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EX-31.2 - KONARED 10K, CERTIFICATION 302, CFO - KonaRed Corpkonaredexh31_2.htm
EX-32.1 - KONARED 10K, CERTIFICATION 906, CEO/CFO - KonaRed Corpkonaredexh32_1.htm
EX-31.1 - KONARED 10K, CERTIFICATION 302, CEO - KonaRed Corpkonaredexh31_1.htm
EX-10.52 - KONARED 10K, SUBSCRIPTION AGREEMENT AND WARRANT - KonaRed Corpkonaredexh10_52.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________

FORM 10-K
 
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Fiscal Year Ended December 31, 2015

OR

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 # 00055208
 
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, CA  92673-4230
 (Address of principal executive offices)    (Zip Code)

Tel. (808) 212-1553
 (Registrant’s telephone no., including area code)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value
(Title of class)
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:  Yes o  No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act:  Yes x  No o

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:  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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K:  Yes o  No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 Act):  Yes o  No x
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: the aggregate market value of the 71,371,132 common shares of the registrant owned by non-affiliates on June 30, 2015 was $8,550,262 based on a closing price of $0.1198 per share.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 118,370,607 common shares were issued and outstanding as of April 13, 2016.















 

 
KONARED CORPORATION

Table of Contents

 
   
   
   
   
   
   
   
   
 
 

 
 
 

 

 
PART I
 
ITEM 1.  DESCRIPTION OF BUSINESS
 
Corporate Overview

In this annual report on Form 10-K the terms "KonaRed", “we”, “us”, “our”, the "Registrant", and the "Company” mean KonaRed Corporation. Unless otherwise stated, “$” refers to United States dollars. Our fiscal year end is December 31st. We were incorporated in the State of Nevada on October 4, 2010 and our predecessor operating business was incorporated in the State of Hawaii on August 22, 2008. Our head office is located at 1101 Via Callejon #200, San Clemente, CA 92673-4230 and our executive office is located at 2829 Ala Kalanikaumaka St., Suite F-133, Koloa, HI 96756.

The Company’s common stock is publicly traded on the OTCQB over-the-counter market ('OTCQB') under the trading symbol: KRED.

Description of Business

Beverage Products

KonaRed's principal product line is our premium coffee fruit wellness drinks. Recently we also introduced a new line of Cold Brew Coffee which we expect may become our dominant product. KonaRed Original Antioxidant Juice, Cold Brew Coffees and Kona coffees are 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.







 
 
KonaRed’s anti-oxidant beverage products consist of the following proprietary formulations:

 
16 oz. KonaRed Original Antioxidant Juice (2 servings)


 
 

 

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



 



 

 
 
 
12oz. RTD Cold Brew Coffees
 
In February 2016 we introduced a new line of Ready-to-Drink ('RTD') Cold Brew Coffees. These include the flavors of 'Original', 'Hawaiian Vanilla' and 'Espresso'. Sales of this product have expanded quickly and the line is now being sold in retailers along the West Coast and Hawaii, as well as online.
 
 
 
 






 
 
 
Wellness 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. Primary among these is our antioxidant KonaRed Hawaiian Superfruit Powder Tub and our Wake-up Performance Powder Packets.
 
 
 
KonaRed Hawaiian Superfruit Powder

100% soluble coffee fruit powder made from coffee fruit from Kona, Hawaii
 

 
 
KonaRed Wake Up Performance Powder Packets
 
1 tub with 30 packets
 
 
 

 
Coffee Bean Products

During summer 2015 we launched sales of KonaRed Coffee Beans in three varieties.


 
 
100% Kona Coffee beans
 




 

 
Coffee Bean Products


 
100% Kona Coffee beans with Hawaiian Coffeeberry
 


 
 
 
Coffee Bean Products


 
Blend of 10% Kona Coffee plus 90% Columbian Coffee
 

 
 
 
Industrial Ingredient Division Launch

During 2015, we started industrial sales of raw coffee fruit powders and liquid extracts to other companies B2B and are now offering an American made, U.S. Hawaiian grown coffee fruit supply to the world. We expect this product line to be a major revenue generator and our bottom line will benefit also due to the comparatively higher gross margin we earn on raw material sales.

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").

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.

Trademarks

We have filed and received several trademarks that we use in our daily business

KonaRed
Nature’s Best Kept Secret
Powdered by Aloha
Paradise in a Bottle

Operations, Facilities and Distribution Method for Our Products

Our distribution facility is a 10,000 square foot facility located in San Clemente, California. We use an outsourcing business model based on utilizing third parties for the bulk of our non-core business operations, such as 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

We have an agreement in place which provides a reliable and trusted source of coffee fruit supply. This is structured as 5-year arrangement containing roll-over provisions, The agreement is 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.

We determine the amount of dried coffee fruit to purchase from our suppliers based on our annual sales forecasts and have historically been accurate at estimating supply quantities based on projected sales. Since the fruit surrounding the coffee bean was previously discarded as a byproduct of coffee production, such raw material has also remained readily available from coffee farms located in Hawaii and internationally. Therefore, although we currently have a principal supplier, in the event that we lose this supplier, we are confident that we would be able to secure raw material from other suppliers.
 
 
 
 
Our production process is based on our company taking possession of the dried coffee fruit from the grower, shipping the dried coffee fruit to our San Clemente warehouse for storage, and then subsequently sending required quantities to subcontractors for value-added processing. The value-added processing consists of water based extraction whereby the dried coffee fruit is reduced to liquid extract. This processing generally takes approximately 24 hours to complete.

For our company’s beverage production, our antioxidant beverages are processed via the coffee fruit finished goods being sent to a 3rd party flavor house which makes the KonaRed concentrate and then ships it to our company’s bottling vendors. The process for Cold Brew Coffee is similar. Notably, we own the proprietary beverage formulas. Pallets of the ready-to-drink product items (defined as "Stock-keeping Units", or "SKUs") are then shipped back to our company’s warehouse, or third party inventory transit service providers, and disseminated to either distributors, or shipped directly to retailers.

Market

We believe our company has established a frontrunner position in the coffee fruit category, boasting a numerous retail entrees since its 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 and Canada by winning placements at Kroger, Target, Vitamin Shoppe and other major retailers. Moving forward we will expand on our domestic success by developing international distribution opportunities in South East Asia, beginning with Japan, Korea and China.

Expansion into Japan

In April 1, 2015 we began 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.

Sales Strategy

Our sales strategy for beverage products and nutritional supplement products is to sell and ship directly from our warehouse in San Clemente, California.  We have a direct sales team of four individuals, two in Hawaii and two in Southern California whose main job is to secure new customers directly in person. We have also retained manufacturers’ sales representatives who work to increase 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. We anticipate adding sales staff to meet demand for our recently introduced line of Cold Brew Coffees.

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, as well as dairy shelves with cold brew coffees and the coffee isle with our whole bean coffee line.  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.

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
 
 
 
 
Major Industry Participants

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

Market Development and Metrics

Our objective is to develop KonaRed into a powerhouse coffee company which supplies consumers with a variety of high quality coffee, beverage and nutritional products. We plan to achieve this using a strategy of expanding our retail footprint through a series of revenue generating distribution channels as well as direct to consumer sales.

Presently, our predominant focus is our beverage and cold brew coffee businesses and we are generating revenues through the following distribution channels:

 
Direct Store Distributors

 
Broadline Distributors

 
Direct to Retail

 
Online Retail

 
Raw Material Ingredient Sales
 
The specifics of each channel are as follows:
 
 
Direct Store Distributors:
The direct store distributors (“DSDs”) channel comprises wholesale distributors who maintain in-house inventories of multiple brands of beverage products, such as juices, beer, and water, which they sell to retail stores and other wholesalers. DSD is a business process that manufacturers use to both sell and distribute goods directly to point of sales or point of consumption including additional product and market related services such as merchandising.  In order to fulfill growing demand from retailers, DSDs specializing in the beverage channels are expanding their functional beverage categories to include the type of products in which KonaRed specializes

 
 
 
 
Broadline Distributors:
The broadline distributors channel includes wholesalers who specialize in distribution of natural food products to retail stores. A broadline distributor services a wide variety of accounts with a wide variety of products ranging from food, beverages and supplies in the natural channel selling to retailers like Whole Foods Markets. 
     
 
Direct to Retail:
During our growth phase we have developed a direct to retail sales channel to grocery stores such as Albertson’s and specialty retail stores. We intend to continue to service and develop this channel further. Direct to retailer includes major retail chains with 500 locations or more where the KonaRed product ships direct to the retailers distribution centers and the retailers are responsible for the distribution to each retail store. 
     
 
Online Retail:
The KonaRed brand has gained an increasing following of Internet based customers who purchase our products directly through our website. We plan to expand this channel though on-line marketing initiatives in parallel with our brand recognition marketing campaigns. In April, 2016 we re-launched our website after a major overhaul which included addition of the Shopify platform to promote efficient online sales.
     
 
Raw Material Ingredient Sales:
In 2016 we launched our coffee fruit raw ingredient materials division and will be expanding this revenue channel in cooperation with VDF.

To develop this strategy we continually evaluate: product line sales, product line specific gross margin, individual products costs and pricing of individual product lines. Growth of our retail footprint will continue to be evaluated through the growth of our client base in each specific distribution channel.

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. We compete to secure distributors who will agree to market our product over those of our competitors, provide stable and reliable distribution, and secure adequate shelf space in retail outlets. Our products compete with all liquid refreshments, including numerous specialty beverages, such as: SoBe; Snapple; Arizona; Vitamin Water; Gatorade; and Powerade.

Important factors that affect our ability to compete successfully include taste and flavor of our product, trade and consumer promotions, the development of new, unique and cutting edge products, attractive and unique packaging, branded product advertising, pricing, and the success of our distribution network. We believe our branding is strong and our position as a U.S. coffee supplier is relatively unique. We are committed to ethical production of our source ingredients and our use of a previously discarded by-product of coffee represents our environmentally positive corporate operating philosophy. We are also non-GMO. We believe these factors combine to provide us with a competitive advantage and our products are consistently well received by consumers.
 
 
 
 
 
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®”, "Nature's Best Kept Secret®", and "Powdered by Aloha®" tag lines; 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.

While there can be no assurance that registered trademarks will protect our proprietary information, we intend to assert our intellectual property rights against any infringer. Although any assertion of our rights could result in a substantial cost to, and diversion of effort by, our Company, management believes that the protection of our intellectual property rights will be a key component of our operating strategy.

Partnership Initiative with VDF FutureCeuticals Inc.

To the mutual satisfaction of the parties, on January 28, 2014 KonaRed settled a patent dispute which had been pending since 2011 with VDF by forming a partnership with them.

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.

Research and Development Costs During the Last Two Years
 
Benefiting from its relationship with VDF, KonaRed has been able to reduce its R&D costs over fiscal years 2015 and 2014, having spent approximately $6,502 and $3,931, respectively.
 
 
 
 
 
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. 
 
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.
 
The advertising, distribution, labeling, production, safety, sale, and transportation in the United States of our product are subject to: the Federal Food, Drug, and Cosmetic Act; the Federal Trade Commission Act; the Lanham Act; state consumer protection laws; competition laws; federal, state and local workplace health and safety laws; various federal, state and local environmental protection laws; and various other federal, state and local statutes and regulations. It will be our policy to comply with any and all legal requirements.
 
 
 
 

Employees
 
In addition to Shaun Roberts, who is our Chief Executive Officer, director, and Board Chair; 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 1 part employees whom all work in the United States. Our operations are overseen directly by management that engages our employees to carry on our business. Our management oversees all responsibilities in the areas of corporate administration, business development, and research; and as needed we engage the services of other professionals for legal, audit and other technical services. We intend to expand our current management to retain other skilled directors, officers, and employees with experience relevant to our business focus. Our management’s relationships will provide the foundation through which we expect to grow our business in the future. We believe that the skill-set of our management team will be a primary asset in the development of our brands and trademarks.

ITEM 1A.  RISK FACTORS

Not required for smaller reporting companies.

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 6, 2015. This can be found along with all our filings  with the SEC at www.sec.gov.

There may be other factors included in the Company's filings with the SEC that may cause actual results to differ materially from those projected in any forward-looking statement. The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.
 
ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

Our principal office and warehouse is located at 1101 Via Callejon #200, San Clemente, California 92673-4230. The Company shares a lease for this facility with Malie, Inc., (“Malie”) a company owned by our CEO and his spouse, who is the CEO of Malie. We also utilize offices provided by our CEO and CFO. The current distribution facility lease has a term of June 1, 2014 to May 31, 2016 and presently requires total lease payments of $10,139 per month, of which the Company's portion is $7,790 per month. On February 25, 2016, the Company and Malie extended the lease for an additional 24 month term and committed to total lease payments of $10,466 for June 1, 2016 to May 31, 2017 and $10,793 for June 1, 2017 to May 31, 2018. The Company's portion of payments under the extended term arrangements are $6,461 for June 1, 2016 to May 31, 2017 and $6,663 for June 1, 2017 to May 31, 2018. For the year ended December 31, 2015 our Company paid a total of $92,479 (averaging $7,707 per month) of the total lease expense of $120,360 (averaging $10,030 per month). For the year ended December 31, 2014, our Company paid a total $90,471 (averaging $7,539 per month) of the total lease expense of $117,744 (averaging $9,812 per month). We believe that the condition of our principal office and warehouse are satisfactory, suitable and adequate for our current needs.
 
Fixed assets currently shown on our balance sheet are comprised of furniture and warehouse fixtures and at present the Company has no material property balances which are classified as assets under generally accepted accounting principles.
 
 
 

 
ITEM 3.  LEGAL PROCEEDINGS

On December 30, 2015, our former beverage distributor, Splash Beverage Group ('SBG'), filed the following action in Broward County Circuit Court, Florida: Splash Beverage Group, Inc. v. KonaRed Corporation Case No. 15-022541 CACE 09 regarding the Company's cancellation of the beverage distribution agreement ("CDA") and the sales and marketing agreement ('SMA") the parties had executed on April 23, 2014. The Company had cancelled the SMA on September 16, 2015 and the CDA on September 23, 2015. The Company believes SBG's allegations are both factually and legally unfounded and the likelihood of a material loss in this matter is considered to be remote and any damages the Company may pay are not currently estimable.

On September 22, 2015 we settled a claim from two related parties that a service provider engaged by SBG to provide social media postings services to the Company had violated the copyrights of two related clients regarding certain pictures used by the service provider. We had received this claim on March 27, 2015 and settled the matter 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 matter regarding SBG, 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 4.  MINE SAFETY DISCLOSURES

Not applicable.















 
PART II
 
ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is quoted on the OTCQB over-the-counter stock market ("OTCQB") under the symbol: 'KRED'. Because we are quoted on the OTCQB, our securities may be less liquid, receive less coverage by security analysts and news media, and generate lower prices than might otherwise be obtained if they were listed on a major national securities exchange. Trading in stocks quoted on the OTCQB is often thin and is characterized by wide fluctuations in trading prices due to many factors that may be unrelated or have little to do with a company’s operations or business prospects. We cannot assure you that there will be a market for our common stock in the future.

The following table sets forth the high, low and closing prices for our Common Stock per quarter as reported by NASDAQ.COM for the years ended December 31, 2015 and December 31, 2014. These prices represent quotations between dealers without adjustment for retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 
  Quarter Ended:
 
High
 
Low
         
  FY2015:
       
  March 31, 2015
$
0.2299
$
0.07
  June 30, 2015
$
0.2216
$
0.105
  September 30, 2015
$
0.1765
$
0.073
  December 31, 2015
$
0.826
$
0.05
  FY2014:
       
  March 31, 2014
$
1.36
$
0.654
  June 30, 2014
$
0.789
$
0.48
  September 30, 2014
$
   0.5475
$
0.25
  December 31, 2014
$
0.3473
$
0.1359

Shareholders
 
At year-end December 31, 2015 there were 182 shareholders of record of the 108,769,514 shares outstanding of our common stock.

Dividends

There are no restrictions that would limit the Company from paying dividends. We have not paid any cash or stock dividends on our common stock and have no present intention of paying any dividends on the shares of our common stock. Our current policy is to retain earnings, if any, for use in our operations and in the development of our business. Our future dividend policy will be determined from time to time by our board of directors.

Re-Purchase of Equity Securities

None.

Securities Authorized for Issuance Under Equity Compensation Plans
 
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. To date, 6,750,000 options have been issued under the Stock Option Plan. There were no stock options issued during the years ending December 31, 2015 and December 31, 2014.
 
 
 
 
Additionally, we have in place a Form S-8 share compensation plan totaling 5,000,000 registered shares reserved for issuance which was authorized by the Board on May 27, 2014. There were no shares issued under this plan during the year ended December 31, 2015; and 500,000 shares were issued under this plan during the year ended December 31, 2014, leaving a balance of 4,500,000 registered potentially issuable shares.

Recent Sales of Unregistered Securities

On February 6, 2015 we issued 600 restricted common shares at $0.0752 per share to an employee ("Employee One") for compensation. These share issuances were issued based on market close price on issue date for deemed payments totaling of $45. 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 February 6, 2015, we issued 11,000 restricted common shares at $0.0752 per share to a professional athlete ("Ambassador One") for endorsement services rendered. These shares were issued at market close price on issue date for deemed compensation of $827. 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 at $0.19 per share as compensation to our CFO. These shares were valued per terms of his compensation agreement 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 May 1, 2015, we issued 300,000 restricted common shares to a third party for professional 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 June 9, 2015 we issued 1,200 restricted common shares at $0.14 per share to Employee One for compensation. These share issuances were issued based on market close price on issue date for deemed payments totaling 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.

On June 30, 2015, 1,666,667 shares of restricted common shares were issued to investor, unrelated to LPC, 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.
 
 
 
 
On July 6, 2015, we issued 6,025 restricted common shares at $0.1188 per share to Ambassador One for professional athlete endorsement services rendered. These shares were issued at market close price on issue date for deemed compensation of $716. 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 July 9, 2015 we issued 226,860 restricted common shares at $0.1102 per share as compensation to our CFO. These shares were valued per terms of his compensation agreement 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 August 11, 2015, we issued 1,333,333 restricted common shares to our new President & Chief Operating Officer at $0.107. These shares were valued based on market close price on issue date for deemed proceeds of $142,667. 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 15, 2015, we issued 1,000 restricted common shares at $0.075 per share to Employee One for compensation. These share issuances were issued 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 18, 2015, we issued 26,000 restricted common shares at $0.0901 per share to a consultant for services rendered. These share issuances were issued based on market close price on issue date for deemed payments totaling 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, we issued 12,500 restricted common shares at $0.0829 per share to a professional athlete ("Ambassador Two") for endorsement services rendered. These share issuances were issued based on market close price on issue date for deemed payments totaling 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.

On September 30, 2015, we issued 9,000 restricted common shares at $0.078 per share to Ambassador One for endorsement services rendered. These share issuances were issued based on market close price on issue date for deemed payments totaling of $702. 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 30, 2015, we issued 50,000 restricted common shares at $0.078 per share to a consultant for services rendered. These share issuances were issued based on market close price on issue date for deemed payments totaling of $3,900. 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 30, 2015 we issued 320,513 restricted common shares at $0.078 per share as compensation to our CFO. These shares were valued per terms of his compensation agreement 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 October 20, 2015, we issued 348,472 restricted common shares at an agreed price of $0.0699 per share for aggregate deemed compensation of $24,358 to a beverage distributor per terms of a services agreement. 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.

On September 30, 2015 we issued 502,283 restricted common shares at $0.078 per share as compensation to our President & COO. These shares were valued per terms of his compensation agreement for aggregate deemed compensation totaling $39,178. 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 October 21, 2015, we issued 1,381,025 restricted common shares at a contractually agreed price of $0.07241 per share for aggregate deemed compensation of $100,000 to a service provider ("Service Provider") for services rendered. 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.

On October 27, 2015, we issued 2,000,000 restricted common shares at a contractually agreed price of $0.068 per share for aggregate deemed compensation of $136,000 to Service Provider for services rendered. 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.

On December 3, 2015, we issued 500,000 restricted common shares valued market close price on date of issue at $0.0601 for aggregate deemed proceeds of $30,050 to a lender as a fee for a loan to the Company. 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.

On December 8, 2015, we issued to LPC: (a) 66,964 restricted common shares valued at the LPC Note One Conversion Price of $0.07 for interest of $4,688 accrued on LPC Note One to December 31, 2015; and (b) 31,667 restricted common shares valued at the LPC Note Two Conversion Price of $0.05 for interest of $1,583 accrued on LPC Note Two to December 31, 2015. 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.

On December 31, 2015 we issued 458,926 restricted common shares at $0.05448 per share as compensation to our CFO. These shares were valued per terms of his compensation agreement 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 December 31, 2015 we issued 1,262,047 restricted common shares at $0.05448 per share as compensation to our President & COO. These shares were valued per terms of his compensation agreement for aggregate deemed compensation totaling $68,750. 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.

Subsequent to the year ended December 31, 2015, the Company made shares issuances to staff and service providers. In issuing these shares 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. These included: (a) 651,269 restricted common shares to a service provider on January 8, 2016 at a negotiated price of $0.05 per share for deemed aggregate compensation of $32,563; (b) 600 restricted common shares to Employee One on January 1, 2016 at market close price of $0.0614 per share for deemed aggregate compensation of $37; (c) 5,000 restricted common shares to an employee on January 11, 2016 at market close price of $0.064 per share for deemed compensation of $320; and (d) 3,500 restricted common shares at market close price of $0.0559 on March 4, 2015 to a professional athlete endorser for deemed compensation of $196.

Subsequent to the year ended December 31, 2015, in February 2015 we executed a private placement unit offering which raised $171,000 through the sale of 4,275,000 units. This offering terminated on March 29, 2016 and was priced at $0.04 per unit with each unit being comprised of one restricted common share price plus one five year warrant exercisable to purchase one restricted common share at $0.055 per share. These shares were issued to four US persons who are accredited investors (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended) or qualified under the terms Rule 506 Regulation D, and in issuing these shares 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.

Subsequent to the year ended December 31, 2015, the Company issued 4,650,000, Sale Shares and 15,724 per sale Commitment Shares under the 2015 Equity Line for aggregate proceeds of $235,740.

ITEM 6.  SELECTED FINANCIAL DATA

Not required for smaller reporting companies.
 
ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
 
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-K 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 above in Item 1 - Description of Business contains 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 (“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”).
 
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
 
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.
  
















 
 
RESULTS OF OPERATIONS

The following discussion and analysis covers material changes in the financial condition of our Company for the years ended December 31, 2015 and December 31, 2014. A summary is as follows:

   
Year ended
December 31, 2015
   
Year ended
December 31, 2014
 
                 
Total sales
  $ 635,503     $ 1,254,234  
Cost of goods sold
    541,069       1,094,037  
GROSS MARGIN
    94,434       160,197  
Research and development
    6,502       3,931  
Advertising and marketing
    435,390       967,164  
General and administrative
    1,822,434       1,745,569  
Non-cash compensation
    1,170,115       2,046,991  
Operating expenses
    3,434,441       4,763,655  
Loss from operations
    (3,340,007 )     (4,603,458 )
Other non-cash income (expense)
    (204,990 )     1,838  
Interest expense
    (255,372 )     (1,007 )
NET LOSS
  $ (3,800,369 )   $ (4,602,627 )
                 
Net loss per share, fully diluted
  $ (0.04 )   $ (0.06 )


Total Sales

Total sales are comprised of product sales and shipping and delivery fees. During the year ended December 31, 2015 we recorded total sales of $635,503 compared with total sales of $1,254,234 for the year ended December 31, 2014, representing a decrease of 49%. Product sales and shipping and delivery fees for the year ended December 31, 2015 were $611,424 and $24,079 respectively, compared with $1,160,941 and $93,293 for the year ended December 31, 2014.

We attribute the comparative decrease in sales during the year ended December 31, 2015 to the lack of success of beverage distribution arrangements and our decreased expenditure on advertising and marketing due to a reduction in working capital from reduced sales. To rebuild our revenue base we chose to take back control of our brand. In August 2015, we hired former POM Wonderful executive Kyle Redfield to provide new leadership, restructure and create new revenue streams and in September 2015 we terminated our former master beverage distributor.

Cost of Goods Sold
 
As referenced in our Description of Business above, our production is based on an outsourcing business model which utilizes third parties for the bulk of our non-core business operations, such as coffee fruit extraction and product manufacturing. The main component of our cost of goods sold ('COGS') relates to costing the finished goods which are drawn from our inventory when sold. These finished goods primarily include bottles of different types of our coffee beverages in various container and lot sizes which have been manufactured in a staged process for us by third parties and delivered to our warehouse, or to inventory logistics service providers, for distribution. Costing is done by applying specific unit sales to unit product costs based on the costs per unit recorded in our inventory system. Costs per unit in the inventory system include per unit manufacturing charges from outsource manufacturers.
 
 
 
 
 
Along with the current period cost of inventory which has been used for product sales, COGS also include expensing of inventory which has: (i) been disposed of because it has expired and/or become obsolete; and (ii) been subject to a write-down reserve because the inventory has been deemed to be potentially useful, but has been slow moving for a significant period of time. During the year ended December 31, 2015, we disposed of $26,760 of obsolete inventory and during the year ended December 31, 2014, we disposed of $49,249 of obsolete current inventory, net of $18,732 of inventory which previously had previously been reserved. Obsolete inventory during 2015 was primarily comprised of dried coffee fruit raw material which had an expired useful life. Obsolete inventory during 2014 was comprised both of dried coffee fruit raw materials which had expired, old labels which included outdated information, and remaining inventory of a discontinued product. At year end December 31, 2015 we had no further reserves of outdated inventory.
 
For the years ended December 31, 2015 and December 31, 2014, COGS were $541,069 and $1,094,037, or 85% and 87% of sales. This corresponds to gross margin percentages of 15% and 13%. As order flow increases we should benefit from less expensive shipping costs and the economies of scale of larger production runs. We project COGS will decrease during fiscal 2016 and gross margin will improve.

COGS primary components for the years ended December 31, 2015 and December 31, 2014 are as follows: (i) manufacturing costs, which include both in-house and outsourced manufacturing costs, totaled $384,293 versus $746,377, respectively; (ii) customer shipping which totaled $92,907 versus $175,515, respectively; (iii) shipping and inventory delivery which totaled $16,051 versus $61,563, respectively. and (iv) packaging which totaled $14,368 versus $44,902, respectively.

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 $6,502 and $3,931, respectively for years ended December 31, 2015 and December 31, 2014, respectively, for a comparative increase of 65%. Increases in research and development costs are attributable to development of new products, such as our Cold Brew Coffee line. We project R&D costs will remain near current levels during the upcoming fiscal year.

Advertising and Marketing

Advertising and marketing costs were $435,390 for the year ended December 31, 2015, compared with $967,164 for the year ended December 31, 2014, representing a decrease of 55%. Primary components of advertising and marketing cost during the years ended December 31, 2015 versus December 31, 2014 were as follows: (i) sales and marketing fees paid to our former beverage distributor based on the sales they produced were $8,377 versus $241,306, representing an decrease of 97%; (ii) the cost of free samples and product demonstrations was $93,478 versus $231,883, representing a decrease of 60%; (iii) advertising and graphic art costs were $211,284 versus $160,548, representing an increase of 32%; (iv) website expenses were $27,580 versus $75,976, representing a decrease of 64%; and (iv) other marketing expenses including sponsorship and public relations initiatives totaled $94,671 versus $357,451, representing a decrease of 74%. We project advertising and marketing costs will increase during our upcoming fiscal year.
 
 
 
 
 
General and Administrative

General and administrative ('G&A') costs were $2,992,549 for the year ended December 31, 2015 compared to and $3,792,560 for the year ended December 31, 2014, representing a decrease of 21%. We project general and administrative expenses will remain at current levels or increase moderately during the coming fiscal year.

G&A costs include cash expand non-cash expenses. Non-cash expenses include Black-Scholes option and warrant grant costing and amortization expenses, stock based compensation expenses, stock issued for services, and depreciation expenses. For the years ended December 31, 2015 and December 31, 2014, G&A cash expenses comprised $1,822,434 and $1,745,569, or 61% and 46% of total expenses; and G&A non-cash expenses comprised $1,170,115 and $2,046,991 or 39% and 54% respectively of total G&A. Year over year G&A cash expenses increased by 4% and G&A non-cash expenses decreased by 43%.

Major items within expenses paid in cash for years ended December 31, 2015 and December 31, 2014 included: (i) payroll of $835,912 versus $745,262, representing an increase of 12%; (ii) professional and consultant fees of $221,558 versus $337,316, representing a decrease of 34%; (iii) VDF License fees and related interest expenses of $318,481 versus $150,791, representing an increase of 111%; and (iv) total rent expenses of $116,089 versus $113,356, representing an increase of 2%.

During the year ended December 31, 2015, payroll increases were due to the addition of executive, warehouse and office support staff. Professional and consulting fees decreases related to reduced legal expenses. Rent increases were due to the tiered increases within our warehouse lease.

Other Income (Expense)

During the year ended December 31, 2015 we incurred an other expense totaling $460,362; and during the year ended December 31, 2014 we recorded other income of $831. Other income (expense) for years ended December 31, 2015 and December 31, 2014 included: (i) cash interest paid of $128,458 and non-cash interest accruals of $126,914, for total interest expense of $255,372 in 2015, versus $1,007 in non-cash interest accrual in 2014; (ii) amortization expense for discounts on notes payable of $128,200 in 2015, versus $nil in 2014; (iii) non-cash expense for the fair market value of a derivative liability of 35,037 in 2015, versus non-cash income for the fair market value of a derivative liability of $1,838 in 2014; and a non-cash expense of $41,753 related to the re-set of the exercise price of previously issued warrants in 2015, versus $nil in 2014. Other than interest expenses for currently outstanding debt and further non-cash derivative related gains or losses which may arise during the coming year, we cannot project other income (expense) items in the near term.

Net Loss

Our net losses for the years ended December 31, 2015 versus December 31, 2014 were $3,800,369, or $0.04 per share, versus $4,602,627, or $0.06 per share.





 
 
Liquidity and Capital Resources

Our financial position as at December 31, 2015 and December 31, 2014 was as follows:
 
Net Working Capital
   
As of
December 31, 2015
   
As of
December 31, 2014
 
             
Current Assets
  $ 645,107     $ 843,217  
Current Liabilities
    463,063       207,794  
Net Working Capital (Deficit)
  $ 182,044     $ 635,423  

At December 31, 2015 we had cash on hand of $148,769, accounts receivable of $33,227, accounts receivable - related party of $18,000; inventory of $439,158, prepaid expenses of $5,953, and other current assets of $nil. This compares with cash on hand of $39,987, accounts receivable of $274,640, accounts receivable - related party of $3,600; inventory of $508,338, prepaid expenses of $16,000, and other current assets of $652 at December 31, 2014.

Our net working capital decreased to a balance of $182,044 at December 31, 2015 from a balance of $635,423 at December 31, 2014. At present, we project we will need to raise additional capital during the coming twelve months to fund our strategic plans.

Our cash flows for the years ended December 31, 2015 and December 31, 2014 were as follows:
 
Cash Flows
   
Year ended
December 31, 2015
   
Year ended
December 31, 2014
 
             
Net cash (used) by operating activities
  $ (2,009,549 )   $ (3,008,496 )
Net cash provided/(used) in investing activities
          (14,674 )
Net cash provided by financing activities
    2,118,331       2,850,001  
Increase (decrease) in cash during the period
    108,782       (173,169 )
Cash, beginning of period
    39,987       213,156  
Cash, end of period
  $ 148,769     $ 39,987  

Comparative figures for Net cash (used) by Operating Activities is comprised of the net loss of $3,800,369 for the year ended December 31, 2015 versus a net loss of $4,602,627 for the year ended December 31, 2014, and also includes comparative non-cash add-backs of: (i) Black-Scholes options grant expense amortizations of $220,960 versus $807,161; (ii) Black-Scholes warrant issuance expense amortizations of $197,905 versus $216; (iii) stock issued for compensation of $350,883 versus $398,123; and (iv) stock issued for services of $598,272 versus $841,707.

Total non-cash items in computation of our cash flow comprise: $1,453,274, or 38%, of our total net loss of $3,800,369 for the year ended December 31, 2015; and $2,049,556, or 45%, of our total net loss of $4,602,627 for year ended December 31, 2014.

Other key elements included in net cash (used) by operating activities for the comparative years ended December 31, 2015 versus December 31, 2014 comprised: (i) a decrease in accounts receivable of $220,993 in 2015 versus an increase in accounts receivable of $254,022 in 2014; (ii) a decrease in inventory of $69,180 in 2015 versus an increase of $118,211 in 2014; and (iii) an increase in accounts payable and accrued liabilities of $19,402 in 2015 versus a decrease in accounts payable and accrued liabilities of $79,501 in 2014.
 
 
 

Cash Raised from Equity Sales

During the year ended December 31, 2015, the Company raised $350,000 cash from two private placements of its restricted common shares and $629,850 through equity line sales of common shares which have been registered in a Form S-1. During the year ended December 31, 2014, the Company raised $1,000,000 from two private placements unit sales and $1,700,001 through equity line sales of common shares which have been registered in a Form S-1.

Cash Raised from Debt

During the year ended December 31, 2015, the Company raised: (a) net proceeds from short term debt of $325,000, which was comprised of three short term promissory notes which provided net proceeds of $90,000, $135,000 and $100,000 respectively; (b) net proceeds of $Nil from short term debt - related party, which was comprised of an advance of $500,000 from a director of the Company and a repayment to him of $500,000; and (c) net proceeds of $813,481 from convertible notes payable which was comprised of: (i) net proceeds of $Nil from one lender who advanced net $400,000 and received repayment of that $400,000, (ii) two fixed exercise price convertible notes from the same lender which provided net proceeds of $225,000 and $270,000 respectively, and (iii) net proceeds of $318,481 from VDF from the rollover of $300,000 of License Fee payments and $18,481 of accrued interest. During the year ended December 31, 2014, the Company raised net proceeds from short debt and short term debt - related party of $Nil and $Nil respectively; and raised net proceeds from convertible notes of $150,000 which was comprised of $150,000 from the rollover of License Fee payments due to VDF.

Off-Balance Sheet Arrangements

We had no significant off-balance sheet arrangements at December 31, 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.

Material Events and Uncertainties

Our operating results are difficult to forecast. Our prospects should be evaluated in light of the risks, expenses and difficulties commonly encountered by comparable early stage companies in rapidly evolving markets. There can be no assurance that we will successfully address such risks, expenses and difficulties.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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






 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO
FINANCIAL STATEMENTS















 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors 
KonaRed Corporation

We have audited the accompanying balance sheets of KonaRed Corporation as of December 31, 2015 and 2014 and the related statement of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of KonaRed Corporation as of December 31, 2015 and 2014, and the results of its operations, changes in stockholders’ equity (deficit) and cash flows for the periods then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ M&K CPAS, PLLC
 
www.mkacpas.com
Houston, Texas
April 13, 2016






 

KONARED CORPORATION
BALANCE SHEETS
 
 
   
December 31,
2015
   
December 31,
2014
 
             
ASSETS
           
             
CURRENT ASSETS
           
Cash
  $ 148,769     $ 39,987  
Accounts receivable
    33,227       274,640  
Accounts receivable - related party
    18,000       3,600  
Inventory
    439,158       508,338  
Prepaid expenses
    5,953       16,000  
Other current assets
          652  
TOTAL CURRENT ASSETS
    645,107       843,217  
                 
OTHER ASSETS
               
Fixed assets (net of accumulated depreciation)
    10,247       12,691  
TOTAL OTHER ASSETS
    10,247       12,691  
TOTAL ASSETS
  $ 655,354     $ 855,908  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
                 
CURRENT LIABILITIES
               
Accounts payable and accrued liabilities
  $ 211,429     $ 195,183  
Accounts payable - related party
    3,156        
Short term debt, net of discounts
    235,237        
Unearned revenue
    1,434       3,443  
Derivative liability
    11,807       9,168  
TOTAL CURRENT LIABILITIES
    463,063       207,794  
                 
LONG-TERM LIABILITIES
               
Convertible notes payable, net of discounts
    548,881       140,001  
TOTAL LONG-TERM LIABILITIES
    548,881       140,001  
TOTAL LIABILITIES
    1,011,944       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 December 31, 2015 and December 31, 2014.
           
Common shares, 877,500,000 shares with par value $0.001  authorized; 108,769,514 and 83,496,530 shares issued  and outstanding at December 31, 2015 and December 31, 2014, respectively
      108,787         83,497  
Additional paid in capital
    19,616,012       16,705,636  
Accumulated deficit
    (20,081,389 )     (16,281,020 )
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)
    (356,590 )     508,113  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
  $ 655,354     $ 855,908  

 
The accompanying notes to financial statements are an integral part of these financial statements
 
 
 
KONARED CORPORATION
STATEMENTS OF OPERATIONS
 
 
   
Year ended
December 31, 2015
   
Year ended
December 31, 2014
 
             
REVENUE:
           
Product sales
  $ 571,824     $ 1,124,994  
Product sales - related party
    39,600       35,947  
Shipping and delivery
    24,079       93,293  
Total sales
    635,503       1,254,234  
                 
Cost of goods sold
    541,069       1,094,037  
GROSS MARGIN
    94,434       160,197  
                 
OPERATING EXPENSES:
               
Research and development
    6,502       3,931  
Advertising and marketing
    435,390       967,164  
General and administrative expenses
    2,992,549       3,792,560  
Total operating expenses
    3,434,441       4,763,655  
                 
Loss from operations
    (3,340,007 )     (4,603,458 )
                 
OTHER INCOME (EXPENSE):
               
Interest expense
    (255,372 )     (1,007 )
Amortization expense - notes discounts
    (128,200 )      
Change in fair market value of derivative liabilities
    (35,037 )     1,838  
Loss on equity modification
    (41,753 )      
Total other income (expense)
    (460,362 )     831  
Loss before income taxes
  $ (3,800,369 )   $ (4,602,627 )
Provision for income taxes
           
Net loss
  $ (3,800,369 )   $ (4,602,627 )
                 
Basic and diluted loss per common share
  $ (0.04 )   $ (0.06 )
Basic and diluted weighted average shares outstanding
    91,278,322       77,208,523  


 

 



The accompanying notes to financial statements are an integral part of these financial statements
 
 
 
KONARED CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
 
 
   
Common Stock
    Additional     Accumulated        
   
Shares
   
Amount
   
Paid In Capital
   
Deficit
   
Total
 
                               
Ending balance – December 31, 2013
    72,366,667       72,367       11,969,774       (11,678,393 )     363,748  
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 services
    4,052,759       4,053       837,655             841,708  
Common shares issued for equity line underwriting fees
    903,633       904       (904 )            
Common shares issued as compensation
    657,400       657       397,465             398,122  
Additional paid-in capital related to option grants
                  807,161             807,161  
Net loss – year ended December 31, 2014
                      (4,602,627 )     (4,602,627 )
Ending balance – December 31, 2014
    83,496,530     $ 83,497     $ 16,705,636     $ (16,281,020 )   $ 508,113  
                                         
Common shares issued for cash
    3,333,334       3,333       346,667             350,000  
Common shares issued under equity line
    8,550,000       8,550       621,300             629,850  
Common shares issued for services
    6,344,022       6,345       591,926             598,271  
Common shares issued for equity line underwriting fees
    2,708,656       2,724       (2,724 )            
Common shares issued as compensation
    4,238,341       4,238       346,645             350,883  
Common shares issued for interest payments
    98,631       100       6,171             6,271  
Additional paid-in capital related to option grants
                220,960             220,960  
Additional paid-in capital related to warrant issuances
                453,046             453,046  
Additional paid-in capital related to convertible notes beneficial conversion features
                209,743             209,743  
Additional paid-in capital related to convertible notes redemption
                74,889             74,889  
Additional paid-in capital related to equity modification
                41,753             41,753  
Net loss – year ended December 31, 2015
                      (3,800,369 )     (3,800,369 )
Ending Balance – December 31, 2015
    108,769,514     $ 108,787     $ 19,616,012     $ (20,081,389 )   $ (356,590 )

 
 
 

 
 
 



The accompanying notes to financial statements are an integral part of these financial statements
 
 
 
KONARED CORPORATION
STATEMENTS OF CASH FLOWS
 
 
   
Year Ended
December 31, 2015
   
Year Ended
December 31, 2014
 
             
OPERATING ACTIVITIES:
           
Net loss
  $ (3,800,369 )   $ (4,602,627 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Bad debt expense
    6,020       2,204  
Depreciation expense
    2,444       1,983  
Stock issued for compensation
    350,883       398,123  
Stock issued for services
    598,272       841,707  
Option grants expense
    220,960       807,161  
Change in fair market value of derivative liabilities
    35,037       (1,838 )
Amortization of notes payable discounts
    197,905       216  
Loss on equity modification
    41,753        
Change in operating assets and liabilities:
               
Accounts receivable
    220,993       (254,022 )
Inventory
    69,180       (118,211 )
Prepaid expenses
    10,047       (8,500 )
Other current assets
    652       2,848  
Accounts payable and accrued liabilities
    19,402       (79,501 )
Accrued interest
    19,281        
Unearned revenue
    (2,009 )     1,961  
NET CASH USED IN OPERATING ACTIVITIES
    (2,009,549 )     (3,008,496 )
                 
INVESTING ACTIVITIES:
               
Purchase of fixed assets
          (14,674 )
NET CASH USED IN INVESTING ACTIVITIES
          (14,674 )
                 
FINANCING ACTIVITIES:
               
Proceeds from short term debt
    325,000        
Proceeds from short term debt - related party
    500,000        
Repayments on short term debt - related party
    (500,000 )      
Proceeds from convertible notes payable
    1,213,481       150,000  
Repayments on convertible notes payable
    (400,000 )      
Proceeds from issuance of common stock for cash
    979,850       2,700,001  
NET CASH PROVIDED BY FINANCING ACTIVITIES
    2,118,331       2,850,001  
                 
NET INCREASE (DECREASE) IN CASH
    108,782       (173,169 )
                 
CASH, Beginning of Period
    39,987       213,156  
                 
CASH, End of Period
  $ 148,769     $ 39,987  

 


The accompanying notes to financial statements are an integral part of these financial statements
 
 
 
KONARED CORPORATION
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
   
Year Ended
December 31, 2015
   
Year Ended
December 31, 2014
 
             
Cash paid during the year for:
           
Interest
  $ 128,458     $ 15,693  
Taxes
  $     $  
 
 
 
NON CASH INVESTING AND FINANCING ACTIVITIES
 
   
Year Ended
December 31, 2015
   
Year Ended
December 31, 2014
 
             
Discounts on derivative
  $ 241,710     $ 11,006  
Discounts on warrants
  $ 453,046     $  
Interest paid by stock issuances
  $ 6,271     $  
Shares issued as commitment fees - offering costs
  $ 2,724     $ 904  
Discounts from beneficial conversion features
  $ 209,743     $  
Settlement of derivative liability
  $ 274,108     $  



 








The accompanying notes to financial statements are an integral part of these financial statements
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
 
 
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.

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.

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 December 31, 2015 and December 31, 2014.
 
 
 
 

KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


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

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 years ended December 31, 2015 and December 31, 2014, the Company wrote off accounts receivable totaling $6,020 and $2,204, respectively. There were no allowances for doubtful accounts recorded for the years ended December 31, 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 which include coffee fruit, 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. Our cold brew coffee is manufactured using a comparable process. 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.
 
 
 
 
 

KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


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 circumstances where returns are negotiated, sales returns which are accepted 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 December 31, 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.
 
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


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, 2015, the Company had outstanding a senior convertible note (the "VDF Note") with a balance of $453,298, net of a discount of $15,974. The Company determined the VDF Note had an embedded derivative valued at $11,807 at December 31, 2015 due to Sr. Note One having a provision which required adjustments to the conversion price to compensate for dilutive stock issuance events unrelated to the VDF Note. As of December 31, 2014, the VDF Note had a balance of $140,001, net of a discount of $10,790 and the embedded derivative liability was valued at $9,168. During the period ended December 31, 2015, $318,481 of principal was added to the VDF Note. This was comprised of $300,000 of patent license fees which were rolled over to the VDF Note and accrued interest for the year ended December 31, 2015 of $18,481.

On January 20, 2015 the Company also issued an unsecured subordinate convertible debenture with a face value of $440,000 (the "Subordinated Debenture"), which after deducting a $40,000 original issue discount ('OID'), provided funds of $400,000. The Subordinated Debenture was initially valued as having a balance of $207,074, net of a discount of $232,926. The Company determined the Subordinated Debenture initially had an embedded derivative liability valued at $232,926 due to it providing for adjustments to the conversion price. On June 5, 2015, the Company redeemed the Subordinated Debenture 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. $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.
Because there was a derivative liability recorded for the Subordinated Debenture, the derivative component was marked-to-market at time of redemption and the resulting net loss of $41,182 was added to the Change in Fair Value of Derivatives for the period ended December 31, 2015.

The net amount of the Change in Fair Value of Derivatives for the period ended December 31, 2015 was a loss of $35,037, which included the loss on the derivative loss on the Subordinated Debenture and the net amount of mark-to-market value changes in the embedded derivatives liabilities of the VDF Note of $6,145 for the year ended December 31, 2015.

There are no embedded derivatives in any other notes issued by the Company.

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.
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


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, and no convertible preferred stock has been issued. 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 years ended December 31, 2015 and December 31, 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).

The three levels of the fair value hierarchy defined by ASC 820 are as follows:
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


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

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, accounts receivable - related party, inventories net, of any inventory allowance, prepaid expenses, other current assets, accounts payable and accrued liabilities, accounts payable - related party, short term debt, net of discounts, 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.

Level components:
 
As of
December 31,
2015
   
As of
December 31,
2014
 
Cash
  $ 148,769     $ 39,987  
Accounts receivable
    33,227       274,640  
Accounts receivable - related party
    18,000       3,600  
Inventories, net of allowance
    439,158       508,338  
Prepaid expenses
    5,953       16,000  
Other current assets
    -       652  
Acc/payable and accrued liabilities
    211,429       195,183  
Accounts payable - related party
    3,156       -  
Short term debt, net of discounts
    235,237       -  
Unearned revenue
    1,434       3,443  
Level 1 total
  $ 1,096,363     $ 1,041,843  
                 
Derivative liability
  $ 11,807     $ 9,168  
Level 2 total
  $ 11,807     $ 9,168  
      -       -  
Level 3 total   $ Nil     $ Nil  


 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


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

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

Advertising
Costs for advertising are expensed when incurred. Advertising costs totaled $175,432 and $110,498 for the years ended December 31, 2015 and December 31, 2014, respectively. The Company also incurs marketing expenses for product promotion and investor relations 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 $259,958 and $856,666 for the years ended December 31, 2015 and December 31, 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

During the years ended December 31, 2015 and December 31, 2014: (a) depreciation for furniture and equipment of $2,096 and $1,467 was respectively recorded; and (b) depreciation for warehouse fixtures of $348 and $516 was respectively recorded. Accumulated depreciation for all fixed assets totaled $4,427 at December 31, 2015.

Maintenance and repairs are expensed as incurred while renewals and betterments are 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.

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.
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


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

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.

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 $20,081,389 as of December 31, 2015; and has a incurred a net loss for the current year of $3,800,369. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. If necessary, 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. To December 31, 2015, cash proceeds from this equity line and related private placement offering of our common shares totaled $979,850. The Company also entered into five notes which raised net cash proceeds of $820,000 during the year ended December 31, 2015. Subsequent to the year ended December 31, 2015, the Company has raised an additional $235,740 from equity line sales of our common shares and $171,000 from a private placement unit offering.

 
 
 
 

 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


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:

   
December 31, 2015
   
December 31, 2014
 
             
Raw materials
  $ 100,702     $ 157,839  
Finished goods
    338,456       350,499  
Inventory allowance
           
Total
  $ 439,158     $ 508,338  
 
During the years ended December 31, 2015 and December 31, 2014, the Company respectively wrote down inventory by $26,760 and $49,249 to account for expired inventory which had been write-off and disposed of, and for minor manufacturing process shrinkages. The write off during the year ended December 31, 2014 included $18,732 of inventory which had been reserved in prior periods. The Company recognized $nil and $nil recovery in inventory allowance respectively for the years ended December 31, 2015 and December 31, 2014. At December 31, 2015 the Company had $nil of reserved inventory and all inventory was valued at full cost.
 
 
NOTE 5 – Prepaid Expenses and Other Current Assets

Prepaid expenses at December 31, 2015 were comprised a prepayment $5,953 for a manufacturing run and prepaid expenses $16,000 at December 31, 2014 were comprised of prepayments to two service providers.

Other current assets at December 31, 2015 were $nil and at December 31, 2014 totaled $652 which were comprised of a manufacturing deposit of $652. During the year ended December 31, 2014 a $3,500 rental deposit was written off.


NOTE 6 – Fixed Assets

Fixed assets at December 31, 2015 and December 31, 2014 respectively comprised: (a) furniture and equipment totaling $7,639 and $9,735, net of accumulated depreciation of $3,563 and $1,467; and (b) warehouse fixtures totaling $2,608 and $2,956, net of accumulated depreciation of $864 and $516.
 
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 7 – Short Term Debt and Short Term Debt - Related Party

Short Term Debt

September 2015 Notes:
On September 30, 2015 ("Issuance Date"), subject to securities purchase agreements we issued two subordinated promissory notes (the “September 2015 Notes”) to two lenders (the “September 2015 Lenders”) in the aggregate amount of $250,000 (the "Original Principal"). The September 2015 Notes bear interest at 8% per annum and this amount fully accrued upon execution of the loans and added $20,000 to the balance due at Issuance Date. The principal and interest is due and payable in full on September 30, 2016 (“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 September 2015 Notes included an aggregate $25,000 original issuance discount ("OID") which resulted in net proceeds of $225,000. The Company has the right to prepay the September 2015 Notes, pursuant to the terms thereof, at any time, provided it pays the then outstanding balance and accrued interest. The September 2015 Notes provide for customary events of default such as failing to timely make payments and the occurrence of certain fundamental defaults, as described in the September 2015 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 September 2015 Notes are not secured and are subordinated to senior notes issued by the Company. As an inducement for the loans, the Company granted the September 2015 Lenders 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 using a Black-Scholes model at $167,788. The warrants include cashless exercise rights. At December 31, 2015, the balance on the September 2015 Notes was $125,672, including accrued interest of $20,000 and net of unamortized discounts totaling $125,612 related to the inducement warrants and an unamortized OID of $18,716. During the year ended December 31, 2015, $42,176 of the warrants discount was recorded as an amortization expense and $6,284 of the OIDs were recorded as interest expense. Subsequent to the year ended December 3, 2015, the Company has made timely payment of the payments due on the fourth to sixth monthly anniversaries of Issuance Date.

December 2015 Note:
On December 30, 2015 ("Issuance Date"), subject to a securities purchase agreement we issued a subordinated promissory note (the “December 2015 Note”) to one lender (the “December 2015 Lender”) in the aggregate amount of $110,000 (the "Original Principal"). The December 2015 Note bear interest at 8% per annum and this amount fully accrued upon execution of the loan and added $8,800 to the balance due at Issuance Date. The principal and interest is due and payable in full on December 3, 2016 (“Maturity Date”) and has a re-payment schedule which requires payments of $39,600 respectively on sixth, ninth and twelfth month anniversary dates of Issuance Date. The December 2015 Notes included an aggregate $10,000 original issuance discount ("OID") which resulted in net proceeds of $100,000. The Company has the right to prepay the December 2015 Note, pursuant to the terms thereof, at any time, provided it pays the then outstanding balance and accrued interest. The December 2015 Note provides for customary events of default such as failing to timely make payments and the occurrence of certain fundamental defaults, as described in the December 2015 Note. If there should be occurrence of an event of default, repayment of the note will be due at an amount equal to 120% of the outstanding principal and interest due.  The Note is not secured and is subordinated to senior notes issued by the Company and ranks equally with other debt issued by the Company. As an inducement for the loan, the Company issued the December 2015 Lender 500,000 restricted common shares valued at $30,050. At December 31, 2015, the balance on the December 2015 Note was $109,565, including accrued interest of $8,800 and net of unamortized OID of $9,235. During the year ended December 31, 2015, $764 of the OID was recorded as interest expense.
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 7 – Short Term Debt and Short Term Debt - Related Party

Short Term Debt - Related Party

Interim Note:
On June 5, 2015 (the “Issuance Date”), the Company issued a $500,000 note (the “Interim Note”) to a corporation affiliated with a director of the Company. This Note was classified as related party debt and had a maturity date of December 5, 2015. The Interim Note required two payments of $250,000 on the three and six month anniversaries of Issuance, allowed for re-payment at any time without penalty, and  accrued interest at 12% per annum. 1,700,000 restricted common shares of the Company were issued to the lender as an inducement fee. As security for the Interim Note, the Company’s Chief Executive Officer pledged 3,333,333 shares of the Company (the "Pledge"), which he owns, as security for the Interim Note (the "Pledge Shares"). If the Company had defaulted on the Interim Note, the portion of the Pledge Shares equivalent to the amount due would have been released to re-pay the loan. The Company made early re-payments of $50,000 on June 23, 2015 and $211,556 on August 19, 2015 as full settlement of the first installment of Interim Note, including $11,556 of accrued interest then due; and on November 24, 2015 made early repayment of the second installment totaling $253,534, including $3,534 of accrued interest then due; and on that date the Pledge was dissolved. At December 31, 2015, the balance due on the Interim Note was $nil.


NOTE 8 – Convertible Notes Payable

VDF 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 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 Note. The maturity of the VDF 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 Note have been paid. Due to its term, the VDF 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. The VDF Note is secured through the Pledge and Security Agreement executed with VDF and is senior to any other debt issued by the Company. At any time VDF has the option to convert any principal outstanding on the VDF Note into shares of our common stock at a Conversion Price determined by the terms of the VDF Note. Key terms of the VDF 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 VDF Note unless prior written consent of VDF is obtained; and (iii) payments under the VDF Note are secured by a Security Agreement. The VDF Note provides that we may, at our option, roll-over to the VDF Note quarterly $75,000 License fee payments and accrued interest. During the year ended December 31, 2015, we rolled-over License fee payments of $300,000 plus accrued interest for the year $18,481 for a total addition to the VDF Note of $318,481. During the year ended December 31, 2014, we rolled-over License fee payments of $150,000 plus accrued interest for the year of $791 for a total addition to the VDF Note of $150,791. At December 31, 2015, the VDF Note had an outstanding balance $453,298, net of a discount of $15,974 resulting from the embedded derivative; and at December 31, 2014 the outstanding balance was $140,001, net of a discount of $10,790.
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 8 – Convertible Notes Payable (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; 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; and on December 31, 2015 the Conversion Price was adjusted to $0.3823 based on our issuance of a fixed conversion price convertible debenture to a third party, and issuances of warrants and stock to third parties.

Subordinate 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 “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 $400,000 plus accrued interest and OID of $59,529, 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 recorded at redemption as an amortization expense. $5,788 OID was amortized to interest expense over the life of the note and the repayment of the remaining $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.



 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 8 – Convertible Notes Payable (continued)

LPC Note One:
On August 18, 2015, we issued a Senior Convertible Note (“LPC Note One”) to a third party ("LPC") in the amount of $250,000. LPC Note One was issued pursuant to the terms of a Securities Purchase Agreement and bears interest at the rate of 5% per annum (or 18% upon the occurrence of an event of default). 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 long term debt. Interest may be paid via issuance of 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. For the period ended December 31, 2015 $4,688 of accrued interest was paid via issuance of 66,964 restricted common shares priced at the Conversion Price of LPC Note One of $0.07 per clause 2(a) of LPC Note One. LPC Note One has a $25,000 original issuance discount ("OID") which resulted in net proceeds of $225,000. The Company has the right to prepay LPC Note One, 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. LPC Note One provides for customary events of default such as failing to timely make payments and the occurrence of certain fundamental defaults, as described in LPC Note One. LPC Note One is not secured and is subordinated to the VDF Note, ranks equally with LPC Note Two, and ranks above other debt issued by the Company. The principal amount of LPC Note One and all accrued interest is convertible at the option of LPC into shares of our common stock at any time at a fixed Conversion Price of $0.07 per share, subject to adjustments for stock splits, stock dividends, stock combinations or other similar transactions as provided in LPC Note One. At no time may LPC Note One be converted into shares of our common stock if such conversion would result in LPC 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. As an inducement for the loan, the Company granted LPC a six year warrant to purchase 3,750,000 shares of our common stock at an exercise price of $0.10 per share valued using a Black-Scholes model at $277,014. At issuance date, LPC Note One also included a beneficial conversion feature ("BCF") of $107,143 because the exercise price of LPC Note One was set below the market price of our stock when the note was executed. Since the combined warrant discount and BCF exceeded the face value of the note less OID, the warrant discount for LPC Note One was capped at $117,857, resulting in a total discount of $225,000. This warrant has a cashless exercise right. At December 31, 2015, the recorded balance on LPC Note One was $67,365, net of an unamortized discount of $164,372 and an unamortized OID of $18,263. During the year ended December 31, 2015, $60,628 of the  discount was recorded as an amortization expense and $6,737 of the OID was recorded as interest expense.

LPC Note Two:
On November 23, 2015, we issued a Senior Convertible Note (“LPC Note Two”) to a third party ("LPC") in the amount of $300,000. LPC Note Two was issued pursuant to the terms of a Securities Purchase Agreement and bears interest at the rate of 5% per annum (or 18% upon the occurrence of an event of default). 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 long term debt. Interest may be paid via issuance of 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. For the period ended December 31, 2015 $1,583 of accrued interest was paid via issuance of 31,667 restricted common shares priced at the Conversion Price of LPC Note Two of $0.05 per clause 2(a) of LPC Note Two. LPC Note Two has a $30,000 original issuance discount ("OID") which resulted in net proceeds of $270,000.
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 8 – Convertible Notes Payable (continued)

The Company has the right to prepay LPC Note One, 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. LPC Note Two provides for customary events of default such as failing to timely make payments and the occurrence of certain fundamental defaults, as described in LPC Note Two. LPC Note One is not secured and is subordinated to the VDF Note, ranks equally with LPC Note One, and ranks above other debt issued by the Company. The principal amount of LPC Note Two and all accrued interest is convertible at the option of LPC into shares of our common stock at any time at a fixed Conversion Price of $0.05 per share, subject to adjustments for stock splits, stock dividends, stock combinations or other similar transactions as provided in LPC Note Two. At no time may LPC Note Two be converted into shares of our common stock if such conversion would result in LPC 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. As an inducement for the loan, the Company granted LPC a six year warrant to purchase 5,000,000 shares of our common stock at an exercise price of $0.07 per share valued using a Black-Scholes model at $253,098. At issuance date, LPC Note Two also included a beneficial conversion feature ("BCF") of $102,600 because the exercise price of LPC Note Two was set below the market price of our stock when the note was executed. Since the combined warrant discount and BCF exceeded the face value of the note less OID, the warrant discount for LPC Note Two was capped at $167,400, resulting in a total discount of $270,000. This warrant has a cashless exercise right. At December 31, 2015, the recorded balance on LPC Note Two was $28,218, net of an unamortized discount of $244,604 and an unamortized OID of $27,178. During the year ended December 31, 2015, $25,396 of the  discount was recorded as an amortization expense and $2,822 of the OID was recorded as interest expense.











 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
 
 
NOTE 9 – 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 December 31, 2015:

 
Description
 
Convertible
Notes
 
 
Total
Fair Value at December 31, 2013
$
$
Increase due to issuance of senior convertible debenture
 
11,006
 
11,006
Change in Fair Value
 
(1,838)
 
(1,838)
Fair Value at December 31, 2014
$
9,168
$
9,168
Increase due to issuance of subordinate convertible debenture
 
241,710
 
241,710
Reduction due to redemption of subordinate convertible debenture
 
(274,108)
 
(274,108)
Change in Fair Value
 
35,037
 
35,037
Fair Value at December 31, 2015
$
11,807
$
11,807
 

For the year ended December 31, 2015 the change in the fair market value of the derivative liability of $35,037 was recorded as Other Expense. For the year ended December 31, 2014, the change in the fair market value of the derivative liability of $(1,838) were recorded as Other Income.

The lattice methodology was used to value the derivative liabilities related to the convertible notes, with the following assumptions.
 
Assumptions:
December 31, 2015
December 31, 2014
     
Dividend yield
0.00%
0.00%
Risk-free rate for term
1.31%
1.65%
Volatility
133%
117%
Maturity dates
3 years
4 years
Stock Price
$0.055
$0.141


 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 10 – Related Party Transactions

During the years ended December 31, 2015 and December 31, 2014, related party transactions included:

Chief Executive Officer, Director, Board Chair
For the year ended December 31, 2015: (i) cash compensation of $130,000; (ii) Black-Scholes expense amortization of $220,960 related to 2,500,000 options granted on December 19, 2014 of which 750,000 vested on June 30, 2015 and 750,000 vested on December 31, 2015; and (iii) the loan of two vehicles by the CEO to the Company for the sole use by two sales staff in return for the Company providing $37,421 toward lease and loan payments on the vehicles. For the year ended December 31, 2014: (i) cash compensation of $130,000; (ii) issuance of 250,499 shares as past services compensation at $0.627 per share, totaling $157,063; (iii) cancelation of December 12, 2013 option grant totaling 1,000,000 unvested options; and (iv) Black-Scholes expense recording and amortization totaling $159,825 related to 2,500,000 options granted on December 19, 2014 (1,000,000 of which vested immediately and  750,000 which vested on each of June 30, 2015 and December 31, 2015).

President and Chief Operating Officer
For the period ended December 31, 2015: (i) cash compensation, including COBRA benefits, of $116,526 for the period from August 10 (employment start date) to December 310, 2015; (ii) issuance on August 10, 2015 of a signing bonus of 1,333,333 restricted common shares at $0.107 per share for aggregate deemed compensation of $142,667; (iii) issuance on October 2, 2015 of 502,283 restricted common shares at $0.078 per share for aggregate deemed compensation of $39,178; and (iv) issuance on December 31, 2015 of 1,262,047 restricted common shares at $0.05448 per share for aggregate deemed compensation of $68,750. At December 31, 2015, the Company had an account payable of $3,156 due to the President & COO for expenses related to the year ended December 3,1 2015. For the year ended December 31, 2014: n/a.

Chief Financial Officer, Secretary and Treasurer
For the year ended December 31, 2015: (i) cash compensation of $125,000; (ii) issuance on April 30, 2015 of 131,579 restricted common shares at a price of $0.19 per share for aggregate deemed compensation of $25,000; (iii) issuance on July 9, 2015 of 320,513 restricted common shares at $0.1102 per share for aggregate deemed compensation of $25,000; (iv) issuance on October 2, 2015 of 320,513 restricted common shares at $0.078 per share for aggregate deemed compensation of $25,000; and (v) issuance on December 31, 2015 of 458,926 restricted common shares at $0.05448 per share for aggregate deemed compensation of $25,000. For the year ended December 31, 2014: (i) cash payment of consulting fees of $22,500 for services provided from January 1 to March 17, 2014; (ii) cash compensation of $76,500 for period from March 18 to December 31, 2014; (ii) issuance on April 15, 2014 of 50,000 shares at $0.80 per share for aggregate deemed compensation of $40,000; (iii) issuance on August 19, 2014 of 25,000 shares at $0.373 per share for aggregate deemed compensation of $9,325; and (iv) Black-Scholes expense recording of $114,236 for 750,000 options granted on December 19, 2014 which vested immediately. Share payments and options grants were executed by issuances to Mr. Dawe's holding company GBG Management Services Inc.
 
Former Vice-President and Chief Operating Officer
For the year ended December 31, 2015: n/a. For the year ended December 31, 2014: (i) Compensation and termination settlement of $47,613 for period of May 1 to August 14, 2014; and (ii) issuance of 25,000 shares as compensation at $0.62 per share, totaling $15,000.
 
 
 

 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 10 – Related Party Transactions (continued)

Former Chief Financial Officer, Secretary and Treasurer; spouse of President and CEO
For the year ended December 31, 2015: cash compensation of $3,875 for accounting services. For the year ended December 31, 2014: (i) cash compensation as CFO of $23,175 from January 1 to March 17, 2014; (ii) cash compensation as employee of $20,325 for period from March 18 to December 31, 2014; (iii) cancelation of December 12, 2013 option grant of 1,000,000 options which fully vested on grant date; and (v) Black-Scholes expense recording of $152,314 for 1,000,000 options granted on December 19, 2014 which vested immediately.

(Currently serving) Director; (former) Chief Scientific Officer
For the year ended December 31, 2015: cash compensation or $4,000 for consulting services. For the year ended December 31, 2014: (i) Payment of $60,000 as the final installment of CSO contract buy-out negotiated during fiscal 2013; (ii) issuance of 83,167 shares for past services compensation as director at $0.627 per share, totaling $51,146; (iii) cancelation of December 12, 2013 option grant totaling 1,000,000 unvested options; and (iv) Black-Scholes expense recording of $152,314 for 1,000,000 options granted on December 19, 2014 which vested immediately.
 
Independent Director One:
For the year ended December 31, 2015: payment of $19,447 as interest and issuance of 1,700,000 restricted common shares at $0.1402/share as an inducement fee of $238,340 for a short term loan of $500,000 to the Company. For the year ended December 31, 2014: (i) issuance of 83,167 shares for past services compensation as director at $0.627 per share, totaling $51,146; (ii) cancelation of January 7, 2014 option grant totaling 750,000 options; and (iii) Black-Scholes expense recording of $114,236 for 750,000 options granted on December 19, 2014 which vested immediately.

Independent Director Two:
For the year ended December 31, 2015: $39,600 of revenue was derived from product sales to a company owned by Independent Director Two and at December 31, 2015 the Company had an account receivable due of $18,000 related to these sales. For the year ended December 31, 2014: (i) issuance of 83,167 shares for past services compensation as director at $0.627 per share, totaling $51,146; (ii) Black-Scholes expense recording of $114,236 for 750,000 options granted on December 19, 2014 which vested immediately; and (iii) $35,947 of revenue was derived from product sales to a company owned by Independent Director Two and at December 31, 2014 the Company had an account receivable due of $3,600 related to these sales.

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


NOTE 11 – 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 December 31, 2015, there were 108,769,514 shares of our common stock issued and outstanding.
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 11 – Equity (continued)

2015 Share Transactions

On February 6, 2015 we issued 600 restricted common shares at $0.0752 per share to an employee ("Employee One") for compensation. These share issuances were issued based on market close price on issue date for deemed payments totaling of $45. 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 February 6, 2015, we issued 11,000 restricted common shares at $0.0752 per share to a professional athlete ("Ambassador One") for endorsement services rendered. These shares were issued at market close price on issue date for deemed compensation of $827. 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 at $0.19 per share as compensation to our CFO. These shares were valued per terms of his compensation agreement 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 May 1, 2015, we issued 300,000 restricted common shares to a third party for professional 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 June 9, 2015 we issued 1,200 restricted common shares at $0.14 per share to Employee One for compensation. These share issuances were issued based on market close price on issue date for deemed payments totaling 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.
 
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 11 – Equity (continued)

2015 Equity Line: On June 16, 2015, we entered into a $10,250,000 purchase agreement (the "2015 Purchase Agreement") and registration rights agreement (the "2015 Registration Rights Agreement") (collectively the "2015 Equity Line") with an Illinois limited liability company ("LPC"). As part of the 2015 Equity Line, on June 15, 2015, the Company amended a warrant which had been issued to LPC 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. Upon signing the 2015 Purchase Agreement, LPC 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. 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. Subsequently, under the terms of the 2015 Registration Rights Agreement, we filed a Registration Statement on Form S-1 with the U.S. Securities and Exchange Commission (“SEC”) covering the initially issued shares and subsequent shares that may be issued to LPC. 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 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 2015 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 2015 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 2015 Purchase Agreement. LPC shall not have the right nor 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 2015 Equity Line 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. LPC 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 2015 Equity Line, we issued to LPC 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 LPC up to an additional $10 million of our common stock. The 2015 Equity Line  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 LPC under the 2015 Equity Line 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 December 31, 2015 we issued 8,550,000 sale shares and 41,989 per sale commitment shares under the 2015 Equity Line for aggregate cash proceeds of $629,850. Proceeds received by the Company are used for general corporate purposes.
 
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 11 – Equity (continued)

On June 30, 2015, 1,666,667 shares of restricted common shares were issued to investor, unrelated to LPC, 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.

On July 6, 2015, we issued 6,025 restricted common shares at $0.1188 per share to Ambassador One for professional athlete endorsement services rendered. These shares were issued at market close price on issue date for deemed compensation of $716. 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 July 9, 2015 we issued 226,860 restricted common shares at $0.1102 per share as compensation to our CFO. These shares were valued per terms of his compensation agreement 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 August 11, 2015, we issued 1,333,333 restricted common shares to our new President & Chief Operating Officer at $0.107. These shares were valued based on market close price on issue date for deemed proceeds of $142,667. 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 15, 2015, we issued 1,000 restricted common shares at $0.075 per share to Employee One for compensation. These share issuances were issued 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 18, 2015, we issued 26,000 restricted common shares at $0.0901 per share to a consultant for services rendered. These share issuances were issued based on market close price on issue date for deemed payments totaling 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, we issued 12,500 restricted common shares at $0.0829 per share to a professional athlete ("Ambassador Two") for endorsement services rendered. These share issuances were issued based on market close price on issue date for deemed payments totaling 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.
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 11 – Equity (continued)

On September 30, 2015, we issued 9,000 restricted common shares at $0.078 per share to Ambassador One for endorsement services rendered. These share issuances were issued based on market close price on issue date for deemed payments totaling of $702. 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 30, 2015, we issued 50,000 restricted common shares at $0.078 per share to a consultant for services rendered. These share issuances were issued based on market close price on issue date for deemed payments totaling of $3,900. 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 30, 2015 we issued 320,513 restricted common shares at $0.078 per share as compensation to our CFO. These shares were valued per terms of his compensation agreement 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 as compensation to our President & COO. These shares were valued per terms of his compensation agreement for aggregate deemed compensation totaling $39,178. 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 October 20, 2015, we issued 348,472 restricted common shares at an agreed price of $0.0699 per share for aggregate deemed compensation of $24,358 to a beverage distributor per terms of a services agreement. 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.

On October 21, 2015, we issued 1,381,025 restricted common shares at a contractually agreed price of $0.07241 per share for aggregate deemed compensation of $100,000 to a service provider ("Service Provider") for services rendered. 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.

On October 27, 2015, we issued 2,000,000 restricted common shares at a contractually agreed price of $0.068 per share for aggregate deemed compensation of $136,000 to Service Provider for services rendered. 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.
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 11 – Equity (continued)

On December 3, 2015, we issued 500,000 restricted common shares valued market close price on date of issue at $0.0601 for aggregate deemed proceeds of $30,050 to a lender as a fee for a loan to the Company. 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.

On December 8, 2015, we issued to LPC: (a) 66,964 restricted common shares valued at the LPC Note One Conversion Price of $0.07 for interest of $4,688 accrued on LPC Note One to December 31, 2015; and (b) 31,667 restricted common shares valued at the LPC Note Two Conversion Price of $0.05 for interest of $1,583 accrued on LPC Note Two to December 31, 2015. 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.

On December 31, 2015 we issued 458,926 restricted common shares at $0.05448 per share as compensation to our CFO. These shares were valued per terms of his compensation agreement 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 December 31, 2015 we issued 1,262,047 restricted common shares at $0.05448 per share as compensation to our President & COO. These shares were valued per terms of his compensation agreement for aggregate deemed compensation totaling $68,750. 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..

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-US 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 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 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 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 Equity Line (detailed below), was filed and subsequently deemed Effective by the SEC on May 8, 2014.
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 11 – Equity (continued)

2014 Equity Line: On February 3, 2014, we entered into an Equity Line Agreement and a Registration Rights Agreement with  an Illinois limited liability company ("LPC"), pursuant to which we have the right to sell to LPC up to $12,000,000 in shares of our common stock, subject to certain limitations set forth in the 2014 Equity Line Agreement. The Term of the 2014 Equity Line was thirty months and shares under the 2014 Equity Line were registered with the SEC in a Form S-1 which was deemed Effective on May 8, 2014. The 2014 Equity Line is no longer effective due to our stock being below the floor price and because the Form S-1 has now become stale. In consideration for entering into the Equity Line Agreement, we issued LPC 872,727 common shares as a commitment fee and could 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 were recorded as an addition of $904 to common stock and a subtraction of $904 from Additional Paid in Capital. During the year ended December 31, 2014 we issued 3,697,889 shares under the Equity Line for aggregate proceeds of $1,700,001.

On April 14, 2014, we issued 50,000 restricted shares at $0.80 closing market price per share to a consultant ('CFO consultant') for aggregate deemed compensation totaling $40,000. 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, 2014, 25,000 restricted common shares were issued to our former Vice President & Chief Operating Officer 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 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.

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 August 19, 2014, we issued 25,000 restricted shares at $0.373 closing market price per share to CFO consultant for aggregate deemed compensation totaling $9,325. 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 October 1, 2014, 50,000 restricted common shares were issued to an employee for prior services rendered at a price of $0.3449 based on market close price on issue date for deemed compensation of $17,245. 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.
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 11 – Equity (continued)

On October 1, 2014, 7,400 restricted common shares were issued to Employee One for prior services rendered at a price of $0.3449 based on market close price on issue date for deemed compensation of $2,552. 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 October 21, 2014, we issued 352,759 restricted common shares at a contractually agreed price of $0.2835 per share for aggregate deemed compensation of $100,000 to a service provider ("Service Provider") for services rendered. 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.

On December 1, 2014, we issued 2,000,000 restricted common shares at $0.251 closing market price for aggregate deemed compensation of $502,000 to Service Provider for services rendered. 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.

On December 31, 2014, we issued 1,700,000 restricted common shares at $0.141 closing market price for aggregate deemed compensation of $239,700 to Service Provider for services rendered. 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.
 
Warrants

2015
On June 15, 2015, as part of the 2015 Equity Line the Company amended 1,136,364 warrants (the "January 27, 2014 Warrants") which had been issued to LPC on January 27, 2014, to modify the exercise price from $0.65 to $0.15. None of these warrants have yet been exercised. 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 August 18, 2015, as an inducement for execution of LPC Note #1, the Company granted LPC six year warrants (the "August 18, 2015 Warrants") to purchase 3,750,000 shares of restricted common stock at an exercise price of $0.10 per share. Because these warrants are related to issuance of debt, the value of the warrant was required to be recorded as a discount to LPC Note #1 with an offset to additional paid in capital. The original costing of the warrants using a Black-Scholes option pricing model was $277,014, but this amount was reduced to a discount of $117,857 based on the net amount of the face value of the LPC Note #1 of $250,000, less the OID of $25,000, less the BCF of $107,143. These warrants include a cashless exercise right and have the same ownership limitation included in LPC Note #1. None have yet been exercised.
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 11 – Equity (continued)

On September 30, 2015, as an inducement for execution of the September 2015 Notes, the Company granted the September 2015 Lenders five-year warrants (the "September 30, 2015 Warrants") to purchase an aggregate of 3,125,000 shares of our common stock at an exercise price of $0.08 per share. These warrants include cashless exercise rights and none have yet been exercised. Because these warrants were related to issuance of debt, the value of the warrants based on a Black-Scholes option pricing model was required to be recorded as a discount of $167,788 to the September 2015 Notes with an offset to additional paid in capital.

On November 23, 2015, as an inducement for execution of LPC Note #2, the Company granted LPC six year warrants (the "November 23, 2015 Warrants") to purchase 5,000,000 shares of restricted common stock at an exercise price of $0.07 per share. Because these warrants are related to issuance of debt, the value of the warrants was required to be recorded as a discount to LPC Note #2 with an offset to additional paid in capital. The original costing of the warrants using a Black-Scholes option pricing model was $253,098, but this amount was reduced to a discount of $167,400 based on the net amount of the face value of the LPC Note #1 of $300,000, less the OID of $30,000, less the BCF of $102,600. These warrants include a cashless exercise right and has the same ownership limitation included in LPC Note #2. None have yet been exercised.

2014
On January 27, 2014, we issued 681,818 units to an investor in a non-brokered private placement at a purchase price of $0.55 per unit for gross proceeds of $375,000. 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. None of these warrants have yet been exercised.

On January 27, 2014, we issued 1,136,364 units to LPC in a non-brokered private placement at a purchase price of $0.55 per unit for gross proceeds of $625,000. 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. None of these warrants have yet been exercised. As referenced in the above information regarding 2015, on June 15, 2015, as part of the 2015 Equity Line the Company amended 1,136,364 warrants which had been issued to LPC on January 27, 2014, to modify the exercise price from $0.65 to $0.15.






 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 11 – Equity (continued)

The fair valuations for warrants which were required to be valued were done on date of grant using a Black Scholes option pricing model with the following assumptions:

Warrant
Risk free
rate*
Dividend
yield
Volatility
period
Volatility
rate
Estimated
life
Exercise
Price
Grant Date
Stock price
               
November 23, 2015 Warrants
0.85%
0.0%
2.0 years
89%
6.0 years
$0.17
$0.17
September 30, 2015 Warrants
1.37%
0.0%
2.0 years
89%
5.0 years
$0.08
$0.08
August 18, 2015 Warrants
1.78%
0.0%
2.0 years
89%
6.0 years
$0.10
$0.10
January 27, 2014 Warrants (re-priced)
1.56%
0.0%
2.0 years
91%
4.65 years
$0.15
$0.14
January 27, 2014 Warrants (original)
1.56%
0.0%
2.0 years
91%
4.65 years
$0.65
$0.14
October 4, 2013 Warrants
1.40%
0.0%
5 years
429%
1.5 years
$0.65
$0.65
*(based on US Treasury Constant Maturities matching estimated life)

The following table summarizes the Company’s warrant activity for the years ended December 31, 2015 and December 31, 2014:

 
Number of
Warrants
 
Weighted-Average
Exercise Price
Weighted-Average Remaining Term
(in years)*
 
Intrinsic
Value**
             
Outstanding at December 31, 2013
3,966,666
$
0.65
2.79
$
Nil
January 27, 2014 - Granted with Units
1,818,182
 
0.65
4.08
 
Nil
Outstanding at December 31, 2014
5,784,848
$
0.63
3.20
$
Nil
August 18, 2015 - Granted for loan fee
3,750,000
 
0.10
5.64
 
Nil
September 30, 2015 - Granted for loan fee
3,125,000
 
0.08
4.75
 
Nil
November 23, 2015 - Granted for loan fee
5,000,000
 
0.07
5.90
 
Nil
Outstanding at December 31, 2015
17,659,848
$
0.24
4.76
$
Nil
 
*  (remaining term as of December 31, 2015)
**(intrinsic value based on the closing share price of $0.055 on December 31, 2015)
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 11 – Equity (continued)

Options:

On November 25, 2013, the Company issued 250,000 three year options (the "November 25, 2013 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 using a Black-Scholes option pricing model based on inputs shown in the table 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.

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 (the "December 19, 2014 Options") were granted under the Stock Option Plan. Black-Scholes valuation costs for these options were recorded as follows based on the input factors detailed in the table below: (1) During the year ended December 31, 2014: (a) expensing of $152,314 for 1,000,000 five year options granted to CEO exercisable at $0.17 per share which vested immediately; (b) 2014 service period amortization of $7,511 for 1,500,000 options granted to CEO exercisable at $0.17 per share of which 750,000 vest 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; and (2) During the year ended December 31, 2015: $220,960 for 2015 service period amortization for 1,500,000 options granted to CEO December 19, 2014 of which 750,000 vested on June 30, 2015; and 750,000 of which vested on December 31, 2015.

The expensing and amortization of all options grants have been credited to Additional Paid-In Capital.
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 11 – Equity (continued)

The fair valuations for outstanding options were done on date of grant using a Black Scholes option pricing model with the following assumptions:

Option
Risk free rate*
Dividend yield
Volatility period
Volatility
rate
Estimated life
Exercise
Price
Grant Date Stock price
               
December 19, 2014 Options
0.85%
0.0%
2.5 years
205%
2.5 years
$0.17
$0.17
November 25, 2013 Options
0.57%
0.0%
3 years
34%
1.0 years
$0.70
$0.72
*(based on US Treasury Constant Maturities matching estimated life)

A summary of changes in outstanding stock options for the year ended December 31, 2015 and 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
$
0.901
0.701
$
-
January 7, 2014 – Grant to director
750,000
 
-
-
 
-
December 19, 2014 - Cancellations
(3,750,000)
 
-
-
 
-
December 19, 2014 - Grants to directors, officers and employee
6,750,000
 
0.17
4.97
 
nil
Outstanding at December 31, 2014
7,000,000
$
0.19
3.86
$
-
(no option issuances were made in 2015)
-
 
-
-
 
-
Outstanding at December 31, 2015
7,000,000
$
0.19
3.86
$
-

*  (remaining term as of December 31, 2015)
**(intrinsic value based on the closing share price of $0.055 on December 31, 2015)
1 (Weighted average price and term for 2013 Outstanding Balance is based on 250,000 non-cancelled options issued in 2013)

 
The following table summarizes information about the options outstanding at December 31, 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
0.90
 
   250,000
$0.70
$nil
0.90
$0.17
 
6,750,000
$0.17
$nil
3.97
 
6,750,000
$0.17
$nil
3.97
Totals
 
7,000,000
$0.19
$nil
3.86
 
7,000,000
$0.19
$nil
3.86

*  (remaining term as of December 31, 2015)
**(intrinsic value based on the closing share price of $0.055 on December 31, 2015)
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 12 – Commitments and Contingencies

Lease
Our company shares a lease for a 10,000 square foot facility in San Clemente, California, with Malie, Inc., (“Malie”) a company owned by our CEO and his spouse, who is the CEO of Malie. The current lease has a term of June 1, 2014 to May 31, 2016 and presently requires total lease payments of $10,139 per month, of which the Company's portion is $7,790 per month. On February 25, 2016, the Company and Malie extended the lease for an additional 24 month term and committed to total lease payments of $10,466 for June 1, 2016 to May 31, 2017 and $10,793 for June 1, 2017 to May 31, 2018. The Company's portion of payments under the extended term arrangements are $6,461 for June 1, 2016 to May 31, 2017 and $6,663 for June 1, 2017 to May 31, 2018. For the year ended December 31, 2015 our Company paid a total of $92,479 (averaging $7,707 per month) of the total lease expense of $120,360 (averaging $10,030 per month). For the year ended December 31, 2014, our Company paid a total $90,471 (averaging $7,539 per month) of the total lease expense of $117,744 (averaging $9,812 per month).

Total remaining commitments due under the lease include:

Year
Amount
2016
$123,957 
2017
$127,227 
2018
$53,965 
2019 and thereafter
$Nil 

Litigation
On December 30, 2015, our former beverage distributor, Splash Beverage Group ('SBG'), filed the following action in Broward County Circuit Court, Florida: Splash Beverage Group, Inc. v. KonaRed Corporation Case No. 15-022541 CACE 09 regarding the Company's cancellation of the beverage distribution agreement ("CDA") and the sales and marketing agreement ('SMA") the parties had executed on April 23, 2014. The Company had cancelled the SMA on September 16, 2015 and the CDA on September 23, 2015. The Company believes SBG's allegations are both factually and legally unfounded and the likelihood of a material loss in this matter is considered to be remote and any damages the Company may pay are not currently estimable.

On September 22, 2015 we settled a claim from two related parties that a service provider engaged by SBG to provide social media postings services to the Company had violated the copyrights of two related clients regarding certain pictures used by the service provider. We had received this claim on March 27, 2015 and settled the matter 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.

VDF Agreements
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 FutureCeuticals, Inc. ("VDF"). This arrangement included a settlement agreement (the "Settlement Agreement") and is structured 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:
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 12 – Commitments and Contingencies (continued)

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. 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.

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 AMPs is as follows:
 
Three Month Period Ended
Due Date
Amount
     
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
 
 
 

 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 12 – Commitments and Contingencies (continued)

AMP's are due forty five days after the end of each reporting period and we may rollover AMPs to the VDF senior convertible note (the "VDF Note"). During the year ended December 31, 2015, we rolled over four AMPs to VDF Note and during the year ended December 31, 2014, we made one cash license payment and rolled over three AMPs to the VDF Note.

3.  VDF Note
The VDF Note is a senior convertible note with a maturity date of December 31, 2018. Payment requirements are accelerated: (i) pursuant to an event of default; or (ii) if the License Agreement is terminated. 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 VDF Note unless prior written consent of VDF is obtained; and payments under the note are secured by the Security Agreement as described below. At any time and at the option of VDF, any principal outstanding under the VDF Note may be converted into restricted common shares of the Company based on the terms of the VDF Note. As described above in Note 8 - Long Term Debt, the conversion price of the VDF Note is presently $0.3823 per share.

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
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. A Warrant Exercise Event comes into being 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.
 
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.
 
 
 
 
 
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 12 – 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 VDF 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.