pursuant to the terms of Securities Purchase Agreements dated as of Issuance Date. Due to their term, the Promissory Notes are classified as short term debt. The Promissory Notes bear interest at the rate of 8% per annum, which accrued in full as of the Issuance Date. The principal and interest is due and payable in full on September 30, 2016 (the “Maturity Date”) with monthly prepayments of 3% of the Original Principal on the fourth through sixth monthly anniversaries of the Issuance Date and monthly prepayments or 10% of the Original Principal on the seventh through eleventh monthly anniversaries of the Issuance Date. The Promissory Notes included an aggregate $25,000 original issuance discount. As a result, the net amount received in connection with the sale of the Promissory Notes was $225,000. The Company has the right to prepay the Promissory Notes, pursuant to the terms thereof, at any time, provided it pays the then outstanding balance and accrued interest. The Promissory Notes provides for customary events of default such as failing to timely make payments under the Promissory Notes when due and the occurrence of certain fundamental defaults, as described in the Promissory Notes. The interest rate shall be 18% upon the occurrence of an event of default and repayment of the note at an amount equal to 120% of the outstanding principal and interest due. The Notes are not secured and subordinated to existing notes issued by the Company. As additional consideration for the loan, the Company granted the Investors five-year warrants to purchase an aggregate of 3,125,000 shares of our common stock at an exercise price of $0.08 per share valued at $167,788. The warrants include cashless exercise rights. At September 30, 2015, the balance due on the Promissory Notes was $77,212, including accrued interest of $20,000 and net of unamortized discounts totaling $192,788 related to a issuance of warrants for the loans and the original issue discounts.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 8 – Short Term Debt, and Short Term Debt - Related Party (continued)

Short Term Debt - Related Party

On June 5, 2015 (the “Issuance Date”), upon repayment of the Unsecured Subordinate Debenture described above, the Company issued a $500,000 note (the “Interim Note”) to a corporation affiliated with a director of the Company and is therefore classified as related party debt. The Interim Note has a maturity date of December 5, 2015. Due to its term, the Interim Note is classified as short term debt. According to the terms of the Interim Note, $250,000 was due three months from the Issuance Date on September 5, 2016, and the remaining $250,000 will be due six months from the Issuance Date on December 5, 2015. The Interim Note bears interest at 12% until repayment. The Interim Note may be prepaid in whole, or in part, at any time before each maturity date without prepayment penalty. 1,700,000 restricted common shares of the Company were issued to the lender as a fee. As security for the Interim Note, the Company’s Chief Executive Officer pledged 3,333,333 shares of the Company, which he owns, as security for Note One (the "Pledge Shares"). If the Company defaults on the payment of The Interim Note, then sufficient Pledge Shares will be released to cover the full amount of the due payment(s). On June 16, 2015 and August 18, 2015, the Company made early principal re-payments of $50,000 and $200,000 toward Note One, which fulfilled completely the first installment repayment on the Interim Note. At September 30, 2015, the balance due on the Note One was $253,534, which included $3,534 of accrued interest for the period ended September 30, 2015.

NOTE 9 – Long Term Debt

VDF Senior convertible note

On January 28, 2014, we entered into a patent settlement with VDF FutureCeuticals, Inc.("VDF") with respect to a prior action filed by VDF. In connection with the License Agreement and other agreements which formed the settlement, we issued a senior convertible note (the "VDF Senior Convertible Note") to VDF, whereby we promised to pay VDF a principal amount equal to the sum of: (i) the aggregate amount of accrued and unpaid license fee payments, plus (ii) accrued interest on the VDF Senior Convertible Note. The maturity of the VDF Senior Convertible Note is December 31, 2018 unless accelerated pursuant to an event of default or the License Agreement is terminated and all accrued and unpaid obligations under the VDF Senior Convertible Note have been paid. Due to its term, the VDF Senior Convertible Note is classified as long term debt. Interest on the note is 7% per annum, subject to an adjustment to 12% for events of default. On the maturity date, we must pay VDF all principal, unpaid interest and late charges, if any, and we have the right, subject to certain limitations, to prepay principal at any time and from time to time. At any time VDF has the option to convert any principal outstanding on the VDF Senior Convertible Note into shares of our common stock at a Conversion Price determined by the terms of the Senior Convertible Note.

Key terms of the Senior Convertible Note include that: (i) VDF is granted an adjustment to the conversion price upon the issuance of shares of our common stock, stock options or other convertible securities; (ii) no indebtedness shall rank senior to the payments due under the Senior Convertible Note unless prior written consent of VDF is obtained; and (iii) payments under the Senior Convertible Note are secured by a Security Agreement.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 9 – Long Term Debt (continued)

Originally the Conversion Price of the Senior Convertible Note was $0.65 per share. On December 19, 2014, this was adjusted to $0.6163 per share based on our issuance of stock options. On January 20, 2015 the Conversion Price was adjusted to $0.5623 based on our issuance of an unsecured subordinate convertible debenture to a third party; on June 15, 2015 the Conversion Price was adjusted to $0.5572 as the result of re-pricing of warrants issued to a third party; and on September 30, 2015 the Conversion Price was adjusted to $0.4536 based on our issuance of a fixed conversion price convertible debenture to a third party, and issuances of warrants and stock to third parties.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 10 – Derivatives

In connection with the issuance of debt or equity instruments, the Company may sell options or warrants to purchase our common stock. In certain circumstances, the convertible debt, options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as embedded derivative features which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.

The Company's derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income in the period in which the changes occur. For options, warrants and bifurcated embedded derivative features that are accounted for as derivative instrument liabilities, the Company estimates fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The valuation techniques require assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option.

The following table summarizes the convertible debt derivative activity for the period ending September 30, 2015:

Description	Convertible Notes
Fair Value of derivative liabilities at December 31, 2013	$	—
Discount due to issuance of subordinated convertible debenture		11,006
Change in Fair Value		(1,838	)
Fair Value of derivative liabilities at December 31, 2014	$	9,168
Increase due to valuation of newly issued convertible debentures		239,757
Reduction due to convertible debentures redemption		(274,108	)
Change in Fair Value		35,590
Fair Value of derivative liabilities at September 30, 2015	$	10,407

For the period ended September 30, 2015, the net change in the fair market value of derivative liabilities was $35,590 which was recorded as Other Loss.

The lattice methodology was used to value the derivative liabilities related to the convertible notes, with the following assumptions as of September 30, 2015 and December 31, 2014.

Assumptions:	September 30, 2015	December 31, 2014

Dividend yield	0.00%	0.00%
Risk-free rate for term	0.92%	0.97% to 1.11%
Volatility	131%	104% to 117%
Maturity dates	3.25 years	4 years
Stock Price	$0.074 to $0.078	$0.141 to $0.23

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 11 – Related Party Transactions

During the periods ended September 30, 2015 and September 30, 2014, related party transactions included:

Chief Executive Officer, Director and Board Chair (Former President). For the period ended September 30, 2015: (i) compensation of $97,500; (ii) Black-Scholes expense amortization of $165,266 related to 1,500,000 options granted on December 19, 2014 of which 750,000 vested on June 30, 2015 and 750,000 vest on December 31, 2015; (ii) sale of vehicles to the Company totaling $25,550; and (iii) office rent of $11,700. For the period ended September 30, 2014: (i) compensation of $97,500; (ii) Black-Scholes expense amortization of $173,746 related to 1,000,000 options granted on December 12, 2013, which never vested and were cancelled on December 19, 2014; and (iii) issuance of 250,499 S-8 registered common shares at a cost of $0.627 per share on date of issuance for aggregate deemed compensation of $157,063.

President and Chief Operating Officer. For the period ended September 30, 2015: (i) compensation, including COBRA benefits, of $41,186 for the period from August 10 (start date) to September 30, 2015; (ii) issuance of a signing bonus of 1,333,333 restricted common shares at a price of $0.107 per share for aggregate deemed compensation of $142,667; and (iii) issuance of 502,283 restricted common shares at a cost of $0.078 per share on date of issuance for aggregate deemed compensation of $39,178.

Chief Financial Officer, Secretary and Treasurer: For the period ended September 30, 2015: (i) compensation of $93,750; (ii) issuance of 131,579 restricted common shares at a cost of $0.19 per share on date of issuance for aggregate deemed compensation of $25,000; (iii) issuance of 226,860 restricted common shares at a cost of $0.1102 per share on date of issuance for aggregate deemed compensation of $25,000; (iii) issuance of 320,513 restricted common shares at a cost of $0.078 per share on date of issuance for aggregate deemed compensation of $25,000; and (iv) office rent of $6,750. For the period ended September 30, 2014: (i) consulting fees of $25,500; and (ii) a signing bonus of 50,000 restricted common shares at a price of $0.80 per share for aggregate deemed compensation of $40,000.

(Former) Chief Financial Officer, Secretary and Treasurer; spouse of President and CEO. For the period ended September 30, 2015: consulting fees of $3,500. For the period ended September 30, 2014: compensation of $16,500 from January 1 to March 17, 2014.

(Former) Chief Scientific Officer; Director. For the period ended September 30, 2015: consulting fees of $4,000. For the period ended September 30, 2014: (i) payment of $60,000 as the final installment of CSO contract buy-out negotiated during fiscal 2013; (ii) Black-Scholes expense amortization of $173,746 related to 1,000,000 options granted on December 12, 2013, which never vested and were cancelled on December 19, 2014; and (iii) issuance of 83,167 S-8 registered common shares at a cost of $0.627 per share on date of issuance for aggregate deemed compensation of $52,146.

(Former) Vice-President, Chief Operating Officer. For the period ended September 30, 2014: (i) a signing bonus of 25,000 restricted shares on May 1, 2014 at a cost of $0.62 per share on date of issuance, for aggregate deemed compensation of $15,500; (ii) compensation, including severance, of $47,613.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 11 – Related Party Transactions (continued)

Directors:

We have two independent directors.

Related party transactions for the first of our independent directors included: (i) for the period ended September 30, 2015: issuance of a $500,000 Note to a corporation affiliated with the director, repayment of $250,000 principal on the Note plus interest of $11,556 on the Note, and issuance of 1,700,000 restricted common shares of the Company valued at $0.1402 per share for aggregate deemed proceeds of $238,340 as a fee for the Note; and (ii) for the period ended September 30, 2014: Black-Scholes expense recording of $114,236 for 750,000 options granted on December 19, 2014 which vested immediately and which were cancelled on December 19, 2014, and issuance of 83,167 S-8 registered common shares at a cost of $0.627 per share on date of issuance for aggregate deemed compensation of $52,146.

Related party transactions for the second of our independent directors included: (i) for the period ended September 30, 2015: no transactions; and (ii) for the period ended September 30, 2014: issuance of 83,167 S-8 registered common shares at a cost of $0.627 per share on date of issuance for aggregate deemed compensation of $52,146.

At September 30, 2015 and December 31, 2014, the Company had related party accounts payable of $0 and $0, respectively; and shareholder loans of $0 and $0, respectively.

NOTE 12 – Equity

Overview:

Our authorized capital stock consists of 877,500,000 shares of common stock, with a par value of $0.001 per share; and 10,000 shares of preferred stock at a par value of $0.001. The holders of common stock have dividend rights, liquidation rights and voting rights of one vote for each share of common stock. There are no preferred shares issued and outstanding and the terms of any future preferred shares issuances will be as determined by the Board of Directors. As of September 30, 2015, there were 97,901,432 shares of our common stock issued and outstanding.

2014 Share Transactions:

On January 27, 2014, we issued 1,818,182 units to two investors in a non-brokered private placement, at a purchase price of $0.55 per unit for gross proceeds of $1,000,000. Each unit consisted of one share of our common stock and one non-transferable common share purchase warrant, with each warrant entitling the holder to acquire one additional share of our common stock at a price of $0.65 per share for a period of six years. We issued: (i) 681,818 of these units to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in an offshore transaction in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended; and (ii) 1,136,364 of these units to one U.S. person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these units to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended. Pursuant to the securities

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NOTE 12 – Equity

purchase agreements with each investor, we also agreed to file a Form S-1 registration statement related to the transaction with the SEC covering the shares underlying the units (excluding shares issuable upon exercise of the warrants); such Form S-1, which also included shares related to our 2014 Equity Line, was filed and subsequently deemed Effective by the SEC on May 8, 2014. 1,136,364 of these warrants were re-priced on June 16, 2015, to reflect a revised exercise price of $0.15 per share.

During his term as a consultant to the Company, our new CFO was issued 50,000 restricted shares at $0.80 per share on April 14, 2014 and 25,000 restricted shares at $0.373 per share on August 19, 2014, each grant being valued based on market close price on issue date, for aggregate deemed compensation totaling $49,325. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.

On May 1, 2014, 25,000 restricted common shares were issued to our former VP/COO as a signing bonus at a price of $0.62 per share based on market close price on issue date, for aggregate deemed compensation of $15,500. These shares were issued to one U.S. person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On May 22, 2014 KonaRed Corporation filed a Form S-8 Registration Statement to register a total of 4,000,000 shares with the SEC to be used for director, officer and employee compensation share issuances. An initial group of these shares (the "Award Shares") were then separately registered under the Securities Act, by filing on June 4, 2014, as amended, a Post-Effective amendment to the Form S-8 Registration Statement which contained a re-offer prospectus in reference to the Award Shares. Allocation of the Award Shares included a compensation bonus of 250,499 shares to our CEO and 83,167 Award Shares to each of our three other directors at a price of $0.627 per share based on market close price on issue date, for aggregate deemed compensation for past services of $313,500.

On October 1, 2014, 57,400 restricted common shares were issued to two employees for prior services rendered at a price of $0.3449 based on market close price on issue date for deemed compensation of $19,797. These shares were issued to U.S. persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

During the year ended 2014, we issued a total of 4,052,759 restricted common shares to a service provider for services rendered. These issuances were: (i) 352,759 at $0.2835 per share on October 21, 2014; (ii) 2,000,000 at $0.251 on December 2, 2014; and (iii) 1,700,000 at $0.141 on December 31, 2014, for aggregate deemed compensation of $841,707, each grant being valued based on market close price on issue date. These shares were issued to one U.S. person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – Equity (continued)

2014 Equity Line:

On February 3, 2014, we entered into an Equity Line Agreement and a Registration Rights Agreement (the "2014 Equity Line") with an Illinois limited liability company (the "Investor"), pursuant to which we have the right to sell to the Investor of up to $12,000,000 in shares of our common stock, subject to certain limitations set forth in the Equity Line Agreement filed with the SEC in a Current Report on Form 8-K on February 5, 2014. The Term of the 2014 Equity Line is thirty months. As aforementioned, the shares related to this Equity Line were registered with the SEC in a Form S-1 which was deemed Effective on May 8, 2014. We may direct the Investor, at our sole discretion and subject to certain conditions, to purchase up to $100,000 worth of shares of our common stock on any single business day so long as at least one business day has passed since the most recent purchase. Such sales may increase up to a maximum of $500,000 per purchase, depending on the closing sale price of our common stock.

The purchase price of such common stock sold to the Investor is based on the prevailing market price of our common stock preceding the time of any such sale with our company knowing the exact price prior to making sales, if any, to the Investor and we control the timing and amount of sales, if any, of common stock to the Investor. There are no upper limits to the price the Investor may pay to purchase our common stock. No sales of common stock to the Investor may occur below a floor price as set forth in the 2014 Equity Line Agreement. In addition, we may direct the Investor to purchase additional amounts as Accelerated Purchases if on the date of a regular purchase the closing sale price of our common stock is not below the threshold price as set forth in the 2014 Equity Line Agreement.

Our sales of shares of common stock to the Investor under the 2014 Equity Line Agreement are limited to no more than the number of shares that would result in the beneficial ownership by the Investor and its affiliates, at any single point in time, of more than 9.99% of the then outstanding shares of our common stock. The 2014 Equity Line Agreement contains customary representations, warranties, covenants, closing conditions and indemnification and termination provisions by, among and for the benefit of the parties. the Investor has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of our shares of common stock.

In consideration for entering into the 2014 Equity Line Agreement, we issued the Investor 872,727 common shares as a commitment fee (the “Commitment Shares”) and may issue up to 218,182 additional shares on a per share basis. During the year ended December 31, 2014, we issued 30,906 additional commitment shares during 17 transactions. The cost of the 903,633 shares issued for 2014 Equity Line underwriting fees have been recorded as a $904 debit to additional paid-in capital. The Commitment Shares were issued in reliance on an exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder, and were registered for sale under the Registration Statement on Form S-1 which was deemed Effective by the SEC on May 8, 2014. Actual sales of shares of common stock to the Investor under the Equity Line Agreement depend on a variety of factors to be determined by our Company from time to time, including (among others) market conditions, the trading price of our common stock and determinations by us as to available and appropriate sources of funding for our Company and its operations. The Equity Line Agreement may be terminated by us at any time at our discretion without any monetary cost to us. During the year ended December 31, 2014 we issued 3,697,889 shares under the 2014 Equity Line for aggregate proceeds of $1,700,001. We may not make sales under the 2014 Equity Line if our share price is less than $0.35. No shares have been issued under the 2014 Equity Line during the period ended September 30, 2015.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – Equity (continued)

2015 Share Transactions:

On February 6, 2015, June 9, 2015, and September 15, 2015 respectively we issued 600, 1,200, and 1,000 restricted common shares at $0.0752, $0.14 and $0.075 per share to an employee for compensation. These share issuances were issued based on market close price on issue date for deemed payments totaling of $288. These shares were issued to US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On February 9, 2015, July 6, 2015, and September 30, 2015 respectively we issued 11,000, 6,025, and 9,000 restricted common shares at $0.0752, $0.1108 and $0.078 per share to a third party for services rendered. These share issuances were issued based on market close price on issue date for deemed payments totaling of $2,245. These shares were issued to US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On April 30, 2015, July 9, 2015 and September 30, 2015 we issued 131,579, 226,860 and 320,513 restricted common shares at $0.19, $0.1102, and $0.078 per share, respectively as compensation to our CFO. These grants were valued based on market close price on issue date, for aggregate deemed compensation totaling $75,000. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.

On May 1, 2015, we issued 300,000 restricted common shares to a third party for services rendered, such issuance which was valued at $0.20 per share for a deemed aggregate proceeds of $60,000, such grant being valued based on market close price on issue date. These shares were issued to one U.S. person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On June 5, 2015, we issued 1,700,000 restricted common shares valued market close price on date of issue at $0.1402 for aggregate deemed proceeds of $238,340 to a related party as a fee for a loan to the Company. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.

On August 11, 2015 and September 30 2015 respectively, we issued 1,333,333 and 502,283 restricted common shares to our new President and Chief Operating Officer at $0.107 and $0.078 per share. These shares were valued based on market close price on issue date for deemed proceeds of $181,845. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – Equity (continued)

On September 21, 2015, September 24, 2015, and September 30, 2015 respectively we issued 26,000, 12,500, and 50,000 restricted common shares at $0.0901, $0.0829 and $0.078 per share to three separate third parties for services rendered. These share issuances were issued based on market close price on issue date for deemed payments totaling of $7,279. These shares were issued to three US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

2015 Equity Line and related transactions:

On June 16, 2015, we entered into a $10,250,000 Purchase Agreement and Registration Rights Agreement (the "2015 Equity Line") with the same Investor who provided the 2014 Equity Line. Upon signing the Purchase Agreement, the Investor purchased 1,666,667 shares of our common stock at $0.15 per share for proceeds of $250,000 as an initial purchase under the agreement. Subsequently, under the terms of the Registration Rights Agreement, we filed a Registration Statement on Form S-1 with the U.S. Securities & Exchange Commission (“SEC”) covering the shares that may be issued to the Investor. This Form S-1 was filed on July 6, 2015 and was deemed Effective by the SEC on July 16, 2015. Under the 2015 Equity Line we have the right, in our sole discretion, over a 30-month period to sell up to an additional $10 million of our common stock to Investor in amounts from up to 150,000 shares per sale to up to 350,000 shares per sale, depending on certain conditions as set forth in the Purchase Agreement. There are no upper limits to the price Investor may pay to purchase our common stock and the purchase price of shares of Common Stock sold pursuant to the Purchase Agreement will be based on prevailing market prices of our Common Stock at the time of sales without any fixed discount, and the Company will control the timing and amount of any sales of Common Stock to Investor. In addition, the Company may direct Investor to purchase additional amounts as accelerated purchases if on the date of a regular purchase the closing sale price of the Common Stock is not below the threshold price as set forth in the 2015 Purchase Agreement. Investor shall not have the right or the obligation to purchase any shares of our common stock on any business day that the price of our common stock is below the floor price as set forth in the 2015 Purchase Agreement. The Equity Line Agreement may be terminated by us at any time at our discretion without any monetary cost to us.

The 2015 Purchase Agreement contains customary representations, warranties, covenants, closing conditions and indemnification and termination provisions by, among and for the benefit of the parties. Investor has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company’s shares of common stock. In consideration for entering into the

$10,250,000 million agreement, we issued to Investor 2,666,667 shares of our common stock as a commitment fee and may issue up to an additional 666,666 shares as commitment fees pro rata if and when we sell to Investor up to an additional $10 million of our common stock. The agreement may be terminated by us at any time at our discretion without any monetary cost to us. Actual sales of shares of Common Stock to Investor LPC under the 2015 Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time, including (among others) market conditions, the trading price of the Common Stock and determinations by the Company as to available and appropriate sources of funding for the Company and its operations. During the period ended September 30, 2015 we issued 3,750,000 sale shares and 23,008 per sale commitment shares under the 2015 Equity Line for aggregate cash proceeds of $345,120. Proceeds received by the Company under the agreement are used for general corporate purposes.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – Equity (continued)

On June 16, 2015, as part of the Purchase Agreement, we issued LPC 1,666,667 restricted shares of our common stock at $0.15 per share for proceeds of $250,000 as an initial purchase under the Purchase Agreement. These shares were issued to a U.S. person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended. Parallel to the Purchase Agreement we also entered into a Registration Rights agreement whereby we agreed to file a registration statement related to the transaction with the SEC and this registration statement (the "July Registration Statement") became effective on July 16, 2015.

On June 15, 2015, the Company amended a warrant initially issued to Investor on January 27, 2014, to modify the exercise price from $0.65 to $0.15. The fair value of this warrant re-pricing was calculated based on the difference between Black Scholes option pricing model valuations on original grant date of January 27, 2014 and re-pricing date of June 15, 2015. This expense was recorded as a loss on equity modification of $41,753, with an offset to additional paid in capital.

On June 30, 2015, 1,666,667 shares of restricted common shares were issued to another investor, unrelated to Investor, under a securities purchase agreement dated June 30, 2015 at a price of $0.06 per share for aggregate proceeds of $100,000. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended. These shares were included in the Registration Statement on Form S-1 filed on July 6, 2015,which was made Effective by the SEC on July 16, 2015.

Warrants:

On January 27, 2014, we issued 1,818,182 units to two investors in a non-brokered private placement at a purchase price of $0.55 per unit for gross proceeds of $1,000,000. Each unit was comprised of one common share and one six year warrant exercisable into one common share at a price of $0.65 per share. On June 15, 2015, 1,136,364 of these warrants were re-priced from an exercise price of $0.65 per share to an exercise price of $0.15 per share. This re-pricing created a loss on equity modification of $41,753.

On August 18 2015, as additional consideration for issuance of the Senior Convertible Note we granted the lender a six year warrant to purchase 3,750,000 shares of our common stock at an exercise price of $0.10 per share valued at $277,014. This warrant includes the same ownership limitation described above in connection with the Convertible Note. This warrant includes cashless exercise rights.

On September 30, 2015, as additional consideration for the Promissory Notes, the Company granted the Investors five-year warrants to purchase an aggregate of 3,125,000 shares of our common stock at an exercise price of $0.08 per share valued at $167,788. These warrants include cashless exercise rights.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – Equity (continued)

The following table summarizes the Company’s warrant activity for the period ended September 30, 2015, and the year ended December 31, 2014:

	Number of Warrants		Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term (in years)*		Intrinsic Value**

Outstanding at December 31, 2013	5,803,666
January 12, 2014 - Expiration of warrants previously granted to creditor	(1,837,000)		-	-		-
Net	3,966,666		0.65	3.05		Nil
January 27, 2014 - Granted with units	1,136,364		0.15	4.33		Nil
January 27, 2014 - Granted with units	681,818		0.65	4.33		Nil
Outstanding at December 31, 2014	5,784,848	$	0.63	3.45	$	Nil
August 18, 2015 - Granted for issuance of senior convertible note	3,750,000		0.10	5.89		Nil
Outstanding at September 30, 2015	5,784,848	$	0.37	4.41	$	Nil

* (remaining term as of September 30, 2015)

**(intrinsic value based on the closing share price of $0.078 on September 30, 2015)

Options:

On November 25, 2013, the Company issued 250,000 three year options to purchase 250,000 restricted shares of common stock to a consultant ("Consultant") for past services rendered. The options vested immediately and are exercisable at $0.70 per share. The cost of these options was recorded as $173,806 at November 25, 2013 based on a Black-Scholes valuation using the inputs detailed below.

On December 12, 2013, the Company adopted an incentive stock option plan (the "Stock Option Plan"). The Stock Option Plan allows for the issuance of up to 11,000,000 options to acquire 11,000,000 restricted shares of the Company's common stock, with a maximum exercise period of ten years, to be granted to eligible employees, officers, directors, and consultants. On December 12, 2013 3,000,000 options were granted under the Stock Option Plan to directors and officers of the Company.

With respect to the options granted on December 12, 2013, for the years ended December 31, 2013 and December 31, 2014 Black-Scholes valuation costs were recorded as follows: (a) service period amortization of $47,141 for 2013 for 1,000,000 five year options granted to CEO exercisable at $0.45 per share with vesting after October 4, 2014 if the share price of the Company was above $1.00 per share; (b) service period amortization of $47,141 for 2013 for 1,000,000 five year options granted to (former) CSO ("Director One") exercisable at $0.45 per share with vesting after October 4, 2014 if the share price of the Company was above $1.00 per share; (c) expensing of $732,886 in 2013 for 1,000,000 five year options granted to (former) CFO exercisable at $0.74 per share which vested immediately. On December 19, 2014, all of above options grants were cancelled with the consent of the grantees.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – Equity (continued)

Due to the cancellation on December 19, 2014 of the unvested options which had been granted to the CEO and former CSO on December 12, 2013 and the 750,000 vested options which had been granted to Director Two on January 7, 2014, prior Black-Scholes expenses for these options were reversed for the year ended December 31, 2014.

On December 19, 2014, 6,750,000 options were granted under the Stock Option Plan. Black-Scholes valuation costs at December 31, 2014 and for the current period for these options were recorded as follows based on the input factors detailed in the table below: (a) December 19, 2014 expensing of $152,314 for 1,000,000 five year options granted to CEO exercisable at $0.17 per share which vested immediately; (b) service period amortization of $7,511 the year ended December 3, 2014 and $165,266 for the period ended September 30, 2015 for 1,500,000 options granted to CEO exercisable at $0.17 per share of which 750,000 vested on June 30, 2015, and 750,000 vest on December 31, 2015; (c) expensing of $152,314 each for individual grants of 1,000,000 five year options each granted to Director One and Employee exercisable at $0.17 per share which vested immediately; (d) expensing of $114,236 each for individual grants of 750,000 five year options each granted to Director Two, Director Three, and CFO exercisable at $0.17 per share which vested immediately.

The fair value of the December 19, 2014 options grants was calculated on the date of grant using a Black Scholes option pricing model with the following assumptions :

Risk free comparative	Risk free rate	Dividend yield	Volatility period	Volatility rate	Estimated life	Exercise Price	Grant Date Stock price

2.5 year average of US Treasury Constant Maturities	0.85%	0.0%	2.5 years	205%	2.5 years	$0.17	$0.17

The expensing and amortization of all options grants have been credited to Additional Paid-In Capital.

A summary of changes in outstanding stock options for the period ended September 30, 2015 and the year ended December 31, 2014 is as follows:

	Number of Options		Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term (in years)*		Intrinsic Value**

Outstanding at December 31, 2013	3,250,000	$	0.56	-	$	-
January 7, 2014 – Grant to director	750,000		0.81	-		-
December 19, 2014 - Cancellations	(3,750,000)		-	-		-
December 19, 2014 - Grants to directors, officers and employee	6,750,000		0.17	4.22		Nil
Outstanding at December 31, 2014	7,000,000	$	0.19	4.11	$	Nil
Nil activity	-		-	-		-
Outstanding at September 30, 2015	7,000,000	$	0.19	4.11	$	Nil

* (remaining term as of September 30, 2015)

**(intrinsic value based on the closing share price of $0.078 on September 30, 2015)

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KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – Equity (continued)

The following table summarizes information about the options outstanding at September 30, 2015:

Options Outstanding					Options Exercisable
Exercise Prices	Options Outstanding	Weighted Average Exercise Price	Aggregate Intrinsic Value**	Weighted Average Remaining Contractual Life (years)*	Options Outstanding	Weighted Average Exercise Price	Aggregate Intrinsic Value**	Weighted Average Remaining Contractual Life (years)*

$0.70	250,000	$0.70	$nil	1.16	250,000	$0.70	$nil	1.16
$0.17	6,750,000	$0.17	$nil	4.22	6,000,000	$0.17	$nil	4.22
Totals	7,000,000	$0.19	$nil	4.11	6,250,000	$0.19	$nil	4.10

* (remaining term as of September 30, 2015)

**(intrinsic value based on the closing share price of $0.078 on September 30, 2015)

NOTE 13 – Commitments and Contingencies

Litigation

Settlement of Copyright Dispute

On March 27, 2015 we received correspondence from an attorney which alleged a service provider engaged for us by a distributor to provide social media postings services had violated the copyright of two related clients regarding certain pictures used by the service provider. On September 22, 2015, this matter was settled for a net payment of $75,000, of which the Company's insurance providers paid $59,000 and the company paid $16,000.

Various lawsuits, claims and other contingencies arise in the ordinary course of the Company’s business activities. As of the date of these financial statements, other than the aforementioned contingency we know of no threatened or pending lawsuits, claims or other similar contingencies.

License Agreement

As part of our patent dispute settlement with VDF, on January 28, 2014 we entered into a coffee fruit patent license, Coffeeberry® trademark license and raw materials supply agreement (the "License Agreement") with VDF.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 13 – Commitments and Contingencies (continued)

Settlement of Patent Dispute

On January 28, 2014, we entered into a settlement agreement (the "Settlement Agreement") with VDF FutureCeuticals, Inc. based on a series of agreements to settle claims asserted by and against the parties with respect to an action filed by VDF against our predecessor company SITC; and resolve a petition for cancellation of certain trademark registrations filed by SITC. Copies of the agreements which formed the settlement were included with our filing of a Current Report on Form 8-K on February 3, 2014. A summary of each agreement is as follows:

1. Settlement Agreement

Under the Settlement Agreement the parties mutually filed voluntary dismissals with respect to the foregoing claim and petition for cancelation. The parties released each other from liability arising or accruing prior to January 28, 2014 for past monetary damages for any patent infringements and all other claims that the parties brought or could have brought prior to January 28, 2014. In addition, our Company agreed to formally abandon all pending patent applications directed to coffee berries or coffee berry technology and cancel with prejudice all trademark proceedings.

2. License Agreement

The License Agreement comprises a coffee fruit patent license, Coffeeberry® trademark license and raw materials supply agreement. The key elements include:

(a) Patents and Trademark License

In exchange for our ongoing compliance with certain Alternative Minimum Payments and royalties (and the terms and conditions related to raw materials discussed below), VDF granted us a non-exclusive, non-transferrable, non-sublicensable license to use and practice certain VDF patent rights and a non-exclusive license to use certain VDF trademarks and trademark rights.

(b) Raw Materials

VDF will supply us with raw materials. Negotiations were completed during November 2014 which created a mutually determined phase-in schedule for raw materials sales. We are also permitted to have raw materials manufactured by a third party (subject to some limitations) solely for the use in the products that we sell. Additionally, we must share with VDF all details of certain input raw materials.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 13 – Commitments and Contingencies (continued)

The License Agreement requires us to make quarterly payments, which may be a base amount (an "Alternative Minimum Payment", or "AMP"), or be grossed up to a higher amount subject to our use of rights under the License. The amount and schedule for the remaining Alternative Minimum Payments is as follows:

Three Month Period Ended	Due Date	Amount

March 31, 2015	May 15, 2015	$75,000
June 30, 2015	August 14, 2015	$75,000
September 30, 2015	November 14, 2015	$75,000
December 31, 2015	February 14, 2016	$75,000
March 31, 2016	May 15, 2016	$75,000
June 30, 2016	August 14, 2016	$100,000
September 30, 2016	November 14, 2016	$100,000
December 31, 2016	February 14, 2017	$100,000
March 31, 2017	May 15, 2017	$100,000
June 30, 2017	August 14, 2017	$100,000
September 30, 2017	November 14, 2017	$100,000
December 31, 2017	February 14, 2018	$100,000
March 31, 2018	May 15, 2018	$100,000
June 30, 2018	August 14, 2018	$125,000
September 30, 2018	November 14, 2018	$125,000
December 31, 2018	February 14, 2019	$125,000
March 31, 2019	May 15, 2019	$125,000
Each quarter end thereafter	45 days after each quarter end	$150,000

AMP's are due forty five days after the end of each reporting period. During the year ended December 31, 2014, we made a cash license payment to VDF of $75,000 for the June 30, 2014 period AMP, and rolled over into the Senior Convertible Note (see below) the AMPs for the periods ended September 30, 2014, December 31, 2014, March 31, 2015, June 30, 2015 and September 30, 2015.

3. Senior Convertible Note

The Senior Convertible Note provides that we may, at our option, have regularly scheduled License fee payments treated as debt and rolled over into the Senior Convertible Note which we have issued to VDF.

The maturity date of the Senior Convertible Note is December 31, 2018 unless: (i) the Senior Convertible Note is accelerated pursuant to an event of default, or (ii) the License Agreement is terminated and all accrued and unpaid obligations under the Senior Convertible Note have been paid. Interest on the Senior Convertible Note is 7% per annum, subject to adjustment to 12% for events of default. On the maturity date, we must pay VDF all principal, unpaid interest and late charges, if any, and we have the right, subject to certain limitations, to prepay principal at any time and from time to time. No indebtedness of our company shall rank senior to the payments due under the Senior Convertible Note unless prior written consent of VDF is obtained; and payments under the note are secured by the Security Agreement as described below.

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NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 13 – Commitments and Contingencies (continued)

At any time and at the option of VDF, any principal outstanding under the Senior Convertible Note may be converted into shares of our common stock based on the terms of the Senior Convertible Note. Originally the Conversion Price of the Senior Convertible Note was $0.65 per share. On December 19, 2014, this was adjusted to $0.6163 per share based on our issuance of stock options. On January 20, 2015 the Conversion Price was adjusted to $0.5623 based on our issuance of an unsecured subordinate convertible debenture to a third party; on June 15, 2015 the Conversion Price was adjusted to $0.5572 as the result of re-pricing of warrants issued to a third party; and on September 30, 2015 the Conversion Price was adjusted to $0.4536 based on our issuance of a fixed conversion price convertible debenture to a third party, and issuances of warrants and stock to third parties.

4. Pledge and Security Agreement

Under the Pledge and Security Agreement we pledged, collaterally assigned and granted to VDF, a security interest in all of our right, title and interest, whether now owned or hereafter acquired, in and to our Company’s property to secure the prompt and complete payment and performance of obligations existing under any of the agreements.

5. Warrant

As part of the patent settlement, we issued VDF a warrant (the "VDF Warrant") entitling VDF, from any time after the occurrence of a Warrant Exercise Event until the fifteenth anniversary of the issuance of the VDF Warrant, to purchase from our Company, shares of our common stock representing ten percent (10%) of our fully diluted outstanding shares of common stock at a purchase price of $0.001 per share. No circumstances have yet occurred which classify as a Warrant Exercise Event and therefore there is no right in place for VDF to exercise the VDF Warrant.

A Warrant Exercise Event occurs if any of the following events occur:

i.	our Company reports $25,000,000 or more of gross sales in any fiscal year in our audited financial statements for such fiscal year;
ii.	our Company has a class of securities listed for trading on the New York Stock Exchange, the American Stock Exchange or NASDAQ;
iii	our Company maintains an aggregate market capitalization of our company’s outstanding capital stock of at least $125,000,000 for twenty (20) consecutive trading days based on the closing prices for the shares of our common stock as reported on the OTC Bulletin Board; or
iv.	our Company has a change of control as defined in the VDF Warrant.

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KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 13 – Commitments and Contingencies (continued)

6. Registration Rights Agreement

Under the Registration Rights Agreement we granted VDF or an assignee demand registration rights and incidental registration rights with respect to: (i) any shares of our common stock issued upon conversion of the Senior Convertible Note; (ii) any shares of our common stock issued upon exercise of the VDF Warrant; and (iii) any shares of our common stock acquired by VDF or an assignee from our Company after the date of the Registration Rights Agreement upon exercise or conversion of other convertible securities that are acquired by VDF or an assignee from our Company after the date of the Registration Rights Agreement. Pursuant to VDF’s demand registration right, at any time or from time to time, a holder or holders holding a majority of registrable securities then outstanding may require our Company to use our best efforts to effect the registration under the Securities Act of 1933, as amended, of all or part of their respective registrable securities (subject to any limits that may be imposed by the Securities and Exchange Commission pursuant to Rule 415 under the Securities Act), by delivering a written request to our company. In addition to the registration rights granted to VDF, there are restrictions on our granting of registration rights to other parties.

7. Investor Rights Agreement

Under the Investor Rights Agreement VDF has the right to designate that number of nominees to our board of directors such that the total number of directors designated by VDF is in proportion to its percentage ownership of the outstanding voting power of the Company. From and after the date of the Investor Rights Agreement and until such time as: (i) the Senior Convertible Note has terminated; (ii) the VDF Warrant has terminated or been exercised; and (iii) VDF’s percentage interest is less than 1%, if VDF does not have a designee on our board of directors, VDF shall have the right to appoint one individual as a non-voting observer entitled to attend meetings of our board of directors. Also pursuant to the Investor Rights Agreement, for so long as: (i) the Senior Convertible Note remains outstanding, (ii) the VDF Warrant remains outstanding, or (iii) VDF owns a percentage interest equal or greater to 10%, we will require VDF’s consent before taking certain corporate actions, including, among others: (a) amending our constating documents, (b) making any material change to the nature of our business, (c) incurring indebtedness exceeding $7,500,000 at any one time outstanding; or (d) declaring or paying dividends.

NOTE 14 – Subsequent Events

Subsequent to the period ended September 30, 2015, 2,410,462 shares have been issued under the 2015 Equity Line for aggregate proceeds of $156,930.

Subsequent to the period ended September 30, 2015, we issued 1,381,025 and 2,000,000 restricted common shares to a third party at $0.0745 and $0.068 per share for services rendered for aggregate deemed compensation of $238,886, each grant being valued based on market close price on issue date. These shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

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KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 14 – Subsequent Events (continued)

Subsequent to the period ended September 30, 2015, we issued 348,472 restricted common shares to a third party at $0.0699 per share for services rendered for aggregate deemed compensation of $24,358, such grant being valued based on market close price on issue date. These shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

It was management's assessment that there were no other events which should be classified as subsequent events for the period of these financial statements.

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ITEM 2. MANAGEMENTS’ DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

FORWARD LOOKING STATEMENTS

Certain information included herein contains forward-looking statements that involve risks and uncertainties within the meaning of Sections 27A of the Securities Act, as amended; Section 21E of the Securities Exchange Act of 1934. These sections provide that the safe harbor for forward looking statements does not apply to statements made in initial public offerings. The words, such as "may," "would," "could," "anticipate," "estimate," "plans," "potential," "projects," "continuing," "ongoing," "expects," "believe," "intend" and similar expressions and variations thereof are intended to identify forward-looking statements. These statements appear in a number of places in this Form 10-Q and include all statements that are not statements of historical fact regarding intent, belief or current expectations of the Company, our directors or our officers, with respect to, among other things: (i) our liquidity and capital resources; (ii) our financing opportunities and plans; (iii) continued development of business opportunities; (iv) market and other trends affecting our future financial condition; (v) our growth and operating strategy. Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The factors that might cause such differences include, among others, the following: (i) we have incurred significant losses since our inception; (ii) any material inability to successfully develop our business plans; (iii) any adverse effect or limitations caused by government regulations; (iv) any adverse effect on our ability to obtain acceptable financing; (v) competitive factors; and (vi) other risks including those identified in our other filings with the Securities and Exchange Commission.

The following discussion and the information provided contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this Report. Our actual results may differ materially from the results anticipated in any forward-looking statements in this Report due to a variety of factors, including, without limitation those set forth as "Risk Factors" in our Form S-1 which became Effective on July 16, 2015. This can be found along with all our filings to the SEC at www.sec.gov.

Overview

KonaRed Corporation (hereinafter KonaRed Corporation may be referred to: "KonaRed Corporation", "KonaRed", "We”, “Us”, the “Registrant”, or the “Company”) was incorporated on October 4, 2010 in the state of Nevada. The Company was organized under the name TeamUpSports Inc. and on September 9, 2013 entered into an agreement (the "Asset Purchase Agreement") to acquire the assets of Sandwich Isles Trading Co, Inc. ("SITC"). SITC was incorporated in the State of Hawaii on August 22, 2008 and its operations, which we have taken over, include the business of distributing, marketing and selling beverages and other products produced from the fruit of the coffee plant.

After the acquisition, as part of its business plans, the Company: changed its name from TeamUpSport Inc. to KonaRed Corporation; executed a 13.5 to one forward stock split of the authorized, and issued and outstanding shares of its common stock; and changed its year-end from May 31st to December 31st. The financial statements included in this Form 10-Q Report reflect the re-statement of some data from prior periods so as to conform to the revised shares amounts and the new year-end cycle. These financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States.

Unless otherwise stated, “$” refers to United States dollars. Our fiscal year end is December 31st.

The Company’s common stock is publicly traded on the OTC Markets Group’s OTCQB under the symbol: KRED.

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Principal Products

Our principal product is our premium coffee fruit wellness drink, KonaRed Antioxidant Juice, offered to retail consumers across the United States, Canada and Asia. Previously discarded as a byproduct of coffee production, the fruit surrounding the coffee seed (coffee bean) has been recognized as containing powerful anti-oxidants.

Our company’s consumer products line consists of the following proprietary formulations:

●

10.5 oz. KonaRed Original Antioxidant Juice (1 serving)

Our 10.5 oz. is also now also being featured at numerous retailers including Kroger locations.

●

10.5 oz. KonaRed Antioxidant (1 serving) Additional Flavor Combinations Including Organic Green Tea and Coconut Water

In total we offer 3 different beverages in the 10.5oz size: Original Hawaiian Coffeeberry, Hawaiian Coffeeberry with Organic Green Tea, and Hawaiian Coffeeberry with Coconut Water.

●

16 oz. KonaRed Original Antioxidant Juice (2 servings)

The 16 oz. superfruit drink enjoys widespread placement in cold juice coolers in a myriad of retail major establishments including Walmart.

Other Products

We also produce wellness nutritional products which are now available at select locations of Vitamin Shoppe nationwide and in several major chains in Hawaii, including Foodland, CVS Longs, Times Supermarkets, Walmart, 7 Eleven, Whole Foods, and many others:

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KonaRed On-the-Go Packs (15 per box)

KonaRed Hawaiian Superfruit Powder

(100% soluble coffee fruit powder)

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New Products

This summer we launched Performance Powders as a new product line and subsequent to quarter end we added KonaRed whole bean coffee to our product offerings. We are now working on development of a line of cold-brew coffee beverages.

Ingredient Division Launch

We will soon begin selling raw coffee fruit powders and liquid extracts to other companies. This new revenue and margin growth initiative will begin following the 2015 Hawaii coffee harvest season, which runs from September to January. We will begin offering an American made, U.S. Hawaiian grown coffee fruit supply to the world. We expect this newly formed division of KonaRed will add to both to our top line sales and bottom line.

Use of Patents

A key element of our business is the License we have been provided by VDF FutureCeuticals Inc. ("VDF") which provides us with the use of VDF's coffee fruit patents and Coffeeberry® trademark license. The License Agreement has effectively formed a strategic alliance between KonaRed and VDF and eliminated competition and patent defense costs between the parties for rights to valuable proprietary coffee fruit research and development ("R&D").

Leveraging the R&D performed at our original Maui facility, we developed the necessary processing and manufacturing intellectual property (“IP”) for processing and manufacturing our base ingredient - the coffee fruit (and have subsequently merged this with the IP provided by VDF). The License Agreement provides us with access to use of VDF's patents, as existing and/or modified in the future, along with the processes, products, methods, compositions and know-how developed by VDF related to the patented Coffee Cherry related inventions, trade secrets and know-how.

Operations, Facilities and Distribution Method for Our Products

Our company utilizes an outsourcing business model which uses third parties for manufacturing and coffee fruit extraction, while maintaining in-house control of critical marketing, product development and warehousing/shipping functions.

Supply and Distribution for Our Product

Our company’s ability to secure exclusive Kona-based and other Hawaiian coffee fruit has elevated the stature of the home grown brand image and allows our Company to operate without constraints in the supply chain far out into the future. We have been successful in securing agreements structured as 5-year arrangements containing roll-over provisions. These agreements are based on our commitment to exclusively purchase coffee fruit from the supplier, and the supplier is obligated to provide coffee fruit exclusively to our company. Our Company’s principal supplier of raw coffee fruit is Greenwell Farms, Inc., a Hawaii corporation with a long established history as a major Hawaiian coffee supplier.

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Market

We believe our company has established a frontrunner position in the coffee fruit category, boasting a numerous retail entrees since its recent product launch. We first establish our products in the upstart coffee fruit sector on our home turf in Hawaii and then have expanded across the USA, Canada and Asia by winning placements at Kroger, Target, Vitamin Shoppe and other major retailers. Moving forward we plan to consolidate and expand on our domestic success and work toward developing international distribution opportunities in South East Asia, which have begun with our sales into Japan. In the near term we expect to establish sales channels in Korea and China.

Expansion into Japan

During the first quarter of 2015, we have begun the process of expansion into Japan by executing an agreement with Asplund Co. Ltd. for distribution of our beverage products into 250 retail stores specializing in nutritional products. We delivered our first order to Asplund Co. Ltd. in June, 2015 and have taken re-orders from date.

Sales Strategy

Our sales strategy for beverage products and wellness supplement products is to source sales and ship directly from our warehouse in San Clemente, California. We have also retained manufacturers’ sales representatives who work to calibrate our overall sales efforts. We've learned the importance of supporting our distributor network through “on the ground” sales personnel and will add to our sales force as markets develop. For an emerging product such as ours, merchandising follow-up, dialog with store managers, and coordination of promotions and pricing are critical in maintaining brand momentum.

Although KonaRed was invented as a wellness product, we believe consumer acceptance of our beverage products now places us both within the 'functional beverage' and 'premium juice' retail categories. A 'functional beverage' is defined as one which has certain attributes, such as Antioxidants, whereas a 'premium juice' is simply a tasty product which consumers enjoy.

The entrance of leading beverage monoliths into the functional beverage category has tightened pricing but also created a vibrant mergers and acquisitions environment for emerging brands like KonaRed.

Takeovers and mergers are a hallmark of our industry. Recent beverage industry deals have included:

	●	Coca Cola acquired Zico Coconut Water in January 2014;

	●	Pepsi acquired a majority stake in O.N.E. Coconut Water in April 2012;

	●	InBev has made a series of investments in Sambazon (in August 2012, December 2011, and December 2008);

	●	InBev has also made a series of investments in Vita Coco in May 2012 and December 2010; and

	●	Undertaking of a long-term strategic deal wherein Coca-Cola will acquire an approximately 16.7% equity stake

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Market Development and Metrics

Our long-term objective is to develop KonaRed into a nutritional company which supplies consumers with a variety of high quality food and beverage products. We plan to achieve this based on a strategy of expanding our retail footprint through a series of revenue generating distribution channels.

Presently, our predominant focus is our beverage business and we are generating revenues through the following distribution channels:

● Direct Store Distributors

● Broadline Distributors

● Direct to Retail

● Direct to Consumer

● Raw Material Ingredient Sales

In summary, our sales expansion priorities are:

(1) expansion of wholesale distribution

(2) retail chain success

(3) growth of direct to retail sales

(4) growth of direct to consumer sales, and

(5) development of raw material ingredient sales.

Competition

The beverage industry is extremely competitive. The principal areas of competition include pricing, packaging, development of new products and flavors, and marketing campaigns. Our product is competing directly with a wide range of drinks produced by a relatively large number of manufacturers. Most of these brands have enjoyed broad, well-established national recognition for years, through well-funded ad and other marketing campaigns. In addition, companies manufacturing these products generally have far greater financial, marketing, and distribution resources than we do.

Our product will compete generally with all liquid refreshments, including numerous specialty beverages, such as: SoBe; Snapple; Arizona; Vitamin Water; Gatorade; and Powerade. We will compete directly with other consumer products participants in the nascent coffee fruit sector including Bai5 and SoZo Coffeeberry. As we are still a relatively new business and we have modest revenues, we believe that we are a small company in the general liquid refreshments market and health liquid refreshment market.

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Intellectual Property

KonaRed® is a registered trademark in the United States and in Japan and we intend to seek a number of trademarks for slogans and product designs. We also hold trademark rights to the “Paradise in a Bottle®” tag line; and rights to a suite of international CoffeeBerry® trademarks provided under our License with VDF. We believe we have the rights to use the necessary processing and manufacturing intellectual property relating to processing and manufacturing our base ingredient (the coffee fruit) and our proprietary beverage formulas. However, we do not own the manufacturing process for making the finished beverages. We intend to aggressively assert our rights under trade secret, unfair competition, trademark and copyright laws to protect our intellectual property, including product design, product research and concepts and recognized trademarks. These rights are protected through the acquisition of patents and trademark registrations, the maintenance of trade secrets, the development of trade dress, and, where appropriate, litigation against those who are, in our opinion, infringing these rights.

Partnership Initiative with VDF FutureCeuticals Inc.

We are in partnership with VDF FutureCeuticals, Inc. ('VDF') for the development of the coffee fruit market.

VDF (www.futureceuticals.com) is a leader in the bio-research, development, and manufacture of high-quality fruit, vegetable, and grain-based nutraceutical and functional food ingredients. VDF is committed to discovery-based research that leads to the expansion of human health, and is the trusted partner-of-choice for companies in search of creative, ethical solutions for the health and wellness needs of today’s consumer. Its sister company, Van Drunen Farms, was founded over one hundred years ago, and has grown into one of the largest dried food ingredient manufacturers and suppliers in the world.

VDF is a major biotech and ingredient supplier and owner of the patent-protected CoffeeBerry® coffee fruit technology, a proprietary set of agricultural and industrial processes and a line of unique ingredients. VDF's patents and processes capture the same potent nutrition inherent in coffee fruit which had formed the basis of two provisional patent applications made by KonaRed based on the proprietary research and development which had been fully developed by KonaRed.

The partnership brings together the flavor profile of KonaRed’s beverages and the ingenuity, innovation, and ongoing chemistry and clinical research of VDF’s globally integrated CoffeeBerry® coffee fruit ingredient platform.

Seasonality of Business

The sales of our products are influenced to some extent by weather conditions in the markets in which we operate. Unusually cold or rainy weather during the summer months may have a temporary effect on the demand for our product and contribute to lower sales, which could have an adverse effect on our results of operations for such periods.

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Research and Development

Overview

Our R&D has focused on quinic acid, an antioxidant that is in greater abundance in the KonaRed beverage than any other molecule. With a molar mass of 192.17 g/mol, quinic acid is small by comparison to other organic chemicals known as polyphenols. Much of our research has been directed towards attempts to confirm whether there is a correlation between small molecular mass and high bioavailability (the body’s ability to readily absorb a substance introduced). In addition, our research has been focused on whether antioxidants with a high oxygen radical absorbance capacity, a method of measuring antioxidant capacities in biological samples, and a high bioavailability may provide a way to increase one’s cellular metabolic efficiency (“CME”). We believe that it is possible that increased CME may result in increased energy, reduction of metabolic oxygen related stress at the cellular level and reduction of inflammation. We intend to continue our research to the extent of our limited funds and to examine whether the consumption of KonaRed products, if established as substances that increase CME, might provide positive effects on human health by decelerating the death of cells without negative side effects. Such research is in a very preliminary stage, there is no proof that KonaRed can produce health benefits for humans, and we do not have the funds required to conduct an extensive research program on the matter.

In 2012, a series of tests were conducted at Cayetano University in Lima, Peru by a team of research physicians to determine the antiviral and anti-inflammatory properties of KonaRed in a clinical environment. The Cayetano University studies were commissioned by our Company. They were in-vitro (test tube) based studies and not human trials. The KonaRed extract was found to improve cell viability, increase T cell proliferation and improve antiviral defense. The foregoing conclusions were based on the results of antiviral activity and cell proliferate effect of KonaRed on mice.

In these limited tests, KonaRed’s coffee fruit demonstrated an antiviral effect, improving cell viability, increasing T cell proliferation and improving antiviral defense. The body’s first line of defense against viruses is the immune system. This comprises cells and other mechanisms that defend the host from infection in a non-specific manner. Because viruses use vital metabolic pathways within host cells to replicate, they are difficult to eliminate without using drugs that cause toxic effects to host cells in general. The foregoing limited studies suggested that KonaRed beverage’s coffee fruit could have antiviral effects upon consumption by humans.

As in any research and development program, further investigation and study is required. Whether KonaRed's beverage ultimately proves to be a useful CME supplement, and does so without negative effectives, and whether the promotion of CME proves to have therapeutic effects on humans, is unknown. To the extent our Company has funds available for research and development, management intends to pursue this line of research and investigation on a limited basis.

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Recent Research Studies

KonaRed continues to push forward on the science behind the Coffee Fruit. Resulting from our study on the effects of coffee fruit on inflammation and boosting immunity, we announced positive results for the effect of coffee fruit on anti-inflammation, immunostimulatory and antiviral effects of coffee fruit at the 15th International Congress of Immunology held in Milan, Italy on August 22 to 27, 2013.

Researchers from the Universidad Peruana Cayetano Heredia, Department of Cellular and Molecular Sciences, Lima, Peru, led by Dr. Jose L. Aguilar presented the research paper "Anti-inflammatory, Immunostimulatory and Antiviral effects of Coffee fruit (Coffea arabica)" and concluded "CFE showed anti-inflammatory properties on cellular and humoral levels supported by histological techniques. CFE decreased the secretion of pro-inflammatory cytokines such us IL6, TNFα and also MCP-1, thus diminishing cellular infiltration. Conversely, under viral simulation, CFE stimulated T cell proliferation and increased the percentage and activated cytotoxic T cells. Therefore, these results could attribute coffee fruit immunomodulatory and antiviral properties."

These results were presented at the annual conference of the International Congress of Immunology held in Milan Italy and demonstrate the efficaciousness of the active ingredients in KonaRed the Hawaiian Superfruit Antioxidant Wellness Beverage sold throughout Hawaii and select US markets.

Government Regulation

Our products are considered to be synonymous with coffee for regulatory purposes and are thus sold under the U.S. Food and Drug Administration’s (“FDA”) “Generally Regarded as Safe” (“GRAS”) regulatory umbrella. Accordingly, we are not required to petition for FDA approval of our coffee fruit offerings, which would be typical under standard dietary supplement guidelines. However, our Company has registered all of its supply chain subcontractors with the FDA as required and has met and answered all inquiries by the FDA. We believe we are in full compliance with all FDA regulations.

Employees

In addition to Shaun Roberts, who is our Chief Executive Officer, Board Chair and a Director, Kyle Redfield, who is our President and Chief Operating Officer, and John Dawe, who is our Chief Financial Officer, Secretary & Treasurer, we currently employ 7 full time and 3 part employees whom all work in the United States.

Description of Property

Our primary corporate office, warehouse and distribution center is located at 1101 Via Callejon #200, San Clemente, California 92673-4230 comprised of 2,558 square feet of office area and 8,344 square feet of warehouse area. Our company shares a two-year lease for this 10,000 square foot facility with Malie, Inc., (“Malie”) a company owned by our CEO and his spouse. The Company and Malie currently have a 24 month lease to May 31, 2016 and are committed to total lease payments of: (i) $9,812 for June 1, 2014 to May 31,2015; and (ii) $10,139 for June 1, 2015 to May 31, 2016. The Company's portion of payments under the lease are: (i) $7,539 for June 1, 2014 to May 31,2015; and (ii) $7,790 for June 1, 2015 to May 31, 2016. We believe that the condition of our principal office and warehouse are satisfactory, suitable and adequate for our current needs.

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Critical Accounting Policies

Basis of presentation

The financial statements of the company have been prepared in accordance with the accounting principles generally accepted in the United States of America ('GAAP').

Inventories

Inventories are primarily raw materials and finished goods. Inventories are valued at the lower of, cost as determined on an average basis, or market. Market value is determined by reference to selling prices at, or around, balance sheet date or by management’s estimates based on prevailing market conditions. Management writes down the inventories to market value if it is below cost. Management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if valuation allowance is required. Costs of raw material and finish goods inventories include purchase and related costs incurred in bringing the products to their present location and condition.

Revenue recognition

Sales revenue consists of amounts earned from customers through the sale of its consumer products and from delivery fees. Sales revenue is recognized when persuasive evidence of an arrangement exists, price is fixed or determinable, title to and risk of loss for the product has passed, which is generally when the products are received by the customers, and collectability is reasonably assured. Customers accept good FOB shipping point. Goods are sold on a final sale basis and in the normal course of business the Company does not accept sales returns.

Cost of goods sold

Cost of goods sold consists primarily of selling of raw materials and finished goods purchased from vendors as well as warehousing and distribution costs such as inbound freight charges, shipping and handling costs, purchasing and receiving costs.

Stock Based Payments

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EVENTS DURING THE QUARTER

Addition of Key Executive

On August 10, 2015 Kyle Redfield was hired as our Company's new President and Chief Operating Officer. Mr. Redfield brings an impeccable industry reputation and extensive experience in growing revenue and profitability across the food, beverage, healthy snacks and dietary supplement industry. For the past four years Mr. Redfield was General Manager of POM Wonderful, LLC, a beverage and fruit extracts company. At POM Wonderful he started the industrial division and grew the Company’s revenue significantly within 2 years time, and the division continues to grow today. The Wonderful Company, parent company to POM Wonderful, generated $3.5 billion in sales as of October 2014. Mr. Redfield managed a global sales team, designed and implemented all sales support materials, approved marketing trade expenditures and was the lead negotiator on multiple contracts with co-manufacturers. While expanding global sales reach including opening up the EU and Asia regions, he created multiple processes for customer service, shipping, technical and regulatory compliance, finance and production and was responsible for full management of profit & loss,, overhead, travel & entertainment, and budgeting. Mr. Redfield will oversee KonaRed’s global sales efforts, new product development, staff management, forecasting, production, distribution and day-to-day operations. His focus will be on expanding the sales and marketing strategy to increase revenue and profitability.

Concurrent with recruiting Kyle Redfield, Mr. Shaun Roberts resigned his post as President in favor of Mr. Redfield and maintains his position as Chief Executive Officer and Board Chair.

Japan

In June, 2015 we commenced sales of our beverages to Asplund Co. Ltd. in Japan and have had continued re-orders since that time. This relationship establishes a base for our expansion into Asia. We are now working to develop sales channels in Korea and China.

Walmart

During summer 2015, Walmart advised KonaRed and 10,000 of its other suppliers that substantially higher fees would be charged to suppliers for products placed in their stores. We have discontinued sales to Walmart due to these fees.

Target

During the summer we received an invitation from Target Corporation, which is the second largest discount retailer in the U.S., and in July, 2015 we commenced sales of our beverages in select Target stores. Re-orders have been steady since start date and we believe Target will be a major customer as our relationship develops.

Marketing

Subsequent to the addition of our new President, we implemented changes to our marketing strategies with the goal of increasing sales on a rapid basis. This included cancellation on September 16, 2015 of the Sales and Marketing Agreement executed with Splash Beverage Group Inc. on April 22, 2014. We are now managing all marketing initiatives in-house to optimize cost and delivery.

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RESULTS OF OPERATIONS

The following discussion and analysis covers material changes in the financial condition of our Company for the periods ended September 30, 2015 and September 30, 2014. A summary is as follows:

	Nine Months ended September 30, 2015			Nine Months ended September 30, 2014

Sales	$	587,705		$	1,058,808
Cost of goods sold		472,954			875,115
Gross Margin		114,751			183,693
Research and development		4,610			3,300
Advertising and marketing		269,047			861,955
General and administrative		2,098,375			2,473,013
Operating expenses		2,372,032			3,338,268
Loss from operations		(2,257,281	)		(3,154,575	)
Interest expense		(212,343	)		—
Other losses		(77,343	)		—
Net Loss	$	(2,546,967	)	$	(3,154,575	)

Net loss per share, fully diluted	$	(0.03	)	$	(0.04	)

Revenue and net sales

Net sales are comprised of product sales, raw material ingredient sales, and shipping and delivery fees. For the three and nine month periods ended September 30, 2015 compared with the three and nine month periods ended September 30, 2014, we recorded sales of $174,418 and $587,705, compared with sales of $279,288 and $1,058,808 respectively, representing decreases of 38% and 44%, respectively. Comparative product sales for the periods ended September 30, 2015 and September 30, 2014 were $168,148 and $572,358 versus $270,831 and $973,781, respectively; and comparative shipping and delivery fees for the periods ended September 30, 2015 and September 30, 2014 were $6,270 and $15,347 versus $8,397 and $85,027, respectively. We attribute the comparative decrease in sales to reductions to marketing and advertising during the period ended September 2015 due to capital restraints.

Cost of Goods Sold

For the three and nine month periods ended September 30, 2015 and September 30, 2014, COGS were $131,419 and $472,954, compared to $234,855 and $875,115, respectively; or 75% and 80% of sales compared to 84% and 83%, respectively. This corresponds to gross margin percentages of 25% and 20% for the three and nine months periods ended September 30, 2015, versus gross margin percentages of 16% and 17% for the three and nine month periods ended September 30, 2014. The period over period improvements in gross margin have resulted from efforts to reduce costs and optimize delivery methods. We believe margin will continue to improve as we benefit from regularized shipping arrangements and the economies of scale of larger production runs.

Additionally, as we re-align our sales mix with the addition of raw material ingredients sales we project this will have a beneficial effect on gross margin. Wholesale raw material ingredients have a lower cost of goods sold and earn a higher gross margin than our consumer products.

The primary COGS components for the three and nine month periods ended September 30, 2015 and September 30, 2014 were: manufacturing costs, which include both in-house and outsourced manufacturing costs, which totaled $113,596 and $407,253, respectively versus $199,530 and $731,463, respectively; and customer shipping which totaled $17,823 and $65,701, respectively versus $35,325 and $143,652, respectively.

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Operating Expenses

Our operating expenses are classified into three categories:

- Research and development

- Advertising and marketing

- General and administrative expenses

Research and Development

Research and development costs were minimal for both periods ended September 30, 2015 and September 30, 2014. We project R&D costs will remain near current levels during the balance of fiscal 2015.

Advertising and Marketing

Advertising and marketing costs were $70,500 and $269,047 respectively for the three and nine month periods ended September 30, 2015 versus $296,400 and $861,955 for the three and nine month periods ended September 30, 2014, representing comparative decreases of 74% and 66%, respectively. Primary components of advertising and marketing expenses for the nine month periods ended September 30, 2015 and September 30, 2014 were: (i) advertising and graphic art costs of $127,513 versus $118,209, respectively; (ii) cost of free sample demos was $54,828 versus $215,638, respectively; and (iii) other marketing expenses, sponsorships and public relations initiatives totaled $114,059 and $528,108, respectively. We project advertising and marketing costs will remain at current levels during the balance of fiscal 2015.

General and Administrative

General and administrative ('G&A') costs were $2,098,375 for the nine month period ended September 30, 2015 compared to $2,473,013 for the nine month period ended September 30, 2014, representing a decrease of 15%. Major components of G&A for the nine month periods ended September 30, 2015 and September 30, 2014 were: (i) payroll of $544,558 versus $526,297, respectively; (ii) non-cash stock issued for services of $307,864 versus $0, respectively; (iii) non-cash stock based compensation expense of $257,133 versus 378,325, respectively; (iv) non-cash options based compensation expense of $165,266 versus $797,258, respectively; (v) professional and consultant fees of $234,649 versus $313,140, respectively; and (vi) VDF License fees of $225,000 versus $75,000, respectively. We project general and administrative expenses will remain at current levels during the balance of fiscal 2015.

Interest Expense

Interest expense, including amortizations related to derivatives created by issuance of convertible securities, totaled $212,343 for the nine month period ended September 30, 2015 versus $0 for the nine month period ended September 30, 2014. We project that interest expenses will increase moderately during the balance of fiscal 2015.

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Other Expense

During the nine month periods ended September 30, 2015 and September 30, 2014, we recorded non-cash charges for changes in fair market value of derivative liabilities which arose from our issuance of convertible debt instruments. These were classified as other expense items and comprised $35,590 and $0, respectively for the comparative nine month periods.

During the period ended September 30, 2015, we also amended a warrant initially issued on January 27, 2014, to modify the exercise price from $0.65 to $0.15. The fair value of this warrant re-pricing was calculated based on the difference between Black Scholes option pricing model valuations on original grant date of January 27, 2014 and re-pricing date of June 15, 2015. This expense was recorded as a loss on equity modification of $41,753, with an offset to additional paid in capital. There were no similar such expenses during the period ended September 30, 2014.

Net Loss

Our net losses for the three and nine month periods ended September 30, 2015 and September 30, 2014 were $867,965 or ($0.01) per share and $2,546,967 or ($0.03) per share, versus $814,521 or ($0.01) per share and $3,154,575, or ($0.04) per share.

Liquidity and Capital Resources

Our financial position at September 30, 2015 and December 31, 2014 was as follows:

Net Working Capital

	As of September 30, 2015		As of December 31, 2014

Current Assets	$	903,795	$	843,217
Current Liabilities		660,055		207,794
Net Working Capital (Deficit)	$	243,740	$	635,423

As of September 30, 2015 we had cash on hand of $297,607, accounts receivable of $128,442, inventory of $477,746, prepaid expenses of $0, and other current assets of $0. This compares with cash of $39,987, accounts receivable of $278,240, inventory of $508,339, prepaid expenses of $16,000, and other current assets of $652 for the period ended December 31, 2014. Our net working capital decreased to a balance of $243,740 at September 30, 2015 from a balance of $635,423 at December 31, 2014. At present, we estimate we will need to raise capital during the coming twelve months to fund our strategic plans.

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Cash Flows

	Nine months ended September 30, 2015			Nine months ended September 30, 2014

Net cash (used) by operating activities	$	(1,323,534	)	$	(2,298,032	)
Net cash provided/(used) in investing activities		(48,966	)		(14,674	)
Net cash provided by financing activities		1,630,120			2,700,000
Increase (decrease) in cash during the period		257,620			387,294
Cash, beginning of period		39,987			213,156
Cash, end of period	$	297,607		$	600,450

Key elements comprising the comparative figures for Net cash (used) by Operating Activities for the nine month periods ended September 30, 2015 and September 30, 2014 include: (i) net losses of $2,546,967 and $3,154,575, respectively; (ii) non-cash expenses for stock issued for services and compensation of $730,262 and $1,175,583, respectively; (iii) non-cash options amortization costs of $165,266 and $797,258, respectively; and (iv) an increase of $144,290 and a decrease of $168,815 in accounts payable, respectively.

2015 Equity Line

On June 16, 2015, we signed a $10,250,000 million purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), an Illinois limited liability company. Upon signing the Purchase Agreement, LPC agreed to purchase 1,666,667 shares of our common stock for $250,000 as an initial purchase under the agreement. We also entered into a registration rights agreement with LPC whereby we agreed to file a registration statement related to the transaction with the U.S. Securities & Exchange Commission (“SEC”) covering the shares that may be issued to LPC under the Purchase Agreement within ten days after the Effective Date. The SEC declared this registration statement effective on July 16, 2015 and under the registration statement, we have the right, in our sole discretion, over a 30-month period to sell up to an additional $10 million of our common stock to LPC in amounts from up to 150,000 shares per sale to up to 350,000 shares per sale, depending on certain conditions as set forth in the Purchase Agreement. There are no upper limits to the price LPC may pay to purchase our common stock and the purchase price of shares of Common Stock sold pursuant to the Purchase Agreement will be based on prevailing market prices of our Common Stock at the time of sales without any fixed discount, and the Company will control the timing and amount of any sales of Common Stock to LPC. In addition, the Company may direct LPC to purchase additional amounts as accelerated purchases if on the date of a regular purchase the closing sale price of the Common Stock is not below the threshold price as set forth in the Purchase Agreement. LPC shall not have the right or the obligation to purchase any shares of our common stock on any business day that the price of our common stock is below the floor price as set forth in the Purchase Agreement.

During the period ended September 30, 2015 we issued a total of 3,773,008 shares under the 2015 Equity Line for aggregate cash proceeds of $345,120. Subsequent to the end of the period, we issued a total of 2,259,872 shares for aggregate proceeds of $148,080.

On June 30, 2015, 1,666,667 restricted common shares were also issued to an unrelated investor in a non-brokered private placement, at a purchase price of $0.06 per share for gross proceeds of $100,000. These shares were issued to a U.S. person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended. These shares were also incorporated in the July Registration Statement, which effected the registration of these 1,666,667 shares.

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Debt

On January 28, 2014, pursuant to our patent settlement with VDF, we issued a senior convertible note (the "Senior Convertible Note") to VDF, whereby we promised to pay VDF a principal amount equal to the sum of: (i) the aggregate amount of accrued and unpaid License fee payments, plus (ii) accrued interest on the Senior Convertible Note. The maturity of the Senior Convertible Note is December 31, 2018 unless the Senior Convertible Note is accelerated pursuant to an event of default or the License Agreement is terminated and all accrued and unpaid obligations under the Senior Convertible Note have been paid. Interest on the Senior Convertible Note is 7% per annum, subject to an adjustment to 12% for events of default. On the maturity date, we must pay VDF all principal, unpaid interest and late charges, if any, and we have the right, subject to certain limitations, to prepay principal at any time and from time to time. At any time VDF has the option to convert any principal outstanding on the Senior Convertible Note into shares of our common stock at a Conversion Price determined by the terms of the Senior Convertible Note. Key terms of the Senior Convertible Note include that: (i) VDF is granted an adjustment to the conversion price upon the issuance of shares of our common stock, stock options or other convertible securities; (ii) no indebtedness shall rank senior to the payments due under the Senior Convertible Note unless prior written consent of VDF is obtained; and (iii) payments under the Senior Convertible Note are secured by a Security Agreement. The Senior Convertible Note provides that we may, at our option, have regularly scheduled License fee payments treated as debt and rolled over into the Senior Convertible Note. To date, we have rolled-over five License fee payments of $75,000 each, plus accrued interest for the year ended December 31, 2014 of $791 for a total additions to the Senior Convertible Note balance of $371,591. Originally the Conversion Price of the Senior Convertible Note was $0.65 per share and has subsequently been adjusted to $0.4536 per share.

On January 20, 2015, we entered into a Convertible Debt Purchase Agreement with a third party and issued to the lender an Unsecured Subordinate Debenture with a face value principal amount of $440,000 (which includes $40,000 in original issue discount) for $400,000 in cash. This variable rate convertible debenture is now repaid in full and extinguished.

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On August 18, 2015, we issued a Senior Convertible Note (the “Convertible Note”) to a third party in the amount of $250,000. The Convertible Note was issued pursuant to the terms of a Securities Purchase Agreement dated as of the same date. The Convertible Note bears interest at the rate of 5% per annum (or 18% upon the occurrence of an event of default) and the principal and interest is due and payable in full on December 31, 2016 (the “Maturity Date”). The Convertible Note included a $25,000 original issuance discount. As a result, the net amount received in connection with the sale of the Convertible Note was $225,000. The Company has the right to prepay the Convertible Note, pursuant to the terms thereof, at any time, provided it pays a prepayment amount of 120% of the then outstanding balance, accrued interest and interest payable from the date of prepayment to the Maturity Date. The principal amount of the Convertible Note and all accrued interest is convertible at the option of the lender into shares of our common stock at any time. The fixed conversion price of the Convertible Note is $0.07, as adjusted for stock splits, stock dividends, stock combinations or other similar transactions as provided in the Convertible Note. As additional consideration for the loan, the Company granted the lender a six-year warrant to purchase 3,750,000 shares of our common stock at an exercise price of $0.10 per share. This warrant includes the same ownership limitation described above in connection with the Convertible Note. This warrant includes cashless exercise rights. At September 30, 2015, the amount we are required to repay on the Convertible note was $250,000 plus accrued interest of $1,667 for a balance of 251,667. Under generally accepted accounting principles, this translated to a balance due on the Convertible Note of $31,119, including accrued interest of $1,667 and net of unamortized discounts totaling $220,548 related to a beneficial conversion feature initially valued at $(107,143), issuance of warrants for the loan initially valued at $(117,857), the original issue discount initially valued at $(25,000), and amortization of $29,452 which was recorded during the period ended September 30, 2015.

On September 30, 2015 ("Issuance Date"), we issued Subordinated Promissory Notes (the “Promissory Notes”) to two investors (the “Investors”) in the aggregate amount of $250,000 (the "Original Principal"). The Promissory Notes were issued pursuant to the terms of Securities Purchase Agreements dated as of Issuance Date. Due to their term, the Promissory Notes are classified as short term debt. The Promissory Notes bear interest at the rate of 8% per annum, which accrued in full as of the Issuance Date. The principal and interest is due and payable in full on September 30, 2016 (the “Maturity Date”) with monthly prepayments of 3% of the Original Principal on the fourth through sixth monthly anniversaries of the Issuance Date and monthly prepayments or 10% of the Original Principal on the seventh through eleventh monthly anniversaries of the Issuance Date. The Promissory Notes included an aggregate $25,000 original issuance discount. As a result, the net amount received in connection with the sale of the Promissory Notes was $225,000. The Company has the right to prepay the Promissory Notes, pursuant to the terms thereof, at any time, provided it pays the then outstanding balance and accrued interest. The Promissory Notes provides for customary events of default such as failing to timely make payments under the Promissory Notes when due and the occurrence of certain fundamental defaults, as described in the Promissory Notes. The interest rate shall be 18% upon the occurrence of an event of default and repayment of the note at an amount equal to 120% of the outstanding principal and interest due. The Notes are not secured and subordinated to existing notes issued by the Company. As additional consideration for the loan, the Company granted the Investors five-year warrants to purchase an aggregate of 3,125,000 shares of our common stock at an exercise price of $0.08 per share. The warrants include cashless exercise rights. At September 30, 2015, the balance due on the Promissory Notes was $270,000, which included the original issue discount of $25,000 and accrued interest of $20,000. Under generally accepted accounting principles, this translated to a balance due on the Promissory Notes of $77,212, including accrued interest of $20,000 and net of unamortized discounts totaling $192,788 related to a issuance of warrants for the loans and the original issue discounts.

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Derivative Liabilities

The following table summarizes the convertible debt derivative activity for the period ending September 30, 2015:

Description	Convertible Notes
Fair Value of derivative liabilities at December 31, 2013	$	—
Discount due to issuance of subordinated convertible debenture		11,006
Change in Fair Value		(1,838	)
Fair Value of derivative liabilities at December 31, 2014	$	9,168
Increase due to valuation of newly issued convertible debentures		239,757
Reduction due to convertible debentures redemption		(274,108	)
Change in Fair Value		35,590
Fair Value of derivative liabilities at September 30, 2015	$	10,407

For the period ended September 30, 2015, the net change in the fair market value of derivative liabilities was $35,590 which was recorded as Other Loss.

The lattice methodology was used to value the derivative liabilities related to the convertible notes, with the following assumptions as of September 30, 2015 and December 31, 2014.

Assumptions:	September 30, 2015	December 31, 2014

Dividend yield	0.00%	0.00%
Risk-free rate for term	0.92%	0.97% to 1.11%
Volatility	131%	104% to 117%
Maturity dates	3.25 years	4 years
Stock Price	$0.074 to $0.078	$0.141 to $0.23

Off-Balance Sheet Arrangements

We had no significant off-balance sheet arrangements at September 30, 2015 or December 31, 2014 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 of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

EXCHANGE RATE FLUCTUATION RISK

Our reporting currency is United States Dollars. Our transactions are primarily conducted in US$ but may also include transactions in other currencies. Foreign currency rate fluctuations may have a material impact on the Company’s financial reporting. These fluctuations may have positive or negative impacts on the results of operations of the Company.

We have not entered into derivative contracts either to hedge existing risk or for speculative purposes.

ITEM 4. CONTROLS AND PROCEDURES

A. Disclosure Controls and Procedures.

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) our management conducted an evaluation (under the supervision and with the participation of our President and Chief Executive Officer, Shaun Roberts, and our Chief Financial Officer, John Dawe) as of the end of the period covered by this Quarterly Report on Form 10-Q, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, Mr. Roberts and Mr. Dawe each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act, (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) is accumulated and communicated to our management, including Mr. Roberts and Mr. Dawe, as appropriate to allow timely decisions regarding required disclosure.

B. Management’s Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.

Management has assessed the effectiveness of our internal control over financial reporting as of September 30, 2015. Management’s assessment was based on criteria set forth in Internal Control - Integrated Framework (1992), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon this assessment, management concluded that, as of March 31, 2015, our internal control over financial reporting was not effective, based upon those criteria, as a result of the identification of the material weaknesses described below.

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Specifically, management identified the following control weaknesses: (i) the Company has not implemented measures that would prevent one individual from overriding the internal control system. The Company does not believe that this control weakness has resulted in deficient financial reporting because the Chief Financial Officer is aware of his responsibilities under the SEC's reporting requirements and personally certifies the financial reports; and (ii) The Company utilizes accounting software that does not prevent erroneous or unauthorized changes to previous reporting periods and/or can be adjusted so as not to provide an adequate audit trail of entries made in the accounting software.

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Accordingly, while the Company has identified certain material weaknesses in its system of internal control over financial reporting, it believes that it has taken reasonable steps to ascertain that the financial information contained in this report is in accordance with generally accepted accounting principles. Management has determined that current resources would be appropriately applied elsewhere and when resources permit, they will alleviate material weaknesses through various steps.

C. Changes in Internal Control Over Financial Reporting.

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Settlement of Copyright Dispute

On March 27, 2015 we received correspondence from an attorney which alleged a service provider engaged for us by a distributor to provide social media postings services had violated the copyright of two related clients regarding certain pictures used by the service provider. On September 22, 105, this matter was settled for a net payment of $75,000, of which the Company's insurance providers paid $59,000 and the company paid $16,000.

Other than the aforementioned matter, there are no material, active, or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceedings or pending litigation. There are no proceedings in which any of our officer and director, or any registered or beneficial shareholders are an adverse party or has a material interest adverse to us.

ITEM 1A. RISK FACTORS

Not required for smaller reporting companies.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On February 6, 2015, 600 restricted common shares were issued to an employee for compensation and 11,000 restricted common shares were issued to a vendor for services rendered. These share issuances were both issued at a price of $0.0752 based on market close price on issue date for deemed payments totaling of $872. These shares were issued to US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On April 30, 2015, we issued 131,579 restricted common shares to our CFO as compensation at a price of $0.19 per share for aggregate deemed compensation of $25,000. These shares were issued to one non-US person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.

On May 1, 2015, we issued 300,000 restricted common shares to a service provider at a price of $0.20 per share for aggregate deemed fees of $60,000. These shares were issued to a US corporation, in accordance with exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On June 9, 2015, 1,200 restricted common shares were issued to an employee for compensation. These shares were valued at $0.14 based on market close price on issue date for deemed proceeds of $168. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

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On June 16, 2015, as part of a $10,250,000 million purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), an Illinois limited liability company, we issued LPC 1,666,667 shares of our common stock for $250,000 as an initial purchase under the agreement and 2,666,667 shares of our common stock as a commitment fee. These shares were issued to a U.S. person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended. We also entered into a registration rights agreement with LPC whereby we agreed to file a registration statement related to the transaction with the U.S. Securities & Exchange Commission (“SEC”) covering the shares that may be issued to LPC under the Purchase Agreement. The SEC declared this registration statement (the "July Registration Statement") effective on July 16, 2015, which effected registration of these 4,333,334 shares.

On June 30, 2015, 1,666,667 restricted common shares were issued to Peat Financial Ltd in a non-brokered private placement, at a purchase price of $0.06 per share for gross proceeds of $100,000. These shares were issued to a U.S. person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended. These shares were also incorporated in the July Registration Statement, which effected the registration of these 1,666,667 shares.

On July 9, 2015, we issued 226,860 restricted common shares at $0.1102 per share to our CFO. This grant was valued based on market close price on issue date, for aggregate deemed compensation totaling $25,000. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.

On July 9, 2015, 6,025 restricted common shares were issued to a third party for services provided. These shares were valued at $0.1108 based on market close price on issue date for deemed proceeds of $716. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On August 11, 2015, we issued 1,333,333 restricted common shares at $0.107 per share to our new President and COO. This grant was valued based on market close price on issue date, for aggregate deemed compensation totaling $142,667. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.

On September 15, 2015, 1,000 restricted common shares were issued to an employee for compensation. These share issuances were both issued at a price of $0.075 based on market close price on issue date for deemed payments totaling of $75. These shares were issued to US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On September 21, 2015, 26,000 restricted common shares were issued to a third party for services provided. These shares were valued at $0.0901 based on market close price on issue date for deemed proceeds of $2,343. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On September 24, 2015, 12,500 restricted common shares were issued to a third party for services provided. These shares were valued at $0.0829 based on market close price on issue date for deemed proceeds of $1,036. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

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On September 30, 2015, 9,000 and 50,000 restricted common shares were issued to two unrelated third parties for services provided. These shares were valued at $0.078 based on market close price on issue date for deemed proceeds of $702 and $3,900, respectively. These shares were issued to US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On September 30, 2015, we issued 320,513 restricted common shares at $0.078 per share to our CFO. This grant was valued based on market close price on issue date, for aggregate deemed compensation totaling $25,000. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.

On September 30, 2015, we issued 502,283 restricted common shares at $0.078 per share to our President and COO. This grant was valued based on market close price on issue date, for aggregate deemed compensation totaling $39,178. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

No. Exhibit Description

Exhibit Number	Description	Filed

(3)	Articles of Incorporation and Bylaws
3.1	Articles of Incorporation	(attached as an exhibit to our Registration Statement on Form S-1, filed on August 22, 2011)
3.2	Bylaws	(attached as an exhibit to our Registration Statement on Form S-1, filed on August 22, 2011)
3.3	Articles of Merger dated effective September 9, 2013	(attached as an exhibit to our current report on Form 8-K, filed on September 13, 2013)
3.4	Certificate of Change dated effective September 9, 2013	(attached as an exhibit to our current report on Form 8-K, filed on September 13, 2013)
(31)	Certifications
31.1	Certificate of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
(101)	Interactive Data File
101.INS	XBRL Instance Document	Filed herewith
101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith
101.DEF	Taxonomy Extension Definition Linkbase Document	Filed herewith
101.LAB	Taxonomy Extension Labels Linkbase Document	Filed herewith
101.PLE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

KONARED CORPORATION

/s/ Shaun Roberts	Dated:	November 16, 2015
Shaun Roberts
President & CEO


/s/ John Dawe	Dated:	November 16, 2015
John Dawe
Chief Financial Officer,
Secretary & Treasurer

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