Attached files
| file | filename |
|---|---|
| EX-10.49 - KONARED 10K, NOTE AGREEMENT - KonaRed Corp | konaredexh10_49.htm |
| EX-32.1 - KONARED 10K, CERTIFICATION 906, CEO/CFO - KonaRed Corp | konaredexh32_1.htm |
| EX-10.57 - KONARED 10K, PROMISSORY NOTE - KonaRed Corp | konaredexh10_57.htm |
| EX-31.2 - KONARED 10K, CERTIFICATION 302, CFO - KonaRed Corp | konaredexh31_2.htm |
| EX-31.1 - KONARED 10K, CERTIFICATION 302, CEO - KonaRed Corp | konaredexh31_1.htm |
| EX-10.54 - KONARED 10K, NOTE AND ADDENDUM - KonaRed Corp | konaredexh10_54.htm |
| EX-10.48 - KONARED 10K, CONVERTIBLE NOTE - KonaRed Corp | konaredexh10_48.htm |
| EX-10.47 - KONARED 10K, NOTE AGREEMENT - KonaRed Corp | konaredexh10_47.htm |
| EX-10.44 - KONARED 10K, NOTE AGREEMENT - KonaRed Corp | konaredexh10_44.htm |
| EX-10.43 - KONARED 10K, SUBSCRIPTION AGREEMENT - KonaRed Corp | konaredexh10_43.htm |
| EX-10.42 - KONARED 10K, NOTE AGREEMENT - KonaRed Corp | konaredexh10_42.htm |
| EX-10.41 - KONARED 10K, PROMISSORY NOTE - KonaRed Corp | konaredexh10_41.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended December 31, 2016
OR
☐ 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)
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Nevada
(State or other jurisdiction
of incorporation or organization)
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99-0366971
(IRS Employer
Identification Number)
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1101 Via Callejon #200
San Clemente, CA 92673-4230
(Address of principal executive offices) (Zip Code)
(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 ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act: Yes ☒ No ☐
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 ☒ No ☐
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 ☒ No ☐
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 ☐ No ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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☐
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Smaller reporting company
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☒
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐ No ☒
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 63,378,077 common shares of the registrant owned by non-affiliates on June 30, 2016 was $3,149,890 based on a closing price of $0.0497 per share.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 178,256,378 common shares were issued and outstanding as of April 12, 2017.
KONARED CORPORATION
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Corporate Overview
In this Annual Report on Form 10-K the terms "KonaRed", "we", "us", "our", the "Registrant", and the "Company" mean KonaRed Corporation. Unless otherwise stated, "$" 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 and distribution center is located at 1101 Via Callejon #200, San Clemente, CA 92673-4230.
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® Corporation is a Hawaiian Coffee Company and the pioneer of the USA Grown, Hawaiian Coffee Fruit. The company oversees a vertically integrated supply chain which starts with the world renowned, highest quality Coffee and Coffee Fruit from Kona, Hawaii. The Company produces five award winning Ready to Drink ('RTD') 12oz Cold Brew Coffee varieties, Bag in the Box, Key Kegs, a complete line of whole bean and ground Kona Coffee Beans, plus its well established RTD Antioxidant Juices and Hawaiian Coffee Fruit nutritional supplements. The Company also has an industrial ingredients supply division. KonaRed products are sold throughout the U.S. and can be found in select Vons, Albertsons, Publix, Pavilions, Costco, Ralphs, Fred Meyer, King Soopers, Smiths, Kroger, Safeway, Vitamin Shoppe, Target, Whole Foods, 7-Eleven and many other retail outlets. More information about KonaRed and its products can be found at www.konared.com.
12oz. Award Winning RTD Cold Brew Coffees
In February 2016 we introduced a new line of Ready-to-Drink ('RTD') Cold Brew Coffees which included the flavors of 'Original', 'Hawaiian Vanilla' and 'Espresso'. In August 2016, consumer demand precipitated the addition of 'Kauai Caramel' and 'Maui Mocha' flavors. Sales of this product have expanded quickly and the line is now being sold in leading retailers throughout the US. Hawaiian Vanilla has won the BevergeWorld BevStar award and the Original Cold Brew won the Gourmet Retailer Editor's Choice for Best Coffee. KonaRed RTD Cold Brew Coffees have become one of the leading brands in this fast growing consumer packaged goods sector. Cold brew coffee continues to grow in popularity as it appeals to premium beverage trends, but also health and wellness ones too.
The evidence of consumer demand for Cold Brewed Coffee is in the numbers. According to SPINS data for the 52 weeks ending October 4th 2015, Cold Brewed Coffee sales reached $15.3million in Multi-Outlet and $7.3million in the Natural Channel. With dollar and unit sales in both channels exceeding 100% growth versus the prior year and the top three brands commanding over 85% share of the segment, it's evident that 2015 was just the beginning. The category is estimated to have grown to $65million in 2016.
KonaRed's anti-oxidant beverage products consist of the following proprietary formulations:
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16 oz. KonaRed Original Antioxidant Juice (2 servings)
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10.5 oz. KonaRed Original Antioxidant Juice (1 serving)
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New Product Offerings:
KonaRed® Original Bag in a box – sold primarily at Costco.
Shelf pictures
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.
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KonaRed Hawaiian Superfruit Powder
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100% soluble coffee fruit powder made from coffee fruit from Kona, Hawaii
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KonaRed Wake Up Performance Powder Packets
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1 tub with 30 packets
Coffee Bean Products
Our line of KonaRed Coffee Beans come in varieties.
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100% Kona Coffee beans
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10% Kona Blends
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Both come in Whole Bean or Ground
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Industrial Ingredient Division Launch
In December of 2015, we executed a supply contract with our partner, VDF Futureceuticals Inc, ("VDF"). We now offer an American made U.S.A Hawaiian grown coffee fruit supply to the world with both coffee fruit powders and liquid extracts to other companies B2B.
Use of Patents
An important element of our business is the License we have been provided by 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.
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
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 and retail products, 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 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 by us sending processed coffee fruit 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 and cold brew categories, boasting numerous retail entrees and continued expansion. We first established our products in the upstart coffee fruit sector on our home turf in Hawaii and then have expanded across the USA by winning placements at Kroger, Target, Vitamin Shoppe and other major retailers. We have since moved into the large and lucrative market of coffee and have expanded beyond just coffee fruit. Over 50% of Americans over the age of 18 drink coffee daily and it is a huge marketplace. We have positioned ourselves as one of the leading RTD Cold Brew Coffee product lines on the market since our February 2016 launch.
Sales Strategy
Our sales strategy for our Cold Brew Coffee and Antioxidant beverages 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 in specific regions such as New York, Los Angeles and Florida.
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 as we grow.
Although KonaRed was invented as a wellness product, we believe consumer acceptance of our beverage products now places us both within the coffee and 'premium juice' retail categories, as well as on dairy shelves with cold brew coffees, and the coffee aisle with our whole bean coffee line.
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 expansion of leading beverage monoliths within new products in the 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:
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Coca Cola acquired Zico Coconut Water in January 2014
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Pepsi acquired a majority stake in O.N.E. Coconut Water in April 2012
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InBev has made a series of investments in Sambazon (in August 2012, December 2011, and December 2008)
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InBev has also made a series of investments in Vita Coco in May 2012 and December 2010
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Bai Brands sold to Dr. Pepper Snapple for an acquisition of $1.7 billion in December 2016
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Peets Coffee & Tea purchased 100% of Stumptown Coffee Roasters in October 2015 for an un-disclosed amount
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High Brew Coffee received $4 Million investment from CAVU Venture Partners in April 2016
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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:
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Direct Store Distributors
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Broadline Distributors
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Direct to Retail
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Online Retail
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Raw Material Ingredient Sales
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The specifics of each channel are as follows:
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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. (A 'functional beverage' is defined as one which has certain attributes, such as Antioxidants.)
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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.
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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.
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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.
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Raw Material Ingredient Sales:
In December 2015, we launched our coffee fruit raw ingredient materials division and will be expanding this revenue channel in cooperation with VDF.
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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®" and "Nature's Best Kept Secret®" 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.
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, director; and John Dawe, who is our Chief Financial Officer, Secretary & Treasurer, we currently employ 10 full-time and 4 part-time employees who 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.
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.
None.
Our principal office and warehouse is located at 1101 Via Callejon #200, San Clemente, California 92673-4230. During the years ended December 31, 2016 and December 31, 2015 we shared our warehouse premises with a sublessee whose occupancy ended on April 7, 2017, at which time we assumed all lease payments until we acquire a new sublessee tenant. We also utilize offices provided by our CEO and CFO. The current distribution facility lease has a term of June 1, 2016 to May 31, 2018 and presently requires total lease payments of $10,466 per month, of which the Company's portion is $8,066 per month. On February 25, 2016, the Company 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 comprise $8,066 for June 1, 2016 to April 30, 2017 and will, in the absence of a new sublessee, be $10,793 for June 1, 2017 to May 31, 2018. For the year ended December 31, 2015 our Company paid a total of $95,412 (averaging $7,951 per month) of the total lease expense of $123,957 (averaging $10,330 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.
On October 18, 2016, the Company entered into a Settlement Agreement with Splash Beverage Group, Inc. ("SBG") (collectively the "Parties") to settle and discharge, with no payments being made between the Parties, all claims between the Parties regarding the Confidential Distribution Agreement ("CDA") and Sales and Marketing Services Agreement ("SMSA") which the Parties had entered on April 22, 2014 and which the Company had provided cancelation notices to SBG of the SMSA on September 16, 2015 and the CDA on September 23, 2015. A copy of the settlement agreement was included in our filing of a Current Report on Form 8-K on October 21, 2016. This Settlement Agreement is the final resolution of all disputes and claims between the Parties.
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.
Not applicable.
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, 2016 and December 31, 2015. These prices represent quotations between dealers without adjustment for retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
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Quarter Ended:
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High
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Low
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FY2016:
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March 31, 2016
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$
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0.044
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$
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0.067
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June 30, 2016
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$
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0.045
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$
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0.069
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September 30, 2016
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$
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0.045
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$
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0.066
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December 31, 2016
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$
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0.042
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$
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0.061
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FY2015:
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March 31, 2015
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$
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0.230
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$
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0.070
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June 30, 2015
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$
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0.222
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$
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0.105
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September 30, 2015
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$
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0.177
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$
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0.073
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December 31, 2015
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$
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0.826
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$
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0.050
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Shareholders
On April 12, 2015 there were 217 shareholders of record of the 178,256,378 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. As of December 31, 2016, 6,750,000 options had been issued under the Stock Option Plan. There were no stock options issued during the years ending December 31, 2016 and December 31, 2015.
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 years ended December 31, 2016 and December 31, 2015. 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 August 11, 2016 we discontinued the 2015 Equity Line after the last shares which had been registered under the related Form S-1 were sold. Subsequently there has not been filing of, and there are no plans to file, a new registration statement to effect further sales and the 2015 Equity Line is now effectively defunct. During the year ended December 31, 2016, the Company issued 6,450,000 Sale Shares and 21,529 per sale Commitment Shares under the 2015 Equity Line for aggregate proceeds of $322,936.
On January 1, 2016 we issued 600 restricted common shares at $0.0614 per share at market close price on date of grant to an employee for deemed compensation of $37. 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 January 8, 2016, we issued 651,269 restricted common shares at $0.05 per share at market close price on date of grant for deemed compensation of $32,563 to a service provider as final payment 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 January 11, 2016 we issued 5,000 restricted common shares at $0.064 per share to an employee at market close price on date of grant for deemed compensation of $320. 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.
In February 2016, we executed a private placement unit offering which raised $171,000 through the sale of 4,275,000 units. Unit offer #1 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. The fair market value of the shares based on closing market prices on dates of sale was $227,160 and the embedded value of the warrants based on a Black-Scholes option pricing model was $182,910. 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.
On February 23, 2016 we issued 5,000 restricted common shares at $0.0502 per share at market close price on date of grant to an employee for deemed compensation of $251. 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 March 4, 2016, we issued 3,500 restricted common shares at $0.0559 per share at market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $196. 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.
For the three month period ended March 31, 2016, we issued to LPC: (a) 45,143 restricted common shares at $0.07 per share for a deemed cost of $3,160 for interest accrued on LPC Note One for the period from January 1, 2016 to March 31, 2016 ; and (b) 75,840 restricted common shares at $0.05 per share for a deemed cost of $3,792 for interest accrued on LPC Note Two for the period from January 1, 2016 to March 31, 2016. These shares were issued at market close price on date of grant to one US company, which 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 March 31, 2016 we issued 150,366 restricted common shares at $0.051 per share at market close price on date of grant to our CEO for deemed compensation totaling $7,669. 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 March 31, 2016 we issued 318,081 restricted common shares at $0.051 per share at market close price on date of grant to our President & COO for deemed compensation totaling $16,222. 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 March 31, 2016 we issued 462,663 restricted common shares at $0.051 per share at market close price on date of grant to a company wholly owned by our CFO for deemed compensation totaling $23,596. 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 March 31, 2016 we issued 600 restricted common shares at $0.054 per share at market close price on date of grant to an employee for deemed compensation of $30. 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.
From April to May 2016, we executed a private placement unit offering which raised $394,000 through the sale of 9,850,000 units. Unit Offer #2 terminated on May 31, 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. The fair market value of the shares based on closing market prices on dates of sale was $532,443 and the embedded value of these warrants based on a Black-Scholes option pricing model was $426,730. These shares were issued to nine 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.
On May 20, 2016 we issued 10,000 restricted common shares at $0.054 per share at market close price on date of grant to an employee for deemed compensation of $540. 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 May 20, 2016 we issued 5,000 restricted common shares at $0.054 per share at market close price on date of grant to an employee for deemed compensation of $270. 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 May 20, 2016, we issued 68,000 restricted common shares at $0.054 per share at market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $3,672. 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 May 20, 2016, we issued 8,500 restricted common shares at $0.054 per share at market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $459. 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 May 20, 2016, we issued 7,000 restricted common shares at $0.054 per share at market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $378. 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 May 20, 2016, we issued 8,500 restricted common shares at $0.054 per share at market close price on date of grant to a professional athlete for endorsement services for deemed compensation of $459. 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 June 6, 2016, we issued 5,000 restricted common shares at $0.0518 per share at market close price on date of grant to a health care professional for endorsement services for deemed compensation of $259. 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 June 8, 2016 we issued 333,781 restricted common shares at $0.049 per share at market close price on date of grant as compensation to our CEO for deemed compensation totaling $16,355. 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 8, 2016 we issued 254,441 restricted common shares at $0.049 per share at market close price on date of grant as compensation to our President & COO for deemed compensation totaling $12,468. 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.
For the period ended June 30, 2016 we issued 164,841 restricted common shares at $0.052483 per share at market close price on date of grant to our CEO for deemed compensation totaling $8,651. 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.
For the period ended June 30, 2016 we issued 348,702 restricted common shares at $0.052483 per share at market close price on date of grant to our President & COO for deemed compensation totaling $18,301. 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.
For the period ended June 30, 2016 we issued 507,202 restricted common shares at $0.052483 per share at market close price on date of grant to a company wholly owned by our CFO for deemed compensation totaling $26,619. 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 30, 2016 we issued 1,200 restricted common shares at $0.0497 per share at market close price on date of grant to an employee for deemed compensation of $60. 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, 2016, we issued 17,000 restricted common shares at $0.0497 per share at market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $845. 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 June 30, 2016, we issued 1,500,000 restricted common shares at $0.0497 per share at market close price on date of grant for consultant services rendered for a deemed cost of $74,550. These shares were issued to three US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
For the three months ended June 30, 2016, we issued to LPC: (a) 45,143 restricted shares at $0.0497 per share for a deemed cost of $2,244 for interest accrued on LPC Note One for the period from April 1, 2016 to June 30, 2016 ; and (b) 75,840 restricted shares at $0.0497 per share for a deemed cost of $3,769 for interest accrued on LPC Note Two for the period from April 1, 2016 to June 30, 2016. These shares were issued at market close price on date of grant to one US company, which 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 July 13, 2016, we issued 294,737 restricted common shares at $0.0475 per share at market close price on date of grant for consultant services rendered for a deemed cost of $14,000. 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.
From July to September 2016, we executed a private placement offering which raised $101,000 through the sale of 2,525,000 units. Unit Offer #3 terminated on September 30, 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. The fair market value of the shares based on closing market prices on dates of sale was $168,525 and the embedded value of the warrants based on a Black-Scholes option pricing model was $132,571. These shares were issued to eight 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.
On August 1, 2016, the Company received a loan of $100,000 from a director of the Company and issued 340,000 restricted common shares as an inducement fee at market close price of $0.0456 on date of issue for a deemed cost of $15,504. 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 8, 2016, we issued 20,000 restricted common shares at $0.0475 per share market close price on date of grant to an employee for deemed compensation of $950. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On August 8, 2016, we issued 50,000 restricted common shares at $0.0475 per share market close price on date of grant to an employee for deemed compensation of $2,375. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On August 15, 2016, we issued 1,333,333 restricted common shares at $0.049 per share at market close price on date of grant to our President & COO for deemed compensation totaling $65,333. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On August 24, 2016, we issued 42,500 restricted common shares at $0.0639 per share market close price on date of grant to an employee for deemed compensation of $2,716. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On August 24, 2016, we issued 25,000 restricted common shares at $0.0639 per share market close price on date of grant to an employee for deemed compensation of $1,598. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On August 30, 2016, the Company redeemed the balance due of $59,000 on the September 2015 Note One through issuance of 1,475,000 shares valued at $95,875 based on a market close price of $0.065 per share on date of issuance. This included a loss on conversion of $36,875 based on the difference between the value of the shares issued at market close price on date of issue and the agreed conversion price of $0.04 per share. These shares were issued to one US company, which 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 6, 2016, we issued 10,000 restricted common shares at $0.0599 per share market close price on date of grant to an employee for deemed compensation of $599. 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 8, 2016, we issued 25,000 restricted common shares at $0.06 per share market close price on date of grant to an employee for deemed compensation of $1,500. 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 9, 2016, we issued 10,000 restricted common shares at $0.0581 per share market close price on date of grant to an employee for deemed compensation of $581. 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 23, 2016, a note holder provided an extension of the maturity of the note held in return for the note being amended to provide for conversion into shares at $0.04 per share. This amendment created a beneficial conversion feature which was valued at a cost of $37,669, such amount which was recorded as an increase to Additional Paid in Capital.
On September 27, 2016 we issued 435,180 restricted common shares at $0.05802 per share at market close price on date of grant as compensation to our CEO for deemed compensation totaling $25,249. 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 27, 2016 we issued 906,634 restricted common shares at $0.05802 per share at market close price on date of grant to our President & COO for deemed compensation totaling $52,603. 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 29, 2016, we issued 129,244 restricted common shares at $0.058 per share market close price on date of grant to a predecessor investor for deemed cost of $7,496 to revise the shares owed to him from our reverse merger share exchange in 2014. 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. A value for capital stock of $129 was recorded and the balance of $7,367 for the cost of the shares was offset to additional paid in capital.
For the three months ended September 30, 2016, we issued to LPC: (a) 45,629 restricted shares at $0.0561 per share for a deemed cost of $2,560 for interest accrued on LPC Note One for the period from July 1, 2016 to September 30, 2016 ; and (b) 76,660 restricted shares at $0.0561 per share for a deemed cost of $4,301 for interest accrued on LPC Note Two for the period from July 1, 2016 to September 30, 2016. These shares were issued at market close price on date of grant to one US company, which 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, 2016, we issued 193,848 restricted common shares at $0.0561 per share at market close price on date of grant to our CEO for deemed compensation totaling $10,875. 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, 2016, we issued 1,382,532 restricted common shares at $0.0561 per share at market close price on date of grant to our President & COO for deemed compensation totaling $77,560. 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, 2016, we issued 426,040 restricted common shares at $0.0561 per share at market close price on date of grant to a company wholly owned by our CFO for deemed compensation totaling $23,901. 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.
From July 1 to September 30, 2016, we raised $120,000 through a private placement stock offering of 3,000,000 restricted common shares at $0.04 per share. These shares were issued to six 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.
On October 4, 2016, we issued 150,000 restricted common shares at $0.059 per share at market close price on date of grant to a newly appointed director as an inducement for joining our Board for a deemed cost of $8,850. 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 28, 2016, we issued 1,000,000 restricted common shares at $0.0525 per share at market close price on date of grant for consultant services rendered for a deemed cost of $52,500. These shares were issued to three 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 November 23, 2016, we issued 500,000 common shares at $0.04 per share for conversion by September 2015 Note Two Purchaser of $20,000 of debt. These shares were issued to one US person with reliance on the exemptions from registration requirements provided in the Securities Act of 1933, as amended, Section 4(1) and Rule 144. Because these shares were issued at below the closing market price of $0.0537 on date of issue, the conversion resulted in a loss of $6,850 which was recorded as additional interest expense.
On November 30, 2016, we issued 1,000,000 restricted common shares at $0.0529 per share at market close price on date of grant for consultant services rendered for a deemed cost of $52,900. These shares were issued to three 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 December 2, 2016, we issued 300,000 common shares at $0.0495 per share at market close price on date of grant to a debt holder as part of the compensation for a maturity extension on the note held for a deemed cost of $14,850. These shares were issued to one US person with reliance on the exemptions from registration requirements provided in Rule 144(d)(3)(ii). At this time the underlining note was also amended to provide for conversion of the note to shares at $0.04 per share and this created a beneficial conversion feature which was valued at a cost of $9,405, such amount which was recorded as an increase to Additional Paid in Capital.
On December 6, 2016, LPC provided an extension of the maturity of two notes held in return for the grant of 7,000,000 six year warrants exercisable at $0.05 per share. The warrants were valued using a Black-Scholes model at a non-cash cost of $315,658, such amount which was recorded as an increase to Additional Paid in Capital.
For the three months ended December 31, 2016, we issued to LPC: (a) 45,629 restricted shares at $0.0451 per share for a deemed cost of $2,058 for interest accrued on LPC Note One for the period from October 1, 2016 to December 31, 2016 ; and (b) 76,660 restricted shares at $0.0451 per share for a deemed cost of $3,457 for interest accrued on LPC Note Two for the period from October 1, 2016 to December 31, 2016. These shares were issued at market close price on date of grant to one US company, which 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.
PCF Holdings Investment:
On December 6, 2016, the Company entered into a securities purchase agreement (the "Securities Agreement") with PCF Holdings Group, LLC. ("PCF") under which PCF committed to invest, or cause to be invested, $940,000 in three tranches of (i) $300,000, (ii) $500,000 and (iii) $140,000, respectively for the purchase of Stock Units. Under the Securities Agreement, PCF (or its designee) will purchase from the Company up to 28.5 million stock units (each a "Stock Unit" and in the plural, the "Stock Units"), to be paid in three tranches. The series of warrants for each tranche each have the same three exercise prices, include cashless exercise rights, and have the same three expiry terms. The first tranche was priced at $0.024 per Stock Unit and the second and third tranches will be priced at $0.04 per Stock Unit. Each Stock Unit consists of one share of restricted common stock of the Company (each a "Share") and three separate warrant classes (each a "Warrant" and the shares underlying the Warrants being the "Warrant Shares" or, in the singular a "Warrant Share") respectively have (i) an exercise price of $0.055 per share for a term of five years, (ii) an exercise price of $0.20 per shares for a term of three years and (iii) an exercise price of $0.25 per share for a term of 18 months. The fair market value of the shares based on closing market price on date of sale
was $625,000 and the embedded value of the warrants based on a Black-Scholes option pricing model was $1,410,059. These shares were issued to three 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. For the second and third tranches, each Stock Unit shall be priced at $0.04 per Stock Unit and shall consist of one Share and three separate warrant classes (each a "Warrant" and the shares underlying the Warrants being the "Warrant Shares", or in the singular a "Warrant Share") that shall respectively have (i) an exercise price of $0.055 per share for a term of five years, (ii) an exercise price of $0.20 per share for a term of three years and (iii) an exercise price of $0.25 per share for a term of 18 months. At the initial Tranche Closing, PCF purchased 12,500,000 Stock Units for a purchase price of $300,000 in cash (the "Initial Tranche"). Subject to the continued accuracy and validity of the representations and warranties of the Company to PCF, the satisfaction by the Company of all its covenants set forth in the Securities Agreement and other considerations, then not later than 120 days from the Initial Tranche Closing (the "Second Tranche Closing"), Purchaser shall purchase 12,500,000 Stock Units (the "Second Tranche) for a purchase price of $500,000; and then not later than 120 days from the Second Tranche Closing (the "Third Tranche Closing"), Purchaser shall purchase 3,500,000 Stock Units (the "Third Tranche) for a purchase price of $140,000. The Securities Agreement includes a Beneficial Ownership Limitation and at no time may PCF exercise warrants or purchase shares if such exercises or purchases would result in PFC and its affiliates owning an aggregate of shares of our common stock in excess of 17.5% of the then outstanding shares of our common stock. PCF and its affiliates may sell or transfer Units, Shares or Warrants that exceed, or might cause PCF to exceed, the Beneficial Ownership Limitation in order for PCF to comply with the Beneficial Ownership Limitation. PCF may at any time request one registration under the Securities Act of 1933, as amended, of all or part of its Shares (including any Warrant Shares issuable upon exercise of any Warrants) (a "Demand Registration"), however the Company will not be obligated to effect any Demand Registration within nine months from the Initial Tranche Closing, or when Purchaser has the ability to freely sell the securities proposed to be registered under Rule 144, without being subject to any volume or manner of sale restrictions thereunder.
On December 8, 2016, we issued 170,000 restricted common shares at $0.048 per share market close price on date of grant to seven employees for deemed compensation of $8,160. These shares were issued to seven 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.
Subsequent to the year ended December 31, 2016, we issued 990,00 common shares at $0.04 per share for conversion by December 2015 Lender of the remaining $39,600 due on the December 2015 Note. This conversion fully paid the note and no further payments are due. These shares were issued to one accredited investor with reliance on the exemptions from registration requirements provided in the Securities Act of 1933, as amended, Section 4(1) and Rule 144.
Subsequent to the year ended December 31, 2016, we issued 4,500,00 common shares at $0.05 per share for conversion by LPC of $225,000 principal due on LPC Note Two which decreased the balance due on the note from $300,000 to $75,000. These shares were issued to one accredited investor with reliance on the exemptions from registration requirements provided in the Securities Act of 1933, as amended, Section 4(1) and Rule 144.
Subsequent to the year ended December 31, 2016, we issued 1,100,000 restricted common shares at $0.0548 per share at market close price on date of grant for consultant services rendered for a deemed cost of $60,280. These shares were issued to one accredited investor (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, 2016, as compensation to a retiring director we re-priced 750,000 options he held from an exercise price of $0.17 per share to an exercise price of $0.05 per share and issued him an additional 150,000 options with the same three year remaining maturity. The exercise price of the new options was set on date of grant and these options vested immediately. The combined Black-Scholes options pricing model cost of the transactions was $13,785.
Subsequent to the year ended December 31, 2016, we remedially executed a private placement related to Unit Offer #3 which raised $15,000 through the sale of 375,000 units. Each unit was priced at $0.04 per unit and comprised of one restricted common share price plus one five year warrant exercisable to purchase one restricted common share at $0.055 per share. The fair market value of the shares and embedded value of the warrants is included in the valuations done for Unit Offer #3. 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.
Subsequent to the year ended December 31, 2016, we issued 1,063,782 five year options with an exercise price of $0.0559 set on date of grant to our CEO as compensation. These options vested immediately and had a Black-Scholes options pricing model cost of $59,411.
Subsequent to the year ended December 31, 2016, we issued 2,476,377 five year options with an exercise price of $0.0559 set on date of grant to our President & COO as compensation. These options vested immediately and had a Black-Scholes options pricing model cost of $138,302.
Subsequent to the year ended December 31, 2016, we issued 653,842 restricted common shares to a company wholly owned by our CFO at a price of $0.0559 on date of grant as compensation for a deemed cost of $36,550. 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.
Subsequent to the year ended December 31, 2016, we issued 1,500,000 restricted common shares to two unit offering subscribers for exercises of warrants they held at $0.055 per share for proceeds of $82,500. These subscribers 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.
Not required for smaller reporting companies.
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 and industrial 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.
Customer shipping expenses
Costs for products shipped to customers are recorded as general and administrative expenses.
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.
Deferred Revenue
Revenue from customer purchase agreements is recorded as unearned revenue and amortized over the term of the agreements. At December 31, 2016 and December 31, 2015, unearned revenues were $193,020 and $1,434 respectively. Unearned revenue is normally comprised of online subscriptions wherein we ship a scheduled amount of product to online retail subscribers each month. During the year ended December 31, 2016, unearned revenue also included a cash payment we received for a non-refundable signing fee of $200,000 from a strategic supplier partnership arrangement (the "FP Agreement").
RESULTS OF OPERATIONS
The following discussion and analysis covers material changes in the financial condition of our Company for the years ended December 31, 2016 and December 31, 2015. A summary is as follows:
|
|
Year ended
December 31, 2016
|
Year ended
December 31, 2015
|
||||||
|
Total sales
|
$
|
1,059,196
|
$
|
635,503
|
||||
|
Cost of goods sold
|
740,806
|
443,049
|
||||||
|
GROSS MARGIN
|
318,390
|
192,454
|
||||||
|
Research and development
|
5,320
|
6,502
|
||||||
|
Advertising and marketing
|
276,299
|
435,390
|
||||||
|
General and administrative
|
1,655,947
|
1,838,970
|
||||||
|
Non-cash operations fees & expenses
|
1,036,827
|
1,251,599
|
||||||
|
Operating expenses
|
2,974,393
|
3,532,461
|
||||||
|
Loss from operations
|
(2,656,003
|
)
|
(3,340,007
|
)
|
||||
|
Amortized portion of License fee
|
7,014
|
—
|
||||||
|
Non-cash amortization expenses
|
(465,047
|
)
|
(204,990
|
)
|
||||
|
Interest expense
|
(186,793
|
)
|
(255,372
|
)
|
||||
|
NET LOSS
|
$
|
(3,300,829
|
)
|
$
|
(3,800,369
|
)
|
||
|
Net loss per share, fully diluted
|
$
|
(0.03
|
)
|
$
|
(0.04
|
)
|
||
Highlights
Comparative to last year, for the year ended December 31, 2016:
| ● |
Product sales increased by 67%
|
| ● |
Operating expenses decreased by 16%, and
|
| ● |
Net loss decreased by 13%
|
| ● |
$200,000 non-refundable cash fee received for five year license agreement
|
Revenue
Sales were comprised of product sales and shipping, related party sales, and delivery fees.During the year ended December 31, 2016 we recorded total sales of $1,059,196 compared with total sales of $635,503 for the year ended December 31, 2015, representing an increase of 67%, and during the year ended December 31, 2016.
Additionally in 2016 we received cash payment of a non-refundable signing fee of $200,000 from a strategic supplier partnership arrangement. Because this was included in a license fee agreement to conform with generally accepted accounting principles it is recorded as unearned revenue which is to be amortized over the five year life of the agreement. For fiscal 2016 the amortized portion of $7,014 for the fee is recorded as other income.
We attribute the growth in revenue during 2016 to the acquisition of new customers for KonaRed Cold Brew Coffees and the success of our efforts to build a distribution network for this new product line. Additionally, a sizable component of Cold Brew Coffee sales growth has been from repeat customers. Cold Brew is now KonaRed's major marketing focus and consumer demand drove expansion of our Cold Brew Coffee line from 3 to 5 products in August with the addition of "Maui Mocha" and "Kauai Caramel" flavors.
The Company introduced Cold Brew Coffees in February, 2016 and for the period ended December 31, 2016 this product line accounted for 59% of our sales. During the last quarter of 2016 Cold Brew Coffee sales comprised 69% of our product sales.
Overall, Cold Brew Coffee is a booming new market sector and KonaRed has emerged early as a leader in this new category. The Cold Brewed Coffee industry earned total revenues of approximately $65 million in 2016. Its growth is expected to mark one of the top food and beverage trends of the last few years and this growth trend continues.
KonaRed's Cold Brew Coffees have won multiple industry and consumer awards during the year ended December 31, 2016 and now appear on major retail shelves throughout the Western US, Florida and New York.
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 adjustments for shrinkage during production runs and inventory which has been disposed of because it has expired and/or become obsolete, or 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 years ended December 31, 2016 and December 31, 2015, these expenses respectively totaled $24,769 and $26,760. At December 31, 2016 and December 31, 2015 we had no reserves of outdated inventory.
For the years ended December 31, 2016 and December 31, 2015, COGS were $740,806 and $443,049, or 70% and 70% of sales. This corresponds to gross margin percentages of 30% and 30%. We project total COGS will increase during fiscal 2017 and gross margin will improve as order flow increases and we begin to benefit from less expensive shipping costs and the economies of scale of larger production runs.
COGS components for the years ended December 31, 2016 and December 31, 2015 include: (i) manufacturing costs, which include both in-house and outsourced manufacturing costs and inventory adjustments, which totaled $692,920 versus $394,688, respectively; (ii) inventory delivery which totaled $33,816 versus $27,845, respectively, term discounts which totaled $7,781 versus $6,148; and (iv) packaging which totaled $6,289 versus $14,368, 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 $5,320 and $6,502, respectively for years ended December 31, 2016 and December 31, 2015, respectively, for a comparative decrease of 18%. We project R&D costs will increase during the upcoming fiscal year.
Advertising and Marketing
Advertising and marketing costs were $276,299 for the year ended December 31, 2016, compared with $435,390 for the year ended December 31, 2015, representing a decrease of 37%. Components of advertising and marketing cost during the years ended December 31, 2016 versus December 31, 2015 were as follows: (i) costs for free samples and product demonstrations was $133,334 versus $96,310, representing an increase of 38%; (ii) advertising costs were $9,945 versus $175,432, representing an decrease of 94%; (iii) website expenses were $10,998 versus $27,580, representing a decrease of 60%; and (v) tradeshows, sponsorships, public relations initiatives, and other marketing expenses totaled $122,022 versus $136,068, representing a decrease of 10%. We project advertising and marketing costs will increase during our upcoming fiscal year.
General and Administrative
General and administrative ('G&A') costs were $2,692,774 for the year ended December 31, 2016 compared to and $3,090,569 for the year ended December 31, 2015, representing a decrease of 13%. G&A costs include cash and non-cash expenses. Non-cash expenses include stock based compensation expenses, stock issued for services, patent license fees, and depreciation expenses. For the years ended December 31, 2016 and December 31, 2015, G&A cash expenses comprised $1,655,947 and $1,838,972, or 56% and 52% of operating expenses; and non-cash expenses comprised $1,036,827 and $1,251,599 or 35% and 35% respectively of total operating expenses.
Year over year G&A cash expenses decreased by 10% and G&A non-cash expenses decreased by 17%. We project G&A expenses will increase moderately during the coming fiscal year.
Major items within expenses paid in cash for years ended December 31, 2016 and December 31, 2015 included: (i) payroll of $952,427 versus $796,290, representing an increase of 20%, which is attributable to an increased staff count; (ii) customer shipping expenses of $124,760 versus $98,020, representing an increase of 27%, which is attributable to increased sales volume; (iii) professional and consultant fees of $109,942 versus $261,180, representing a decrease of 58%, which is attributable to the resolution of legal issues pertaining to fiscal 2015; and (iii) total rent expenses of $126,043 versus $116,089, representing an increase of 9%, which is attributable to scheduled payment increases in our warehouse lease.
Major items within non-cash expenses for years ended December 31, 2016 and December 31, 2015 included: (i) stock issued for compensation of $405,373 versus $350,883, representing an increase of 16%, which is attributable to executive staff accepting shares in lieu of cash for a portion of their remuneration to conserve cash; (ii) stock issued for services of $254,009 versus $598,272, representing an decrease of 58%, which is attributable to the decreased use of consultants; and (iii) patent license fees of $375,000 versus $300,000, representing a decrease of 25%, which is attributable to the scheduled increases in the VDF License Agreement.
Other Income (Expense)
During the years ended December 31, 2016 and December 31, 2015, other income (expense) respectively totaled $(644,826) versus $(460,362). Other income (expense) for years ended December 31, 2016 and December 31, 2015 included: (i) license fee revenue of $7,014 versus $nil; (ii) cash interest paid of $(1,025) and non-cash interest amortization of $(185,768), for total interest expense of $(186,793) in 2016, versus cash interest paid of $(181,611) and non-cash interest amortization of $(73,761) in 2015; (iii) amortization expense for discounts on notes payable of $(472,510) in 2016, versus $(128,200) in 2015; and (iv) non-cash income (expense) for the fair market value of a derivative liability of $7,463 in 2016 versus $(35,037) in 2015; and a non-cash expense of $nil in 2016 and $(41,753) in 2015 related to the re-set of the exercise price of warrants issued in 2015. 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, 2016 versus December 31, 2015 were $3,300,829 , or $0.03 per share, versus $3,800,369, or $0.04 per share.
Liquidity and Capital Resources
Our financial position as at December 31, 2016 and December 31, 2015 was as follows:
Net Working Capital
|
|
As of
December 31, 2016
|
As of
December 31, 2015
|
||||||
|
Current Assets
|
$
|
458,741
|
$
|
645,107
|
||||
|
Current Liabilities
|
657,607
|
463,063
|
||||||
|
Net Working Capital (Deficit)
|
$
|
(198,866
|
)
|
$
|
182,044
|
|||
At December 31, 2016 we had cash on hand of $68,546, accounts receivable of $120,565, accounts receivable - related party of $1,800; and inventory of $267,830. This compares with cash on hand of $148,769, accounts receivable of $33,227, accounts receivable - related party of $18,000; inventory of $439,158, and prepaid expenses of $5,953 at December 31, 2015.
Our net working capital decreased to a balance of $(198,866) at December 31, 2016 from a balance of $182,044 at December 31, 2015. When adjusted for $192,986 unearned revenue related to the unamortized portion of our license fee income, the working capital decrease is $(5,880) 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, 2016 and December 31, 2015 were as follows:
Cash Flows
|
|
Year ended December 31, 2016
|
Year ended
December 31, 2015
|
||||||
|
Net cash (used) by operating activities
|
$
|
(1,747,459
|
)
|
$
|
(2,009,549
|
)
|
||
|
Net cash provided/(used) in investing activities
|
—
|
—
|
||||||
|
Net cash provided by financing activities
|
1,667,236
|
2,118,331
|
||||||
|
Increase (decrease) in cash during the period
|
(80,223
|
)
|
108,782
|
|||||
|
Cash, beginning of period
|
148,769
|
39,987
|
||||||
|
Cash, end of period
|
$
|
68,546
|
$
|
148,769
|
||||
Comparative figures for Net cash (used) by Operating Activities comprised net losses of $3,300,829 for the year ended December 31, 2016 versus $3,800,369 for the year ended December 31, 2015. Major items included respective comparative non-cash add-backs of: (i) Black-Scholes options grant expense amortizations of $nil versus $220,960; (ii) Black-Scholes warrant issuance expense amortizations of $565,528 versus $197,905; (iii) stock issued for compensation of $405,377 versus $350,883; (iv) stock issued for services of $271,571 versus $598,272; (iv) an increase in accounts receivable of $71,138 in 2016 versus a decrease in accounts receivable of $220,993 in 2015; (v) decreases in inventory of $171,328 in 2016 versus $69,180 in 2015; (vi) a decrease of $76,062 in accounts payable and accrued liabilities in 2016 versus an increase in accounts payable and accrued liabilities of $19,402 in 2015; and (vii) an increase in unearned income of $191,587 in 2016 versus a decrease of $2,009 in 2015.
Cash Raised from Equity Sales
During the year ended December 31, 2016 we raised: (a) $666,000 through private placement sales of 16,650,000 units, with each unit priced at $0.04 and including one restricted common share and one five year warrant exercisable at $0.055; (b) $120,000 through the private placement sale of 3,000,000 restricted common shares priced at $0.04 per share; (c) $322,936 from issuance of 6,471,529 shares under the 2015 Equity Line; and (d) $300,000 from investment from a strategic partner. During the year ended December 31, 2015, the Company raised $350,000 cash from private placement sales of restricted common shares and $629,850 through equity line sales sales of 8,550,000 shares.
Equity Line sales termination
On August 11, 2016 the last shares which had been registered under the 2015 Equity Line were sold and subsequently there has not been filed, and there are no plans to file, a new registration statement which would facilitate further equity line share sales and the 2015 Equity Line is now effectively defunct.
No Variable Rate Convertible Securities
The Company has no securities outstanding which have conversion prices which vary based on the trading price of the Company's common shares.
Cash Raised from Debt
During the year ended December 31, 2016, the Company raised $100,000 from a short term non-convertible related party promissory note and rolled over $375,00 of license fees to the VDF Note. 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 related party non-convertible debt, 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) rolled over $318,481 of license fees and accrued interest to the VDF Note.
Details of all debt transactions during 2016 and 2015 are as follows:
September 2015 Notes:
On September 30, 2015, subject to securities purchase agreements we issued two subordinated promissory notes ("September 2015 Note One" and "September 2015 Note Two", collectively, the "September 2015 Notes") to two lenders (the "September 2015 Lenders"). The September 2015 Notes provided 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 September 2015 Notes were not secured and are subordinated to senior notes issued by the Company. September 2015 Note One had a face value of $100,000 and September 2015 Note Two had a face value of $150,000. The interest rate on each note was 8% per annum and this amount fully accrued upon issuance and added $8,000 to September 2015 Note One and $12,000 to September 2015 Note Two to bring the total balances due on each note to $108,000 and $162,000, respectively. The September 2015 Notes each included a 10% original issuance discount ("OID") which resulted in total net proceeds to the Company of $225,000. As an inducement for the loans, On September 30,2015 the September 2015 Lenders received five‑year warrants, with cashless exercise rights, to purchase restricted shares of our common stock at an exercise price of $0.08 per share. September 2015 Note One Lender received 1,250,000 warrants which was valued using a Black-Scholes model at $67,115; and September 2015 Note Two Lender received 1,875,000 warrants which were valued using a Black-Scholes model at non-cash cost of $100,673.
At December 31, 2015, the balance on September 2015 Note One was $50,269. This included the face value of $100,000 plus accrued interest of $8,000 and was net of an unamortized warrant discount totaling $50,245 and an unamortized OID discount of $7,486. During the year ended December 31, 2015, $16,870 of the warrant discount was recorded as an amortization expense and $2,514 of the OID was recorded as interest expense.
At December 31, 2016, the balance on September 2015 Note One was $nil. During the year ended December 31, 2016, the Company timely met a series of scheduled cash payments on September 2015 Note One totaling $49,000 and on August 30, 2016 redeemed the balance of $59,000 due through issuance of 1,475,000 shares valued at $95,875 based on a market close price of $0.065 per share on date of issuance. The $36,875 difference between the cash redemption balance and the value of the shares redemption was recorded as non-cash interest expense. At time of redemption on August 30, 2016 the remaining $50,245 of the warrant discount on September 2015 Note One was recorded as an amortization expense and the remaining $7,486 OID was recorded as interest expense. The September 2015 Note One is now fully repaid and there are no further payments due.
At December 31, 2015, the balance on September 2015 Note Two was $75,403. This included the face value of $150,000 plus accrued interest of $12,000 and was net of an unamortized warrant discount totaling $75,367 and an unamortized OID discount of $11,230. During the year ended December 31, 2015, $25,306 of the warrant discount was recorded as an amortization expense and $3,770 of the OID was recorded as interest expense.
At December 31, 2016, the balance on September 2015 Note Two was $40,411. This included the remaining face value and accrued interest totaling $65,000, net of an unamortized warrant and beneficial conversion feature ("BCF") discounts of $16,527 and an unamortized OID discount of $8,062. During the year ended December 31, 2016, the Company timely met a series of scheduled cash payments on September 2015 Note One totaling $88,500 and, prior to scheduled redemption date, on September 23, 2016 the original lender extended the maturity date of the note to November 14, 2016 in exchange for the right to convert the balance of $73,500 into common shares of the Company at a price of $0.04 per share. On September 23, 2016 the Company's closing share price was $0.0605 and this created a BCF which was valued at $37,669. On November 7, 2016, prior to scheduled redemption date, the $73,500 balance due on September 2015 Note Two was purchased by the September 2015 Note One Lender (hereinafter referred to as "September 2015 Note Two Purchaser") from the original lender. Also on November 7, 2016, in return for the addition of $11,500 to the OID for September 2015 Note Two, September 2015 Note Two Purchaser extended the maturity of September 2015 Note Two to August 7, 2017 based on the Company meeting a payment schedule of $40,000 on May 7, 2017 and $45,000 on August 7, 2017. The addition of the $11,500 addition to the OID increased the principal due on September 2015 Note Two to $85,000. On November 23, 2016, $20,000 of September 2015 Note Two was converted by September 2015 Note Two Purchaser into 500,000 shares of the Company which reduced the principal due on the note to $65,000. During the year ended December 31, 2016, a total of $96,509 of the warrant and BCF discounts were recorded as an amortization expense and $14,668 amortization of the OID was recorded as interest expense.
December 2015 Note:
On December 3, 2015, 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 bears 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 was due and payable in full on December 3, 2016 ("Maturity Date") and had a re-payment schedule which requires payments of $39,600 respectively on sixth, ninth and twelfth month anniversary dates of issuance. The December 2015 Notes included an aggregate $10,000 original issuance discount ("OID") which resulted in net proceeds of $100,000. 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. 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 a non-cash cost of $30,050.
At December 31, 2015, the balance on the December 2015 Note including accrued interest was $109,565, net of an unamortized OID of $9,235. During the year ended December 31, 2015, $764 amortization of the OID was recorded as interest expense.
At December 31, 2016, the balance on the December 2015 Note was $32,081. This included the remaining face value and accrued interest totaling $39,600, net of an unamortized BCF discount of $6,340 and an unamortized OID discount of $1,179. During the year ended December 31, 2016, the Company timely met two scheduled cash payments totaling $79,200 and, prior to scheduled redemption date, on December 2, 2016 the lender extended the maturity date of the note to March 7, 2016 in exchange for 300,000 shares of the Company and the right to convert the balance of $39,600 into common shares of the Company at a price of $0.04 per share. On December 2, 2016, the Company's closing share price was $0.05 which created a BCF valued at $9,405 and a non-cash cost for the shares issuance of $15,000. During the year ended December 31, 2016, a total of $3,065 of the BCF discount was recorded as an amortization expense and $8,056 amortization of the OID was recorded as interest expense.
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 and LPC Note One is now classified as short term convertible 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. 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, on August 18, 2015 the Company granted LPC 3,750,000 six year warrants, which includes a cashless exercise provision, to purchase 3,750,000 restricted shares of our common stock at an exercise price of $0.10 per share which was valued using a Black-Scholes model at a non-cash cost of $277,014. At August 18, 2015, LPC Note One also included a 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. On December 16, 2016, prior to the scheduled redemption dates, LPC extended the maturities of each of its two notes from December 31, 2016 to December 31, 2017 in return for issuance by the Company of 7,000,000 six year warrants, with cashless exercise rights, to purchase 7,000,000 restricted shares of our common stock at an exercise price of $0.05 per share. The warrants were valued using a Black-Scholes model at a non-cash cost of $315,658, of which $143,481 was ascribed as an increase to the discount of LPC Note One and $172,177 was ascribed as an increase to the discount of LPC Note Two.
At December 31, 2015, the recorded balance on LPC Note One was $67,365. This included the remaining face value of $250,000, net of unamortized warrant and BCF discounts totaling $164,372 and an unamortized OID discount of $18,263. During the year ended December 31, 2015, $60,628 of the discount was recorded as an amortization expense, $6,737 of the OID was recorded as interest expense, and accrued interest of $4,688 was paid through issuance of 90,286 restricted common shares.
At December 31, 2016, the recorded balance on LPC Note One was $68,086, This included the remaining face value of 250,000, net of an unamortized warrant and BCF discounts totaling $177,505 and an unamortized OID discount of $4,409. During the year ended December 31, 2016, $130,348 of the BCF and warrant discounts were recorded as an amortization expense, $13,854 of the OID was recorded as interest expense, and accrued interest of $12,708 was paid via issuances of 181,544 restricted common shares.
LPC Note Two:
On November 23, 2015, we issued a Senior Convertible Note ("LPC Note Two") to 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. LPC Note Two is now classified as short term convertible 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. LPC Note Two has a $30,000 OID which resulted in net proceeds of $270,000. The Company has the right to prepay LPC Note Two, 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 Two 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. On November 23, 2015, as an inducement for the loan the Company granted LPC 5,000,000 six year warrants, which includes a cashless exercise provision, to purchase 5,000,000 shares of our restricted common stock at an exercise price of $0.07 per share which was valued using a Black-Scholes model at a cost of $253,098. At November 23, 2015, LPC Note Two also included a 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. On December 16, 2016, prior to the scheduled redemption dates, LPC extended the maturities of each of its two notes from December 31, 2016 to December 31, 2017 in return for issuance by the Company of 7,000,000 six year warrants, with cashless exercise rights, to purchase 7,000,000 restricted shares of our common stock at an exercise price of $0.05 per share. The warrants were valued using a Black-Scholes model at a non-cash cost of $315,658, of which $143,481 was ascribed as an increase to the discount of LPC Note One and $172,177 was ascribed as an increase to the discount of LPC Note Two.
At December 31, 2015, the recorded balance on LPC Note Two was $28,218. This included the remaining face value of $300,000, net of an unamortized warrant and BCF discounts totaling $244,604 and an unamortized OID of $27,178. During the year ended December 31, 2015, $25,396 of the BCF and warrant discounts were recorded as an amortization expense, $2,822 of the OID was recorded as interest expense, and accrued interest of $7,561 was paid via issuance of 151,680 restricted common shares.
At December 31, 2016, the recorded balance on LPC Note Two was $69,000. This included the remaining face value of $300,000, net of an unamortized discount of $224,438 and an unamortized OID of $6,562. During the year ended December 31, 2016, $130,348 of the BCF and warrant discounts were recorded as an amortization expense, $13,854 of the OID was recorded as interest expense, and accrued interest of $15,250 was paid via issuances of 305,000 restricted common shares.
Interim Note:
On June 5, 2015, 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 at a non-cash cost. As security for the Interim Note, the Company's Chief Executive Officer pledged 3,333,333 shares of the Company (the "Pledge"), which he owned, 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 and the Interim Note was fully repaid.
RP Note:
On July 31, 2016, the Company issued a $100,000 note (the "RP Note") to a director of the Company for a loan. The RP Note has a maturity date of January 27, 2017 and is classified as short term related party debt. The RP Note bears interest at 8% per annum due at maturity and may be prepaid in whole, or in part, at any time before each maturity date without prepayment penalty. 340,000 restricted common shares of the Company were issued to the lender as a fee valued at a non-cash cost of $15,504. At December 31, 2016, the balance due on the RP Note was $103,353 including $3,353 of accrued interest for the year ended December 31, 2016.
Subordinate Debenture:
On June 5, 2015, the Company repaid and extinguished an Unsecured Subordinate Debenture which it issued on January 20, 2015 to a third party lender. This note had a face value of $440,000, included $40,000 OID, and provided proceeds of $400,000. The note initially had a recorded balance of $207,074, net of a discount of $232,926 created by an embedded derivative liability which resulted from the note having a conversion price adjustment provision. At redemption on June 5, 2015, the lender was paid 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.
VDF Note:
On January 28, 2014, we entered into a patent settlement with VDF FutureCeuticals, Inc. ("VDF") at which time a senior convertible note (the "VDF Note") was issued to VDF, whereby we promised to pay VDF a principal amount equal to the sum of aggregate accrued and unpaid patent license fee payments plus accrued interest. 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 and we have the right, subject to certain limitations, to prepay principal at any time and from time to time. At any time VDF has the option to convert any principal outstanding on the VDF Note into shares of our common stock at a Conversion Price determined by the terms of the VDF Note, which is subject to adjustment based on our issuance of stock and other securities. During the year ended December 31, 2016, the Conversion Price of the Senior Convertible Note was adjusted from $0.3823 per share to $0.2157 per share per the terms of the Senior Convertible Note. The VDF Note provides that we may, at our option, roll-over to the VDF Note quarterly License fee payments and accrued interest and is secured through the Pledge and Security Agreement ("PSA") and is senior to any other debt issued by the Company unless prior written consent of VDF is obtained to amend the ranking.
On January 4, 2017, VDF and the Company executed an addendum to the VDF Note and the PSA in which VDF agreed it will: (i) remove its lien on the Company's inventory and accounts receivable in the event that the Company executes any line of credit, inventory purchase order financing, or accounts receivable factoring agreements with third party lender(s); and (ii) promptly execute any inter-creditor agreement(s) provided to VDF by such third party lender(s) which affirm VDF's permission for the creation of liens by the third party lender(s) which rank in priority above VDF's existing lien. A copy of this agreement is attached to this Report as Exhibit 10.53.
At December 31, 2015, the VDF Note had an outstanding balance $453,298. This included the principal due of $469,272, net of a discount of $15,974 resulting from the embedded derivative. During the year ended December 31, 2015, we rolled-over License fee payments totaling $300,000 plus accrued interest for the year $18,481 for a total addition to the VDF Note of $318,481.
At December 31, 2016, the VDF Note had an outstanding balance $869,674. This included the principal due of $886,460, net of a discount of $16,786 resulting from the embedded derivative. During the year ended December 31, 2016, we rolled-over License fee payments totaling $375,000 and recorded accrued interest of $42,188 for a total addition to the VDF Note of $332,812.
Off-Balance Sheet Arrangements
We had no significant off-balance sheet arrangements at December 31, 2016 or December 31, 2015 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.
We have not entered into derivative contracts either to hedge existing risk or for speculative purposes.
INDEX TO
FINANCIAL STATEMENTS
|
Page
|
|
|
Audited Financial Statements for the years ended December 31, 2016 and December 31, 2015:
|
|
To the Board of Directors
KonaRed Corporation
KonaRed Corporation
We have audited the accompanying balance sheets of KonaRed Corporation as of December 31, 2016 and 2015 and the related statement of income, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2016. KonaRed Corporation's management is responsible for these financial statements. 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, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2016, 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 a net loss from operations and has a net capital deficiency, 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 12, 2017
BALANCE SHEETS
|
December 31,
2016
|
December 31,
2015
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS
|
||||||||
|
Cash
|
$
|
68,546
|
$
|
148,769
|
||||
|
Accounts receivable
|
120,565
|
33,227
|
||||||
|
Accounts receivable - related party
|
1,800
|
18,000
|
||||||
|
Inventory
|
267,830
|
439,158
|
||||||
|
Prepaid expenses
|
—
|
5,953
|
||||||
|
TOTAL CURRENT ASSETS
|
458,741
|
645,107
|
||||||
|
OTHER ASSETS
|
||||||||
|
Fixed assets (net of accumulated depreciation)
|
7,803
|
10,247
|
||||||
|
TOTAL OTHER ASSETS
|
7,803
|
10,247
|
||||||
|
TOTAL ASSETS
|
$
|
466,544
|
$
|
655,354
|
||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
|
CURRENT LIABILITIES
|
||||||||
|
Accounts payable and accrued liabilities
|
$
|
140,007
|
$
|
211,429
|
||||
|
Accounts payable - related party
|
—
|
3,156
|
||||||
|
Short term convertible notes, net of discounts
|
209,578
|
—
|
||||||
|
Short term debt, net of discounts
|
—
|
235,237
|
||||||
|
Short term debt - related party
|
103,353
|
—
|
||||||
|
Unearned revenue
|
193,020
|
1,434
|
||||||
|
Derivative liability
|
11,649
|
11,807
|
||||||
|
TOTAL CURRENT LIABILITIES
|
657,607
|
463,063
|
||||||
|
LONG-TERM LIABILITIES
|
||||||||
|
Long term convertible notes payable, net of discounts
|
869,674
|
548,881
|
||||||
|
TOTAL LONG-TERM LIABILITIES
|
869,674
|
548,881
|
||||||
|
TOTAL LIABILITIES
|
1,527,281
|
1,011,944
|
||||||
|
COMMITMENTS AND CONTINGENCIES
|
—
|
—
|
||||||
|
STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
|
Preferred shares, 10,000 shares with par value $0.001authorized;
no shares issued and outstanding at December 31, 2016 and
December 31, 2015.
|
—
|
—
|
||||||
|
Common shares, 877,500,000 shares with par value $0.001 authorized;
162,932,882 and 108,769,514 shares issued and outstanding at
December 31, 2016 and December 31, 2015, respectively
|
162,975
|
108,787
|
||||||
|
Additional paid in capital
|
22,158,506
|
19,616,012
|
||||||
|
Accumulated deficit
|
(23,382,218
|
)
|
(20,081,389
|
)
|
||||
|
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)
|
(1,060,737
|
)
|
(356,590
|
)
|
||||
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$
|
466,544
|
$
|
655,354
|
||||
The accompanying notes to financial statements are an integral part of these financial statements
STATEMENTS OF OPERATIONS
|
Year ended
December 31,
2016
|
Year ended
December 31,
2015
|
|||||||
|
REVENUE:
|
||||||||
|
Product sales
|
$
|
1,038,482
|
$
|
571,824
|
||||
|
Product sales - related party
|
1,800
|
39,600
|
||||||
|
Shipping and delivery
|
18,914
|
24,079
|
||||||
|
Total sales
|
1,059,196
|
635,503
|
||||||
|
Cost of goods sold
|
740,806
|
443,049
|
||||||
|
GROSS MARGIN
|
318,390
|
192,454
|
||||||
|
OPERATING EXPENSES:
|
||||||||
|
Research and development
|
5,320
|
6,502
|
||||||
|
Advertising and marketing
|
276,299
|
435,390
|
||||||
|
General and administrative expenses
|
2,692,774
|
3,090,569
|
||||||
|
Total operating expenses
|
2,974,393
|
3,532,461
|
||||||
|
Loss from operations
|
(2,656,003
|
)
|
(3,340,007
|
)
|
||||
|
OTHER INCOME (EXPENSE):
|
||||||||
|
License fee
|
7,014
|
—
|
||||||
|
Interest expense
|
(186,793
|
)
|
(255,372
|
)
|
||||
|
Amortization expense - notes discounts
|
(472,510
|
)
|
(128,200
|
)
|
||||
|
Change in fair market value of derivative liabilities
|
7,463
|
(35,037
|
)
|
|||||
|
Loss on equity modification
|
—
|
(41,753
|
)
|
|||||
|
Total other income (expense)
|
(644,826
|
)
|
(460,362
|
)
|
||||
|
Loss before income taxes
|
$
|
(3,300,829
|
)
|
$
|
(3,800,369
|
)
|
||
|
Provision for income taxes
|
—
|
—
|
||||||
|
Net loss
|
$
|
(3,300,829
|
)
|
$
|
(3,800,369
|
)
|
||
|
Basic and diluted loss per common share
|
$
|
(0.03
|
)
|
$
|
(0.04
|
)
|
||
|
Basic and diluted weighted average shares outstanding
|
131,480,362
|
91,278,322
|
||||||
The accompanying notes to financial statements are an integral part of these financial statements
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
| Additional | ||||||||||||||||||||
|
Common Stock
|
Paid In
|
Accumulated | ||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||
|
Ending balance – December 31, 2014
|
83,496,531
|
$
|
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
|
108,769,515
|
$
|
108,787
|
$
|
19,616,012
|
$
|
(20,081,389
|
)
|
$
|
(356,590
|
)
|
|||||||||
|
Common shares issued for cash
|
32,150,000
|
32,150
|
1,053,850
|
—
|
1,086,000
|
|||||||||||||||
|
Common shares issued under equity line
|
6,450,000
|
6,450
|
316,486
|
—
|
322,936
|
|||||||||||||||
|
Common shares issued for services
|
5,482,750
|
5,484
|
266,087
|
—
|
271,571
|
|||||||||||||||
|
Common shares issued for equity line underwriting fees
|
21,529
|
43
|
(43
|
)
|
—
|
—
|
||||||||||||||
|
Common shares issued as compensation
|
7,597,544
|
7,598
|
397,779
|
—
|
405,377
|
|||||||||||||||
|
Common shares issued for convertible notes redemptions
|
1,975,000
|
1,975
|
120,750
|
—
|
122,725
|
|||||||||||||||
|
Common shares issued for interest payments
|
486,544
|
488
|
24,853
|
—
|
25,341
|
|||||||||||||||
|
Additional paid-in capital related to warrant issuances
|
—
|
—
|
315,658
|
—
|
315,658
|
|||||||||||||||
|
Additional paid-in capital related to convertible notes beneficial conversion features
|
—
|
—
|
47,074
|
—
|
47,074
|
|||||||||||||||
|
Net loss – year ended December 31, 2016
|
—
|
—
|
—
|
(3,300,829
|
)
|
(3,300,829
|
)
|
|||||||||||||
|
Ending Balance – December 31, 2016
|
162,932,882
|
$
|
162,975
|
$
|
22,158,506
|
$
|
(23,382,218
|
)
|
$
|
(1,060,737
|
)
|
|||||||||
The accompanying notes to financial statements are an integral part of these financial statements
STATEMENTS OF CASH FLOWS
|
Year Ended
December 31,
2016
|
Year Ended
December 31,
2015
|
|||||||
|
OPERATING ACTIVITIES:
|
||||||||
|
Net loss
|
$
|
(3,300,829
|
)
|
$
|
(3,800,369
|
)
|
||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
|
Bad debt expense
|
—
|
6,020
|
||||||
|
Depreciation expense
|
2,444
|
2,444
|
||||||
|
Stock issued for compensation
|
405,377
|
350,883
|
||||||
|
Stock issued for services
|
271,571
|
598,272
|
||||||
|
Loss on debt conversions
|
43,725
|
—
|
||||||
|
Option grants expense
|
—
|
220,960
|
||||||
|
Change in fair market value of derivative liabilities
|
(7,574
|
)
|
35,037
|
|||||
|
Amortization of notes payable discounts
|
565,528
|
197,905
|
||||||
|
Loss on equity modification
|
—
|
41,753
|
||||||
|
Change in operating assets and liabilities:
|
||||||||
|
Accounts receivable
|
(71,138
|
)
|
220,993
|
|||||
|
Inventory
|
171,328
|
69,180
|
||||||
|
Prepaid expenses
|
5,953
|
10,047
|
||||||
|
Other current assets
|
—
|
652
|
||||||
|
Accounts payable and accrued liabilities
|
(76,062
|
)
|
19,402
|
|||||
|
Accrued interest
|
50,631
|
19,281
|
||||||
|
Unearned revenue
|
191,587
|
(2,009
|
)
|
|||||
|
NET CASH USED IN OPERATING ACTIVITIES
|
(1,747,460
|
)
|
(2,009,549
|
)
|
||||
|
INVESTING ACTIVITIES:
|
||||||||
|
Purchase of fixed assets
|
—
|
—
|
||||||
|
NET CASH USED IN INVESTING ACTIVITIES
|
—
|
—
|
||||||
|
FINANCING ACTIVITIES:
|
||||||||
|
Proceeds from short term debt
|
—
|
325,000
|
||||||
|
Proceeds from short term debt - related party
|
100,000
|
500,000
|
||||||
|
Repayment of short term debt - related party
|
—
|
(500,000
|
)
|
|||||
|
Repayments of short term convertible notes payable
|
(216,700
|
)
|
—
|
|||||
|
Proceeds from long term convertible notes payable
|
375,000
|
1,213,481
|
||||||
|
Repayment of long term convertible notes payable
|
—
|
(400,000
|
)
|
|||||
|
Proceeds from issuance of common stock for cash
|
1,408,936
|
979,850
|
||||||
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
1,667,236
|
2,118,331
|
||||||
|
NET INCREASE (DECREASE) IN CASH
|
(80,223
|
)
|
108,782
|
|||||
|
CASH, Beginning of Period
|
148,769
|
39,987
|
||||||
|
CASH, End of Period
|
$
|
68,546
|
$
|
148,769
|
||||
The accompanying notes to financial statements are an integral part of these financial statements
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
Year Ended
December 31,
2016
|
Year Ended
December 31,
2015
|
|||||||
|
Cash paid during the year for:
|
||||||||
|
Interest
|
$
|
1,025
|
$
|
128,458
|
||||
|
Taxes
|
$
|
—
|
$
|
—
|
||||
NON CASH INVESTING AND FINANCING ACTIVITIES
|
Year Ended
December 31,
2016
|
Year Ended
December 31,
2015
|
|||||||
|
Debt discounts due to derivative
|
$
|
7,416
|
$
|
241,710
|
||||
|
Discounts due to warrants
|
$
|
315,658
|
$
|
453,046
|
||||
|
Interest paid by stock issuances
|
$
|
25,341
|
$
|
6,271
|
||||
|
Shares issued as commitment fees - offering costs
|
$
|
43
|
$
|
2,724
|
||||
|
Debt discounts from beneficial conversion features
|
$
|
47,074
|
$
|
209,743
|
||||
|
Settlement of derivative liability
|
$
|
—
|
$
|
274,108
|
||||
|
Debt converted to common stock
|
$
|
79,000
|
$
|
—
|
||||
The accompanying notes to financial statements are an integral part of these financial statements
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 years ended December 31, 2016 and December 31, 2015.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)
Deferred Revenue
Revenue from customer purchase agreements is recorded as unearned revenue and amortized over the term of the agreements. At December 31, 2016 and December 31, 2015, unearned revenues were $193,020 and $1,434 respectively. Unearned revenue is normally comprised of online subscriptions wherein we ship a scheduled amount of product to online retail subscribers each month. During the year ended December 31, 2016, unearned revenue also included a cash payment we received for a non-refundable signing fee of $200,000 from a strategic supplier partnership arrangement (the "FP Agreement").
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, 2016 and December 31, 2015, the Company wrote off accounts receivable totaling $6,149 and $6,020, respectively, and during the year ended December 31, 2016 collected $12,238 which had been written off as bad debt in a prior period . There were no allowances for doubtful accounts recorded for the years ended December 31, 2016 and December 31, 2015.
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.
Customer shipping expenses
In accordance with guidance provided in EITF Abstracts Issue No. 00-10 'Accounting for Shipping and Handling Fees and Costs', the Company records costs for products shipped to customers within general and administrative expenses, rather than within COGS. Prior to the year ended December 31, 2016, these costs were included within COGS and COGS for the year ended December 31, 2015 shown in these financial statements were adjusted to reflect the change in accounting policy during fiscal 2016. During the years ended December 31, 2016 and December 31, 2015, customer shipping expenses totaled $124,760 and $98,020, respectively.
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, 2016 and December 31, 2015.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)
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.
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, 2016, the Company had outstanding a senior convertible note (the "VDF Note") with a balance of $869,674, net of a discount of $16,786. The Company determined the VDF Note had an embedded derivative valued at $11,649 at December 31, 2016 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, 2015, the VDF Note had a balance of $453,298, net of a discount of $15,974 and the embedded derivative liability was valued at $11,807. During the period ended December 31, 2016, $417,188 of principal was added to the VDF Note. This was comprised of $375,000 of patent license fees which were rolled over to the VDF Note and accrued interest for the year ended December 31, 2016 of $42,188.
The net amount of the Change in Fair Value of Derivatives for the period ended December 31, 2016 was a gain of $7,463 which included the net amount of mark-to-market value changes in the embedded derivatives liabilities of the VDF Note of $7,463 for the year ended December 31, 2016.
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, 2016 and December 31, 2015.
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, 2016
|
As of December 31, 2015
|
|
Cash
|
$68,546
|
$148,769
|
|
Accounts receivable
|
120,565
|
33,227
|
|
Accounts receivable - related party
|
1,800
|
18,000
|
|
Inventories
|
267,830
|
439,158
|
|
Prepaid expenses
|
-
|
5,953
|
|
Acc/payable and accrued liabilities
|
140,007
|
211,429
|
|
Accounts payable - related party
|
-
|
3,156
|
|
Short term convertible notes, net of discounts
|
209,578
|
-
|
|
Short term debt, net of discounts
|
-
|
235,237
|
|
Short term debt - related party
|
103,353
|
-
|
|
Long term convertible note, net of discount
|
869,674
|
548,881
|
|
Unearned revenue
|
193,020
|
1,434
|
|
Level 1 total
|
$1,974,373
|
$1,645,244
|
|
Derivative liability
|
$11,649
|
$11,807
|
|
Level 2 total
|
$11,649
|
$11,807
|
|
(nil)
|
-
|
-
|
|
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 $9,945 and $175,432 for the years ended December 31, 2016 and December 31, 2015, 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 $266,354 and $259,958 for the years ended December 31, 2016 and December 31, 2015, 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, 2016 and December 31, 2015: (a) depreciation for furniture and equipment of $2,096 and $2,096 was respectively recorded; and (b) depreciation for warehouse fixtures of $348 and $348 was respectively recorded. Accumulated depreciation for all fixed assets totaled $6,871 at December 31, 2016. Maintenance and repairs are expensed as incurred while renewals and betterments are capitalized.
Recent Accounting Pronouncements
In April 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ('ASU') No. 2016-15 ' Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments because stakeholders had indicated that there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this Update apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. Among the eight issues, there were two which appeared germane to the Company: (i) Debt Prepayment or Debt Extinguishment Costs, which provided guidance that Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities; and (ii) Separately Identifiable Cash Flows and Application of the Predominance Principle, which provided guidance that the classification of cash receipts and payments that have aspects of more than one class of cash flows should be determined first by applying specific guidance in generally accepted accounting principles (GAAP). In the absence of specific guidance, an entity should determine each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows. An entity should then classify each separately identifiable source or use within the cash receipts and payments on the basis of their nature in financing, investing, or operating activities. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)
The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. This ASU conforms with the Company's current protocols and the Company expects to adopt this ASU once it becomes effective. The Company does not expect the adoption of the ASU to have a significant impact on our consolidated financial statements.
In April 2016, FASB issued ASU No. 2016-10 'Revenue from Contracts with Customers (Topic 606). This follows the May 28, 2014, FASB and the International Accounting Standards Board (IASB) issuance of a converged standard on recognition of revenue from contracts with customers. The amendments in this Update affect entities with transactions included within the scope of Topic 606. The scope of that Topic includes entities that enter into contracts with customers to transfer goods or services (that are an output of the entity's ordinary activities) in exchange for consideration. The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company will evaluate this standard and may implement adoption of once the standard becomes effective. The Company does not expect the adoption of the standard to have a significant impact on our 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.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 $23,189,232 as of December 31, 2016 and has a incurred a net loss for the current year of $3,107,843. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time. As needed, 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, during the year ended December 31, 2016 the Company received a loan of $100,000 from a director and raised $1,086,000 through several private placement equity offerings and $322,936 through share sales under its 2015 Purchase Agreement Equity Line. On August 11, 2016 the last shares which had been registered under the 2015 Equity Line were sold and subsequently there has not been, nor are there plans for, a new registration statement Form S-1 filing which would allow for further share sales under the 2015 Purchase Agreement. We anticipate we will continue to raise funds through private placement equity sales in the near future.
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:
|
December 31,
2016
|
December 31,
2015
|
|||||||
|
Raw materials
|
$
|
105,035
|
$
|
100,702
|
||||
|
Finished goods
|
162,795
|
338,456
|
||||||
|
Inventory allowance
|
—
|
—
|
||||||
|
Total
|
$
|
267,830
|
$
|
439,158
|
||||
During the years ended December 31, 2016 and December 31, 2015, the Company respectively wrote down inventory by $24,769 and $26,760 to account for expired inventory which had been writen-off and disposed of, and for minor manufacturing process shrinkages. There were no reserved inventory balances as of December 31, 2016 and December 31, 2015 and the Company respectively recognized $nil and $nil recovery in inventory allowance for the years ended December 31, 2016 and December 31, 2015. At December 31, 2016 all inventory was valued at full cost.
NOTE 5 – Prepaid Expenses and Other Current Assets
Prepaid expenses at December 31, 2016 were $nil and at December 31, 2015 comprised a prepayment of $5,953 for a manufacturing run.
NOTE 6 – Fixed Assets
Fixed assets at December 31, 2016 and December 31, 2015 respectively comprised: (a) furniture and equipment totaling $5,543 and $7,639, net of accumulated depreciation of $5,659 and $3,563; and (b) warehouse fixtures totaling $2,260 and $2,608, net of accumulated depreciation of $1,212 and $864.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 7 – Amortization of License Fee
During the year ended December 31, 2016, unearned revenue also included a cash payment we received for a non-refundable signing fee of $200,000 from a strategic supplier partnership arrangement (the "FP Agreement"). The FP Agreement was executed on October 28, 2016 and because this was included in a license fee agreement, to conform with generally accepted accounting principles it is recorded as unearned revenue which is to be amortized over the five year life of the agreement.
Revenue amortizations under the FP License agreement have been, and will be, recorded as income based on the following schedule:
|
Total for the Year Ended
|
Amount
|
|
2016
|
$7,014
|
|
2017
|
$40,000
|
|
2018
|
$40,000
|
|
2019
|
$40,000
|
|
2020
|
$40,000
|
|
2021
|
$32,877
|
|
TOTAL
|
$200,000
|
NOTE 8 – Short Term Debt, Short Term Debt - Related Party & Short Term Convertible Notes
September 2015 Notes:
On September 30, 2015, subject to securities purchase agreements we issued two subordinated promissory notes ("September 2015 Note One" and "September 2015 Note Two", collectively, the "September 2015 Notes") to two lenders (the "September 2015 Lenders"). The September 2015 Notes provided 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 September 2015 Notes were not secured and are subordinated to senior notes issued by the Company. September 2015 Note One had a face value of $100,000 and September 2015 Note Two had a face value of $150,000. The interest rate on each note was 8% per annum and this amount fully accrued upon issuance and added $8,000 to September 2015 Note One and $12,000 to September 2015 Note Two to bring the total balances due on each note to $108,000 and $162,000, respectively. The September 2015 Notes each included a 10% original issuance discount ("OID") which resulted in total net proceeds to the Company of $225,000. As an inducement for the loans, On September 30,2015 the September 2015 Lenders received five‑year warrants, with cashless exercise rights, to purchase restricted shares of our common stock at an exercise price of $0.08 per share. September 2015 Note One Lender received 1,250,000 warrants which was valued using a Black-Scholes model at $67,115; and September 2015 Note Two Lender received 1,875,000 warrants which were valued using a Black-Scholes model at non-cash cost of $100,673.
At December 31, 2015, the balance on September 2015 Note One was $50,269. This included the face value of $100,000 plus accrued interest of $8,000 and was net of an unamortized warrant discount totaling $50,245 and an unamortized OID discount of $7,486. During the year ended December 31, 2015, $16,870 of the warrant discount was recorded as an amortization expense and $2,514 of the OID was recorded as interest expense.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 8 – Short Term Debt, Short Term Debt - Related Party & Short Term Convertible Notes (continued)
At December 31, 2016, the balance on September 2015 Note One was $nil. During the year ended December 31, 2016, the Company timely met a series of scheduled cash payments on September 2015 Note One totaling $49,000 and on August 30, 2016 redeemed the balance of $59,000 due through issuance of 1,475,000 shares valued at $95,875 based on a market close price of $0.065 per share on date of issuance. The $36,875 difference between the cash redemption balance and the value of the shares redemption was treated as a conversion loss and recorded as an additional non-cash interest expense. At time of redemption on August 30, 2016 the remaining $50,245 of the warrant discount on September 2015 Note One was recorded as an amortization expense and the remaining $7,486 OID was recorded as interest expense. The September 2015 Note One is now fully repaid and there are no further payments due.
At December 31, 2015, the balance on September 2015 Note Two was $75,403. This included the face value of $150,000 plus accrued interest of $12,000 and was net of an unamortized warrant discount totaling $75,367 and an unamortized OID discount of $11,230. During the year ended December 31, 2015, $25,306 of the warrant discount was recorded as an amortization expense and $3,770 of the OID was recorded as interest expense.
At December 31, 2016, the balance on September 2015 Note Two was $40,411. This included the remaining face value and accrued interest totaling $65,000, net of an unamortized warrant and beneficial conversion feature ("BCF") discounts of $16,527 and an unamortized OID discount of $8,062. During the year ended December 31, 2016, the Company timely met a series of scheduled cash payments on September 2015 Note One totaling $88,500 and, prior to scheduled redemption date, on September 23, 2016 the original lender extended the maturity date of the note to November 14, 2016 in exchange for the right to convert the balance of $73,500 into common shares of the Company at a price of $0.04 per share. On September 23, 2016 the Company's closing share price was $0.0605 and this created a BCF which was valued at $37,669. On November 7, 2016, prior to scheduled redemption date, the $73,500 balance due on September 2015 Note Two was purchased by the September 2015 Note One Lender (hereinafter referred to as "September 2015 Note Two Purchaser") from the original lender. Also on November 7, 2016, in return for the addition of $11,500 to the OID for September 2015 Note Two, September 2015 Note Two Purchaser extended the maturity of September 2015 Note Two to August 7, 2017 based on the Company meeting a payment schedule of $40,000 on May 7, 2017 and $45,000 on August 7, 2017. The addition of the $11,500 addition to the OID increased the principal due on September 2015 Note Two to $85,000. On November 23, 2016, $20,000 of September 2015 Note Two was converted by September 2015 Note Two Purchaser into 500,000 shares of the Company which reduced the principal due on the note to $65,000. Because the market price of the shares was higher than the conversion price on conversion date, the transaction resulted in a conversion loss of $6,850 which was the difference between the cash redemption balance and the value of the shares issued for redemption and was recorded as an additional non-cash interest expense. During the year ended December 31, 2016, a total of $96,509 of the warrant and BCF discounts were recorded as an amortization expense and $14,668 amortization of the OID was recorded as interest expense.
December 2015 Note:
On December 3, 2015, 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 bears 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 was due and payable in full on December 3, 2016 ("Maturity Date") and had a re-payment schedule which requires payments of $39,600 respectively on sixth, ninth and twelfth month anniversary dates of issuance. The December 2015 Notes included an aggregate $10,000 original issuance discount ("OID") which resulted in net proceeds of $100,000. 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. 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 a non-cash cost of $30,050.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 8 – Short Term Debt, Short Term Debt - Related Party & Short Term Convertible Notes (continued)
At December 31, 2015, the balance on the December 2015 Note including accrued interest was $109,565, net of an unamortized OID of $9,235. During the year ended December 31, 2015, $764 amortization of the OID was recorded as interest expense.
At December 31, 2016, the balance on the December 2015 Note was $32,081. This included the remaining face value and accrued interest totaling $39,600, net of an unamortized BCF discount of $6,340 and an unamortized OID discount of $1,179. During the year ended December 31, 2016, the Company timely met two scheduled cash payments totaling $79,200 and, prior to scheduled redemption date, on December 2, 2016 the lender extended the maturity date of the note to March 7, 2016 in exchange for 300,000 shares of the Company and the right to convert the balance of $39,600 into common shares of the Company at a price of $0.04 per share. On December 2, 2016, the Company's closing share price was $0.05 which created a BCF valued at $9,405 and a non-cash cost for the shares issuance of $15,000. During the year ended December 31, 2016, a total of $3,065 of the BCF discount was recorded as an amortization expense and $8,056 amortization of the OID was recorded as interest expense.
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 and LPC Note One is now classified as short term convertible 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. 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, on August 18, 2015 the Company granted LPC 3,750,000 six year warrants, which includes a cashless exercise provision, to purchase 3,750,000 restricted shares of our common stock at an exercise price of $0.10 per share which was valued using a Black-Scholes model at a non-cash cost of $277,014. At August 18, 2015, LPC Note One also included a 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. On December 16, 2016, prior to the scheduled redemption dates, LPC extended the maturities of each of its two notes from December 31, 2016 to December 31, 2017 in return for issuance by the Company of 7,000,000 six year warrants, with cashless exercise rights, to purchase 7,000,000 restricted shares of our common stock at an exercise price of $0.05 per share. The warrants were valued using a Black-Scholes model at a non-cash cost of $315,658, of which $143,481 was ascribed as an increase to the discount of LPC Note One and $172,177 was ascribed as an increase to the discount of LPC Note Two.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 8 – Short Term Debt, Short Term Debt - Related Party & Short Term Convertible Notes (continued)
At December 31, 2015, the recorded balance on LPC Note One was $67,365. This included the remaining face value of $250,000, net of unamortized warrant and BCF discounts totaling $164,372 and an unamortized OID discount of $18,263. During the year ended December 31, 2015, $60,628 of the discount was recorded as an amortization expense, $6,737 of the OID was recorded as interest expense, and accrued interest of $4,688 was paid through issuance of 90,286 restricted common shares.
At December 31, 2016, the recorded balance on LPC Note One was $68,086, This included the remaining face value of 250,000, net of an unamortized warrant and BCF discounts totaling $177,505 and an unamortized OID discount of $4,409. During the year ended December 31, 2016, $130,348 of the BCF and warrant discounts were recorded as an amortization expense, $13,854 of the OID was recorded as interest expense, and accrued interest of $12,708 was paid via issuances of 181,544 restricted common shares.
LPC Note Two:
On November 23, 2015, we issued a Senior Convertible Note ("LPC Note Two") to 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. LPC Note Two is now classified as short term convertible 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. LPC Note Two has a $30,000 OID which resulted in net proceeds of $270,000. The Company has the right to prepay LPC Note Two, 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 Two 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. On November 23, 2015, as an inducement for the loan the Company granted LPC 5,000,000 six year warrants, which includes a cashless exercise provision, to purchase 5,000,000 shares of our restricted common stock at an exercise price of $0.07 per share which was valued using a Black-Scholes model at a cost of $253,098. At November 23, 2015, LPC Note Two also included a 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. On December 16, 2016, prior to the scheduled redemption dates, LPC extended the maturities of each of its two notes from December 31, 2016 to December 31, 2017 in return for issuance by the Company of 7,000,000 six year warrants, with cashless exercise rights, to purchase 7,000,000 restricted shares of our common stock at an exercise price of $0.05 per share. The warrants were valued using a Black-Scholes model at a non-cash cost of $315,658, of which $143,481 was ascribed as an increase to the discount of LPC Note One and $172,177 was ascribed as an increase to the discount of LPC Note Two.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 8 – Short Term Debt, Short Term Debt - Related Party & Short Term Convertible Notes (continued)
At December 31, 2015, the recorded balance on LPC Note Two was $28,218. This included the remaining face value of $300,000, net of an unamortized warrant and BCF discounts totaling $244,604 and an unamortized OID of $27,178. During the year ended December 31, 2015, $25,396 of the BCF and warrant discounts were recorded as an amortization expense, $2,822 of the OID was recorded as interest expense, and accrued interest of $7,561 was paid via issuance of 151,680 restricted common shares.
At December 31, 2016, the recorded balance on LPC Note Two was $69,000. This included the remaining face value of $300,000, net of an unamortized discount of $224,438 and an unamortized OID of $6,562.
During the year ended December 31, 2016, $130,348 of the BCF and warrant discounts were recorded as an amortization expense, $13,854 of the OID was recorded as interest expense, and accrued interest of $15,250 was paid via issuances of 305,000 restricted common shares
Short Term Debt - Related Party:
Interim Note:
On June 5, 2015, 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 at a non-cash cost. As security for the Interim Note, the Company's Chief Executive Officer pledged 3,333,333 shares of the Company (the "Pledge"), which he owned, 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 and the Interim Note was fully repaid.
RP Note:
On July 31, 2016, the Company issued a $100,000 note (the "RP Note") to a director of the Company for a loan. The RP Note has a maturity date of January 27, 2017 and is classified as short term related party debt. The RP Note bears interest at 8% per annum due at maturity and may be prepaid in whole, or in part, at any time before each maturity date without prepayment penalty. 340,000 restricted common shares of the Company were issued to the lender as a fee valued at a non-cash cost of $15,504. At December 31, 2016, the balance due on the RP Note was $103,353 including $3,353 of accrued interest for the year ended December 31, 2016.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 9 – Convertible Long Term Notes Payable
Subordinate Debenture:
On June 5, 2015, the Company repaid and extinguished an Unsecured Subordinate Debenture which it issued on January 20, 2015 to a third party lender. This note had a face value of $440,000, included $40,000 OID, and provided proceeds of $400,000. The note initially had a recorded balance of $207,074, net of a discount of $232,926 created by an embedded derivative liability which resulted from the note having a conversion price adjustment provision. At redemption on June 5, 2015, the lender was paid 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.
VDF Note:
On January 28, 2014, we entered into a patent settlement with VDF FutureCeuticals, Inc. ("VDF") at which time a senior convertible note (the "VDF Note") was issued to VDF, whereby we promised to pay VDF a principal amount equal to the sum of aggregate accrued and unpaid patent license fee payments plus accrued interest. 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 and we have the right, subject to certain limitations, to prepay principal at any time and from time to time. At any time VDF has the option to convert any principal outstanding on the VDF Note into shares of our common stock at a Conversion Price determined by the terms of the VDF Note, which is subject to adjustment based on our issuance of stock and other securities. During the year ended December 31, 2016, the Conversion Price of the Senior Convertible Note was adjusted from $0.3823 per share to $0.2157 per share per the terms of the Senior Convertible Note. The VDF Note provides that we may, at our option, roll-over to the VDF Note quarterly License fee payments and accrued interest and is secured through the Pledge and Security Agreement ("PSA") and is senior to any other debt issued by the Company unless prior written consent of VDF is obtained to amend the ranking.
On January 4, 2017, VDF and the Company executed an addendum to the VDF Note and the PSA in which VDF agreed it will: (i) remove its lien on the Company's inventory and accounts receivable in the event that the Company executes any line of credit, inventory purchase order financing, or accounts receivable factoring agreements with third party lender(s); and (ii) promptly execute any inter-creditor agreement(s) provided to VDF by such third party lender(s) which affirm VDF's permission for the creation of liens by the third party lender(s) which rank in priority above VDF's existing lien. A copy of this agreement is attached to this Report as Exhibit 10.54.
At December 31, 2015, the VDF Note had an outstanding balance $453,298. This included the principal due of $469,272, net of a discount of $15,974 resulting from the embedded derivative. During the year ended December 31, 2015, we rolled-over License fee payments totaling $300,000 plus accrued interest for the year $18,481 for a total addition to the VDF Note of $318,481.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 9 – Convertible Long Term Notes Payable (continued)
At December 31, 2016, the VDF Note had an outstanding balance $869,674. This included the principal due of $886,460, net of a discount of $16,786 resulting from the embedded derivative. During the year ended December 31, 2016, we rolled-over License fee payments totaling $375,000 and recorded accrued interest of $42,188 for a total addition to the VDF Note of $417,188.
NOTE 10 – Derivatives
In connection with the issuance of debt or equity instruments, the Company may sell options or warrants to purchase our common stock. In certain circumstances, the convertible debt, options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as embedded derivative features which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability. The Company's derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income in the period in which the changes occur. For options, warrants and bifurcated embedded derivative features that are accounted for as derivative instrument liabilities, the Company estimates fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The valuation techniques require assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option.
Also as shown in the table below, prior to conversion into shares, in 2015 the Company repaid in cash a variable rate convertible note which had been issued in 2015. The Company no longer has any variable rate convertible debt outstanding and at December 31, 2016 the anti-dilution clause of the VDF Senior Convertible Note was the only liability of the Company which created a derivative liability.
The following table summarizes the derivative activity for the year ended December 31, 2015 and during the year ended December 31, 2016:
|
Description
|
Total
|
|
|
Fair Value of derivative liabilities at December 31, 2014
|
$
|
9,168
|
|
Increase due to issuance of convertible debentures
|
241,710
|
|
|
Reduction due to redemption of convertible debentures
|
(274,108)
|
|
|
Change in Fair Value
|
35,037
|
|
|
Fair Value of derivative liabilities at December 31, 2015
|
$
|
11,807
|
|
Increase due to issuance of convertible debenture - VDF license fee rollover
|
1,997
|
|
|
Change in Fair Value
|
(570)
|
|
|
Fair Value of derivative liabilities at March 31, 2016
|
$
|
13,234
|
|
Increase due to issuance of convertible debenture - VDF license fee rollover
|
2,353
|
|
|
Change in Fair Value
|
(1,061)
|
|
|
Fair Value of derivative liabilities at June 30, 2016
|
$
|
14,526
|
|
Increase due to issuance of convertible debenture - VDF license fee rollover
|
1,705
|
|
|
Change in Fair Value
|
(4,408)
|
|
|
Fair Value of derivative liabilities at September 30, 2016
|
$
|
11,823
|
|
Increase due to issuance of convertible debenture - VDF license fee rollover
|
1,361
|
|
|
Change in Fair Value
|
(1,535)
|
|
|
Fair Value of derivative liabilities at December 31, 2016
|
$
|
11,649
|
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 10 – Derivatives (continued)
For the year ended December 31, 2016, the change in the fair market value of the derivative liability of $(7,463) was recorded as Other Income. 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.
The lattice methodology was used to value the derivative liabilities related to the convertible notes, with the following assumptions.
|
Assumptions:
|
December 31, 2016
|
December 31, 2015
|
|
|
Dividend yield
|
0.00%
|
0.00%
|
|
|
Risk-free rate for term
|
0.85%
|
1.31%
|
|
|
Volatility
|
78%
|
133%
|
|
|
Maturity dates
|
2 years
|
3 years
|
|
|
Stock Price
|
$0.0499
|
$0.055
|
NOTE 11 – Related Party Transactions
During the years ended December 31, 2016 and December 31, 2015, related party transactions included:
Chief Executive Officer, Director, Board Chair
For the year ended December 31, 2016: (i) compensation of $105,624; (ii) office rent of $15,600; (iii) issuance of 150,366 restricted common shares at a closing market price of $0.051 per share on date of issue, for deemed compensation of $7,669; (iv) issuance of 333,781 restricted common shares at a closing market price of $0.049 on date of issue for deemed compensation of $16,355; (v) issuance of 164,841 restricted common shares at a closing market price of $0.052483 per share on date of issue for deemed compensation of $8,651; (vi) issuance of 435,180 restricted common shares at a closing market price of $0.05802 per share on date of issue for deemed compensation of $25,249; (vii) issuance of 193,848 restricted common shares at a closing market price of $0.0561 per share on date of issue for deemed compensation of $10,875. 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.
President and Chief Operating Officer, Director
For the year ended December 31, 2016: (i) compensation of $223,439; (ii) issuance of 318,081 restricted common shares at a closing market price of $0.051 per share on date of issue for deemed compensation of $16,222; (iii) issuance of 254,441 restricted common shares at a closing market price of $0.049 per share on date of issue for deemed compensation of $12,468; (iv) issuance of 348,702 restricted common shares at a closing market price of $0.052483 per share on date of issue for deemed compensation of $18,301; (v) issuance of 1,333,333 restricted common shares at a closing market price of $0.049 per share on date of issue for deemed compensation of $65,333; (vi) issuance of 906,634 restricted common shares at a closing market price of $0.05802 per share on date of issue for deemed compensation of $52,603; and (vii) issuance of 1,382,532 restricted common shares at a closing market price of $0.0561 per share on date of issue for deemed compensation of $77,560. For the period ended December 31, 2015: (i) cash compensation, including COBRA
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – Related Party Transactions (continued)
benefits, of $116,526 for the period from August 10 (employment start date) to December 31, 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.
Chief Financial Officer, Secretary and Treasurer
For the year ended December 31, 2016: (i) compensation of $117,188 (ii) office rent of $9,000; (iii) issuance of 462,663 restricted common shares at a closing market price of $0.051 per share on date of issue for deemed compensation of $23,596; (iv) issuance of 507,202 restricted common shares at a closing market price of $0.052483 per share on date of issue for deemed compensation of $26,619; and (v) issuance of 426,040 restricted common shares at a closing market price of $0.0561 per share on date of issue for deemed compensation of $23,901. 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. Share payments and options grants were executed by issuances to Mr. Dawe's holding company GBG Management Services Inc.
Non-executive Director One
For the year ended December 31, 2016: nil transactions. For the year ended December 31, 2015: cash compensation or $4,000 for consulting services.
Non-executive Director Two:
For the year ended December 31, 2016: (i) purchase by a holding company wholly owned by Independent Director One of 1,875,000 units priced at $0.04 per unit for aggregate proceeds of $75,000 with each unit including one restricted common share and one five year warrant exercisable at $0.055 per share in Unit Offer One; (ii) purchase by Independent Director One of 500,000 units priced at $0.04 per unit for aggregate proceeds of $20,000 with each unit including one restricted common share and one five year warrant exercisable at $0.055 per share in Unit Offer Two; (iii) provision of a loan of $100,000 to the Company in return for an inducement fee of 340,000 restricted common shares priced at a closing market of $0.0456 per share on date of issue for a deemed cost of $15,504; and (iv) accrual of $3,353 interest on the loan at December 31, 2016. 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.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – Related Party Transactions (continued)
Non-executive Director Three:
For the year ended December 31, 2016: (i) receipt by the Company of payment by Independent Director Two to the Company of $18,000 for a related party accounts receivable which was outstanding at December 31, 2015; and (ii) an arm's length purchase by a company owned by Independent Director Two for $1,800 of raw material products, such order which was recorded as a related party accounts receivable at December 3, 2016. For the year ended December 31, 2015: $39,600 of revenue was derived from arm's length 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.
Non-executive Director Four:
For the year ended December 31, 2016: issuance on October 4, 2016 of 150,000 restricted common shares valued at a cost of $8,850 which were issued as an inducement fee for joining the Company's Board. For the year ended December 31, 2015: n/a.
Non-executive Director Five:
For the year ended December 31, 2016: as part of a group which executed license fee and securities purchase agreements with the Company on December 6, 2016, on December 23, 2016 Director Five purchased 2,500,000 restricted common shares at $0.024 per share for proceeds of $60,000. The appointment of Director Five to the Board fulfilled a clause of the same purchase agreement. For the year ended December 31, 2015: n/a.
At December 31, 2016 and December 31, 2015, the Company had related party accounts payable of $nil and $nil, respectively; and shareholder loans of $nil and $nil, respectively.
NOTE 12 – Equity
Overview:
Our authorized capital stock consists of 877,500,000 shares of common stock, with a par value of $0.001 per share; and 10,000 shares of preferred stock at a par value of $0.001. The holders of common stock have dividend rights, liquidation rights and voting rights of one vote for each share of common stock. There are no preferred shares issued and outstanding and the terms of any future preferred shares issuances will be as determined by the Board of Directors. As of December 31, 2016, there were 162,932,882 shares of our common stock issued and outstanding.
2016 Share Transactions
On August 11, 2016 we discontinued the 2015 Equity Line after the last shares which had been registered under the related Form S-1 were sold. Subsequently there has not been filing of, and there are no plans to file, a new registration statement to effect further sales and the 2015 Equity Line is now effectively defunct. During the year ended December 31, 2016, the Company issued 6,450,000 Sale Shares and 21,529 per sale Commitment Shares under the 2015 Equity Line for aggregate proceeds of $322,936.
On January 1, 2016 we issued 600 restricted common shares at $0.0614 per share at market close price on date of grant to an employee for deemed compensation of $37. 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 12 – Equity (continued)
On January 8, 2016, we issued 651,269 restricted common shares at $0.05 per share at market close price on date of grant for deemed compensation of $32,563 to a service provider as final payment 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 January 11, 2016 we issued 5,000 restricted common shares at $0.064 per share to an employee at market close price on date of grant for deemed compensation of $320. 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.
In February 2016, we executed a private placement unit offering which raised $171,000 through the sale of 4,275,000 units. Unit offer #1 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. The fair market value of the shares based on closing market prices on dates of sale was $227,160 and the embedded value of the warrants based on a Black-Scholes option pricing model was $182,910. 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.
On February 23, 2016 we issued 5,000 restricted common shares at $0.0502 per share at market close price on date of grant to an employee for deemed compensation of $251. 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 March 4, 2016, we issued 3,500 restricted common shares at $0.0559 per share at market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $196. 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.
For the three month period ended March 31, 2016, we issued to LPC: (a) 45,143 restricted common shares at $0.07 per share for a deemed cost of $3,160 for interest accrued on LPC Note One for the period from January 1, 2016 to March 31, 2016 ; and (b) 75,840 restricted common shares at $0.05 per share for a deemed cost of $3,792 for interest accrued on LPC Note Two for the period from January 1, 2016 to March 31, 2016. These shares were issued at market close price on date of grant to one US company, which 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 12 – Equity (continued)
On March 31, 2016 we issued 150,366 restricted common shares at $0.051 per share at market close price on date of grant to our CEO for deemed compensation totaling $7,669. 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 March 31, 2016 we issued 318,081 restricted common shares at $0.051 per share at market close price on date of grant to our President & COO for deemed compensation totaling $16,222. 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 March 31, 2016 we issued 462,663 restricted common shares at $0.051 per share at market close price on date of grant to a company wholly owned by our CFO for deemed compensation totaling $23,596. 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 March 31, 2016 we issued 600 restricted common shares at $0.054 per share at market close price on date of grant to an employee for deemed compensation of $30. 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.
From April to May 2016, we executed a private placement unit offering which raised $394,000 through the sale of 9,850,000 units. Unit Offer #2 terminated on May 31, 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. The fair market value of the shares based on closing market prices on dates of sale was $532,443 and the embedded value of these warrants based on a Black-Scholes option pricing model was $426,730. These shares were issued to nine 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.
On May 20, 2016 we issued 10,000 restricted common shares at $0.054 per share at market close price on date of grant to an employee for deemed compensation of $540. 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 May 20, 2016 we issued 5,000 restricted common shares at $0.054 per share at market close price on date of grant to an employee for deemed compensation of $270. 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 12 – Equity (continued)
On May 20, 2016, we issued 68,000 restricted common shares at $0.054 per share at market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $3,672. 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 May 20, 2016, we issued 8,500 restricted common shares at $0.054 per share at market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $459. 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 May 20, 2016, we issued 7,000 restricted common shares at $0.054 per share at market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $378. 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 May 20, 2016, we issued 8,500 restricted common shares at $0.054 per share at market close price on date of grant to a professional athlete for endorsement services for deemed compensation of $459. 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 June 6, 2016, we issued 5,000 restricted common shares at $0.0518 per share at market close price on date of grant to a health care professional for endorsement services for deemed compensation of $259. 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 June 8, 2016 we issued 333,781 restricted common shares at $0.049 per share at market close price on date of grant as compensation to our CEO for deemed compensation totaling $16,355. 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 8, 2016 we issued 254,441 restricted common shares at $0.049 per share at market close price on date of grant as compensation to our President & COO for deemed compensation totaling $12,468. 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.
For the period ended June 30, 2016 we issued 164,841 restricted common shares at $0.052483 per share at market close price on date of grant to our CEO for deemed compensation totaling $8,651. 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.
For the period ended June 30, 2016 we issued 348,702 restricted common shares at $0.052483 per share at market close price on date of grant to our President & COO for deemed compensation totaling $18,301. 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 12 – Equity (continued)
For the period ended June 30, 2016 we issued 507,202 restricted common shares at $0.052483 per share at market close price on date of grant to a company wholly owned by our CFO for deemed compensation totaling $26,619. 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 30, 2016 we issued 1,200 restricted common shares at $0.0497 per share at market close price on date of grant to an employee for deemed compensation of $60. 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, 2016, we issued 17,000 restricted common shares at $0.0497 per share at market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $845. 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 June 30, 2016, we issued 1,500,000 restricted common shares at $0.0497 per share at market close price on date of grant for consultant services rendered for a deemed cost of $74,550. These shares were issued to three US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
For the three months ended June 30, 2016, we issued to LPC: (a) 45,143 restricted shares at $0.0497 per share for a deemed cost of $2,244 for interest accrued on LPC Note One for the period from April 1, 2016 to June 30, 2016 ; and (b) 75,840 restricted shares at $0.0497 per share for a deemed cost of $3,769 for interest accrued on LPC Note Two for the period from April 1, 2016 to June 30, 2016. These shares were issued at market close price on date of grant to one US company, which 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 July 13, 2016, we issued 294,737 restricted common shares at $0.0475 per share at market close price on date of grant for consultant services rendered for a deemed cost of $14,000. 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.
From July to September 2016, we executed a private placement offering which raised $101,000 through the sale of 2,525,000 units. Unit Offer #3 terminated on September 30, 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. The fair market value of the shares based on closing market prices on dates of sale was $168,525 and the embedded value of the warrants based on a Black-Scholes option pricing model was $132,571. These shares were issued to eight 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.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – Equity (continued)
On August 1, 2016, the Company received a loan of $100,000 from a director of the Company and issued 340,000 restricted common shares as an inducement fee at market close price of $0.0456 on date of issue for a deemed cost of $15,504. 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 8, 2016, we issued 20,000 restricted common shares at $0.0475 per share market close price on date of grant to an employee for deemed compensation of $950. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On August 8, 2016, we issued 50,000 restricted common shares at $0.0475 per share market close price on date of grant to an employee for deemed compensation of $2,375. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On August 15, 2016, we issued 1,333,333 restricted common shares at $0.049 per share at market close price on date of grant to our President & COO for deemed compensation totaling $65,333. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On August 24, 2016, we issued 42,500 restricted common shares at $0.0639 per share market close price on date of grant to an employee for deemed compensation of $2,716. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On August 24, 2016, we issued 25,000 restricted common shares at $0.0639 per share market close price on date of grant to an employee for deemed compensation of $1,598. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On August 30, 2016, the Company redeemed the balance due of $59,000 on the September 2015 Note One through issuance of 1,475,000 shares valued at $95,875 based on a market close price of $0.065 per share on date of issuance. This included a loss on conversion of $36,875 based on the difference between the value of the shares issued at market close price on date of issue and the agreed conversion price of $0.04 per share. These shares were issued to one US company, which 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 6, 2016, we issued 10,000 restricted common shares at $0.0599 per share market close price on date of grant to an employee for deemed compensation of $599. 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 12 – Equity (continued)
On September 8, 2016, we issued 25,000 restricted common shares at $0.06 per share market close price on date of grant to an employee for deemed compensation of $1,500. 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 9, 2016, we issued 10,000 restricted common shares at $0.0581 per share market close price on date of grant to an employee for deemed compensation of $581. 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 23, 2016, a note holder provided an extension of the maturity of the note held in return for the note being amended to provide for conversion into shares at $0.04 per share. This amendment created a beneficial conversion feature which was valued at a cost of $37,669, such amount which was recorded as an increase to Additional Paid in Capital.
On September 27, 2016 we issued 435,180 restricted common shares at $0.05802 per share at market close price on date of grant as compensation to our CEO for deemed compensation totaling $25,249. 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 27, 2016 we issued 906,634 restricted common shares at $0.05802 per share at market close price on date of grant to our President & COO for deemed compensation totaling $52,603. 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 29, 2016, we issued 129,244 restricted common shares at $0.058 per share market close price on date of grant to a predecessor investor for deemed cost of $7,496 to revise the shares owed to him from our reverse merger share exchange in 2014. 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. A value for capital stock of $129 was recorded and the balance of $7,367 for the cost of the shares was offset to additional paid in capital.
For the three months ended September 30, 2016, we issued to LPC: (a) 45,629 restricted shares at $0.0561 per share for a deemed cost of $2,560 for interest accrued on LPC Note One for the period from July 1, 2016 to September 30, 2016 ; and (b) 76,660 restricted shares at $0.0561 per share for a deemed cost of $4,301 for interest accrued on LPC Note Two for the period from July 1, 2016 to September 30, 2016. These shares were issued at market close price on date of grant to one US company, which 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, 2016, we issued 193,848 restricted common shares at $0.0561 per share at market close price on date of grant to our CEO for deemed compensation totaling $10,875. 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 12 – Equity (continued)
On September 30, 2016, we issued 1,382,532 restricted common shares at $0.0561 per share at market close price on date of grant to our President & COO for deemed compensation totaling $77,560. 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, 2016, we issued 426,040 restricted common shares at $0.0561 per share at market close price on date of grant to a company wholly owned by our CFO for deemed compensation totaling $23,901. 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.
From July 1 to September 30, 2016, we raised $120,000 through a private placement stock offering of 3,000,000 restricted common shares at $0.04 per share. These shares were issued to six 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.
On October 4, 2016, we issued 150,000 restricted common shares at $0.059 per share at market close price on date of grant to a newly appointed director as an inducement for joining our Board for a deemed cost of $8,850. 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 28, 2016, we issued 1,000,000 restricted common shares at $0.0525 per share at market close price on date of grant for consultant services rendered for a deemed cost of $52,500. These shares were issued to three 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 November 23, 2016, we issued 500,000 common shares at $0.04 per share for conversion by September 2015 Note Two Purchaser of $20,000 of debt. These shares were issued to one US person with reliance on the exemptions from registration requirements provided in the Securities Act of 1933, as amended, Section 4(1) and Rule 144. Because these shares were issued at below the closing market price of $0.0537 on date of issue, the conversion resulted in a loss of $6,850 which was recorded as additional interest expense.
On November 30, 2016, we issued 1,000,000 restricted common shares at $0.0529 per share at market close price on date of grant for consultant services rendered for a deemed cost of $52,900. These shares were issued to three 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 December 2, 2016, we issued 300,000 common shares at $0.0495 per share at market close price on date of grant to a debt holder as part of the compensation for a maturity extension on the note held for a deemed cost of $14,850. These shares were issued to one US person with reliance on the exemptions from registration requirements provided in Rule 144(d)(3)(ii). At this time the underlining note was also amended to provide for conversion of the note to shares at $0.04 per share and this created a beneficial conversion feature which was valued at a cost of $9,405, such amount which was recorded as an increase to Additional Paid in Capital.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – Equity (continued)
On December 6, 2016, LPC provided an extension of the maturity of two notes held in return for the grant of 7,000,000 six year warrants exercisable at $0.05 per share. The warrants were valued using a Black-Scholes model at a non-cash cost of $315,658, such amount which was recorded as an increase to Additional Paid in Capital.
For the three months ended December 31, 2016, we issued to LPC: (a) 45,629 restricted shares at $0.0451 per share for a deemed cost of $2,058 for interest accrued on LPC Note One for the period from October 1, 2016 to December 31, 2016 ; and (b) 76,660 restricted shares at $0.0451 per share for a deemed cost of $3,457 for interest accrued on LPC Note Two for the period from October 1, 2016 to December 31, 2016. These shares were issued at market close price on date of grant to one US company, which 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.
PCF Holdings Investment:
On December 6, 2016, the Company entered into a securities purchase agreement (the "Securities Agreement") with PCF Holdings Group, LLC. ("PCF") under which PCF committed to invest, or cause to be invested, $940,000 in three tranches of (i) $300,000, (ii) $500,000 and (iii) $140,000, respectively for the purchase of Stock Units. Under the Securities Agreement, PCF (or its designee) will purchase from the Company up to 28.5 million stock units (each a "Stock Unit" and in the plural, the "Stock Units"), to be paid in three tranches. The series of warrants for each tranche each have the same three exercise prices, include cashless exercise rights, and have the same three expiry terms. The first tranche was priced at $0.024 per Stock Unit and the second and third tranches are priced at $0.04 per Stock Unit. Each Stock Unit consists of one share of restricted common stock of the Company (each a "Share") and three separate warrant classes (each a "Warrant" and the shares underlying the Warrants being the "Warrant Shares" or, in the singular a "Warrant Share") respectively have (i) an exercise price of $0.055 per share for a term of five years, (ii) an exercise price of $0.20 per shares for a term of three years and (iii) an exercise price of $0.25 per share for a term of 18 months. The fair market value of the shares based on closing market price on date of sale was $625,000 and the embedded value of the warrants based on a Black-Scholes option pricing model was $1,410,059. These shares were issued to three 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. For the second and third tranches, each Stock Unit shall be priced at $0.04 per Stock Unit and shall consist of one Share and three separate warrant classes (each a "Warrant" and the shares underlying the Warrants being the "Warrant Shares", or in the singular a "Warrant Share") that shall respectively have (i) an exercise price of $0.055 per share for a term of five years, (ii) an exercise price of $0.20 per share for a term of three years and (iii) an exercise price of $0.25 per share for a term of 18 months. At the initial Tranche Closing, PCF purchased 12,500,000 Stock Units for a purchase price of $300,000 in cash (the "Initial Tranche"). Subject to the continued accuracy and validity of the representations and warranties of the Company to PCF, the satisfaction by the Company of all its covenants set forth in the Securities Agreement and other considerations, then not later than 120 days from the Initial Tranche Closing (the "Second Tranche Closing"), Purchaser shall
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – Equity (continued)
purchase 12,500,000 Stock Units (the "Second Tranche) for a purchase price of $500,000; and then not later than 120 days from the Second Tranche Closing (the "Third Tranche Closing"), Purchaser shall purchase 3,500,000 Stock Units (the "Third Tranche) for a purchase price of $140,000. The Securities Agreement includes a Beneficial Ownership Limitation and at no time may PCF exercise warrants or purchase shares if such exercises or purchases would result in PFC and its affiliates owning an aggregate of shares of our common stock in excess of 17.5% of the then outstanding shares of our common stock. PCF and its affiliates may sell or transfer Units, Shares or Warrants that exceed, or might cause PCF to exceed, the Beneficial Ownership Limitation in order for PCF to comply with the Beneficial Ownership Limitation. PCF may at any time request one registration under the Securities Act of 1933, as amended, of all or part of its Shares (including any Warrant Shares issuable upon exercise of any Warrants) (a "Demand Registration"), however the Company will not be obligated to effect any Demand Registration within nine months from the Initial Tranche Closing, or when Purchaser has the ability to freely sell the securities proposed to be registered under Rule 144, without being subject to any volume or manner of sale restrictions thereunder.
On December 8, 2016, we issued 170,000 restricted common shares at $0.048 per share market close price on date of grant to seven employees for deemed compensation of $8,160. These shares were issued to seven US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
2015 Share Transactions
On February 6, 2015 we issued 600 restricted common shares at $0.0752 per share at market close price on date of grant to an employee for deemed compensation 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 at market close price on date of grant to a professional athlete for endorsement services rendered 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 at market close price on date of grant as compensation to our CFO for 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 for professional services rendered, such issuance which was valued at $0.20 per share at market close price on date of grant for a deemed cost of $60,000. 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.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – Equity (continued)
On June 5, 2015, we issued 1,700,000 restricted common shares at $0.1402 per share at market close price on date of grant for an aggregate deemed cost of $238,340 to a director of the Company 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 at market close price on date of grant to an employee for deemed compensation 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.
2015 Equity Line:
[On August 11, 2016 the last shares which had been registered under the Company's 2015 Equity Line were sold. Subsequently there has not been a new registration statement on Form S-1 filed, nor is a filing planned for such registration statement, which would allow for further share sales under the 2015 Purchase Agreement.]
On June 16, 2015, we entered into the 2015 Purchase Agreement and 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. At execution date LPC also 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. 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 up to an additional 666,666 shares could be issued as commitment fees pro rata. The 2015 Equity Line may be terminated by us at any time at our discretion without any monetary cost to us. 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.
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 2015 Equity Line 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 at market close price on date of grant to a professional athlete for endorsement services rendered 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.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – Equity (continued)
On July 9, 2015 we issued 226,860 restricted common shares at $0.1102 per share at market close price on date of grant as compensation to our CFO for deemed compensation of $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 per share at market close price on date of grant for deemed compensation 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 at market close price on date of grant to an employee for deemed compensation 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 at market close price on date of grant to a consultant for services rendered for a deemed cost 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 at market close price on date of grant to a professional athlete for endorsement services rendered for a deemed cost 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 at market close price on date of grant to a professional athlete for endorsement services rendered for a deemed cost 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 at market close price on date of grant to a consultant for services rendered for a deemed cost 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 at market close price on date of grant as compensation to our CFO for 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.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – Equity (continued)
On September 30, 2015 we issued 502,283 restricted common shares at $0.078 per share at market close price on date of grant as compensation to our President & COO for deemed compensation of $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 at market close price on date of grant 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 $0.07241 per share at market close price on date of grant for aggregate deemed compensation of $100,000 to a 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 $0.068 per share at market close price on date of grant for aggregate deemed compensation of $136,000 to a 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 grant 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.
For the three month period ended December 31, 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 valued at market close price on date of grant 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 12 – Equity (continued)
On December 31, 2015 we issued 458,926 restricted common shares at $0.05448 per share at market close price on date of grant as compensation to our CFO for deemed compensation of $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 at market close price on date of grant as compensation to our President & COO for deemed compensation of $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.
Warrants:
2016 Warrant Transactions
During the year ended December 31, 2016, we raised $681,000 through three private placement unit offerings priced at $0.04 per unit which included the issuance of 17,025,000 five year warrants each exercisable to purchase one restricted common share at $0.055 per share. The aggregate embedded value of these warrants based on a Black-Scholes option pricing model was $742,211. At December 31, 2016, none of these warrants had been exercised.
On December 6, 2016, in relation to its first investment tranche we issued PCF a series of three warrants which include cashless exercise rights. These included: Warrant 1 with an exercise price of $0.055 per share and a term of five years, Warrant 2 with an exercise price of $0.20 per shares and a term of three years, and Warrant 3 with an exercise price of $0.25 per share and a term of 18 months. The aggregate embedded value of the warrants based on a Black-Scholes option pricing model was $1,410,059. At December 31, 2016, none of these warrants had been exercised.
On December 16, 2016, LPC extended the maturities of each of its two notes from December 31, 2016 to December 31, 2017 in return for issuance by the Company of 7,000,000 six year warrants, with cashless exercise rights, to purchase 7,000,000 restricted shares of our common stock at an exercise price of $0.05 per share. The warrants were valued using a Black-Scholes model at a non-cash cost of $315,658, of which $143,481 was ascribed as an increase to the discount of LPC Note One and $172,177 was ascribed as an increase to the discount of LPC Note Two. At December 31, 2016, none of these warrants had been exercised.
2015 Warrant Transactions
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.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – Equity (continued)
On August 18, 2015, as an inducement for execution of LPC Note One, 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 One 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 One 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 One. None of these warrants have yet been exercised.
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. None of these warrants have yet been exercised.
On November 23, 2015, as an inducement for execution of LPC Note Two, 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 Two 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 Two 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 Two. None of these warrants have yet been exercised.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – Equity (continued)
The fair valuations for warrants were done on date of grant using a Black Scholes option pricing model with the following assumptions:
|
Warrant issuances
|
Risk free rate*
|
Dividend yield
|
Volatility period
|
Volatility
rate
|
Estimated life
|
Exercise
Price
|
Grant Date Stock price
|
|
December 16, 2016
|
2.24%
|
0.0%
|
2.0 years
|
106%
|
6.0 years
|
$0.050
|
$0.0451
|
|
December 6, 2016 #1
|
1.83%
|
0.0%
|
2.0 years
|
106%
|
5.0 years
|
$0.055
|
$0.05
|
|
December 6, 2016 #2
|
1.40%
|
0.0%
|
2.0 years
|
106%
|
3.0 years
|
$0.020
|
$0.05
|
|
December 6, 2016 #3
|
0.96%
|
0.0%
|
2.0 years
|
106%
|
1.5 years
|
$0.025
|
$0.05
|
|
Unit Offer #3
|
1.16% to 1.22%
|
0.0%
|
2.0 years
|
108% to 108%
|
5.0 years
|
$0.055
|
$0.0561 to $0.0639
|
|
Unit Offer #2
|
1.22% to 1.38%
|
0.0%
|
2.0 years
|
113% to 114%
|
5.0 years
|
$0.055
|
$0.0489 to $0.060
|
|
Unit Offer #1
|
1.11% to 1.33%
|
0.0%
|
2.0 years
|
115% to 116%
|
5.0 years
|
$0.055
|
$0.0504 to $0.0559
|
|
November 23, 2015
|
0.85%
|
0.0%
|
2.0 years
|
89%
|
6.0 years
|
$0.170
|
$0.17
|
|
September 30, 2015
|
1.37%
|
0.0%
|
2.0 years
|
89%
|
5.0 years
|
$0.080
|
$0.08
|
|
August 18, 2015
|
1.78%
|
0.0%
|
2.0 years
|
89%
|
6.0 years
|
$0.100
|
$0.10
|
*(based on US Treasury Constant Maturities matching estimated life)
The following table summarizes the Company's warrant activity for the years ended December 31, 2016 and December 31, 2015:
|
Number of Warrants
|
Weighted-Average Exercise Price
|
Weighted-Average Remaining Term (in years)*
|
Intrinsic Value**
|
|||
|
Outstanding at December 31, 2014
|
5,784,848
|
$
|
0.550
|
2.19
|
$
|
Nil
|
|
August 18, 2015 - Loan fee
|
3,750,000
|
0.100
|
4.63
|
Nil
|
||
|
September 30, 2015 - Loan fee
|
3,125,000
|
0.080
|
3.75
|
Nil
|
||
|
November 23, 2015 - Loan fee
|
5,000,000
|
0.070
|
4.90
|
Nil
|
||
|
Outstanding at December 31, 2015
|
17,659,848
|
$
|
0.090
|
4.39
|
$
|
Nil
|
|
March 29, 2016 - Unit Offer #1
|
4,275,000
|
0.055
|
4.12
|
Nil
|
||
|
May 31, 2016 - Unit Offer #2
|
9,850,000
|
0.055
|
4.37
|
Nil
|
||
|
September 30, 2016 - Unit Offer #3
|
2,525,000
|
0.055
|
4.70
|
Nil
|
||
|
December 6, 2016 - PCF warrant #1
|
12,500,000
|
0.055
|
4.93
|
Nil
|
||
|
December 6, 2016 - PCF warrant #2
|
12,500,000
|
0.055
|
2.93
|
Nil
|
||
|
December 6, 2016 - PCF warrant #3
|
12,500,000
|
0.055
|
1.43
|
Nil
|
||
|
December 16, 2016 - Note maturity extension
|
7,000,000
|
0.050
|
5.96
|
Nil
|
||
|
Outstanding at December 31, 2016
|
79,269,848
|
$
|
0.150
|
3.77
|
$
|
Nil
|
* (remaining term as of December 31, 2016)
**(intrinsic value based on the closing share price of $0.0499 on December 31, 2016)
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – Equity (continued)
Options:
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. As of December 31, 2016 6,750,000 options had been granted under the Stock Option Plan to directors and officers of the Company. The expensing and amortization of all options grants have been credited to Additional Paid-In Capital.
During the year ended December 31, 2016, 250,000 options which had been issued to a consultant on November 25, 2013, which were not issued under the Stock Option Plan, expired without being exercised.
A summary of changes in outstanding stock options for the years ended December 31, 2016 and December 31, 2015 is as follows:
|
Number of
Options
|
Weighted-
Average
Exercise Price
|
Weighted-
Average Remaining
Contractual Term (in years)*
|
Intrinsic
Value**
|
|||
|
Outstanding at December 31, 2014
|
7,000,000
|
$
|
0.19
|
2.97
|
$
|
-
|
|
(no option issuances were made in 2015)
|
-
|
-
|
-
|
-
|
||
|
Outstanding at December 31, 2015
|
7,000,000
|
$
|
0.19
|
2.97
|
$
|
-
|
|
Expiry of options
|
(250,000)
|
0.70
|
-
|
-
|
||
|
Outstanding at September 30, 2016
|
6,750,000
|
$
|
0.17
|
2.97
|
$
|
-
|
* (remaining term as of December 31, 2016)
**(intrinsic value based on the closing share price of $0.0499 on December 31, 2016)
The following table summarizes information about the options outstanding at December 31, 2016:
|
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)*
|
||
|
$0.17
|
6,750,000
|
$0.17
|
$nil
|
2.97
|
6,750,000
|
$0.17
|
$nil
|
2.97
|
||
|
Totals
|
6,750,000
|
$0.19
|
$nil
|
2.97
|
7,000,000
|
$0.17
|
$nil
|
2.97
|
||
* (remaining term as of December 31, 2016)
**(intrinsic value based on the closing share price of $0.0499 on December 31, 2016)
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 13 – Commitments and Contingencies
Litigation
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, we know of no threatened or pending lawsuits, claims or other similar contingencies.
Lease
Our principal office and warehouse is located at 1101 Via Callejon #200, San Clemente, California 92673-4230. During the years ended December 31, 2016 and December 31, 2015 we shared our warehouse premises with a sublessee whose occupancy ended on April 7, 2017, at which time we assumed all lease payments until we acquire a new sublessee tenant. We also utilize offices provided by our CEO and CFO. The current distribution facility lease has a term of June 1, 2016 to May 31, 2018 and presently requires total lease payments of $10,466 per month, of which the Company's portion is $8,066 per month. On February 25, 2016, the Company 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 comprise $8,066 for June 1, 2016 to April 30, 2017 and will, in the absence of a new sub-leasee, be $10,793 for June 1, 2017 to May 31, 2018. For the year ended December 31, 2015 our Company paid a total of $95,412 (averaging $7,951 per month) of the total lease expense of $123,957 (averaging $10,330 per month).
Total remaining commitments due under the lease include:
|
Year
|
Amount
|
|
2017
|
$127,881
|
|
2018
|
$53,965
|
|
2019 and thereafter
|
$Nil
|
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 was 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:
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 and we agreed to abandon pending patent applications directed to coffee berries or coffee berry technology and cancel with prejudice all trademark proceedings.
License Agreement
The License Agreement comprises a coffee fruit patent license, Coffeeberry® trademark license and raw materials supply agreement. The key elements include:
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 13 – Commitments and Contingencies (continued)
(a) Patents and Trademark License
In exchange for 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. We may rollover AMPs to the VDF senior convertible note (the "VDF Note").
The amount and schedule for the remaining AMPs is as follows:
|
Three Month Period Ended
|
Due Date
|
Amount
|
|
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
|
VDF Note
The VDF Note is a senior convertible note with a maturity date of December 31, 2018. Payment requirements are accelerated pursuant to an event of default, or 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. By maturity, we must pay VDF all principal plus accrued interest and we have the right, subject to certain limitations, to prepay principal at any time and from time to time. No indebtedness 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, principal outstanding on the VDF Note may be converted into restricted common shares of the Company. As described above in Note 8 - Convertible Long Term Notes Payable, the conversion price of the VDF Note is presently $0.2157 per share.
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.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 13 – Commitments and Contingencies (continued)
Addendums to VDF Note and PSA
On January 4, 2017, VDF and the Company executed an addendum to the VDF Note and the PSA in which VDF agreed it will: (i) remove its lien on the Company's inventory and accounts receivable in the event that the Company executes any line of credit, inventory purchase order financing, or accounts receivable factoring agreements with third party lender(s); and (ii) promptly execute any inter-creditor agreement(s) provided to VDF by such third party lender(s) which affirm VDF's permission for the creation of liens by the third party lender(s) which rank in priority above VDF's existing lien. A copy of this agreement is attached to this Report as Exhibit 10.54.
Warrant
The VDF Warrant does not yet exist. The VDF Warrant would entitle 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, restricted common shares representing ten percent (10%) of fully diluted outstanding shares at a purchase price of $0.001 per share. A Warrant Exercise Event comes into being if we: (i) report $25,000,000 or more of gross sales in any fiscal year; (ii) have a class of securities listed for trading on the New York Stock Exchange, the American Stock Exchange or NASDAQ; (iii) maintain an aggregate market capitalization of at least $125,000,000 for twenty (20) consecutive trading days; or (iv) undergo a change of control as defined in the VDF Warrant. No circumstances have yet occurred which qualify as a Warrant Exercise Event and therefore there is no right in place for VDF to exercise the VDF Warrant.
Registration Rights Agreement
Under the Registration Rights Agreement VDF, or an assignee, have demand registration rights and incidental registration rights with respect to: (i) common shares issued upon conversion of the VDF Note; (ii) common shares 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.
Investor Rights Agreement
At present VDF holds no ownership interest in the Company and therefore the terms of the Investor Rights Agreement have not come into effect. The Investor Rights Agreement provides VDF the right to designate that number of nominees to our board of directors such that the total number of directors designated by VDF is in proportion to its percentage ownership of the outstanding voting power of the Company. From and after the date of the Investor Rights Agreement and until such time as: (i) the VDF Note has terminated; (ii) the VDF Warrant has terminated or been exercised; and (iii) VDF's percentage interest is less than 1%, if VDF does not have a designee on our board of directors, VDF shall have the right to appoint one individual as a non-voting observer entitled to attend meetings of our board of directors. Also pursuant to the Investor Rights Agreement, for so long as: (i) the VDF Note remains outstanding, (ii) the VDF Warrant remains outstanding, or (iii) VDF owns a percentage interest equal or greater to 10%, we will require VDF's consent before taking certain corporate actions, including, among others: (a) amending our constating documents, (b) making any material change to the nature of our business, (c) incurring indebtedness exceeding $7,500,000 at any one time outstanding; or (d) declaring or paying dividends.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 14 – Income Taxes
The Company is subject to federal income taxes in the United States. The Company has had not net yet had net income on which to pay income taxes and therefore has not yet paid any income taxes, nor are there any income taxes owing. Income taxes at the statutory rate are reconciled to the Company's actual income taxes as follows:
|
Income tax benefit at statutory rate resulting from net operating Loss carry-forward
|
(35
|
%)
|
||
|
Deferred income tax valuation allowance
|
35
|
%
|
||
|
Actual tax rate
|
0
|
%
|
The Company's deferred tax assets, valuation allowance, and change in valuation allowance are as follows ("NOL" denotes Net Operating Loss):
|
Year Ended
|
Estimated
NOL Carry-forward |
NOL
Expires |
Estimated
Tax Benefit from NOL |
Valuation
Allowance |
Net Tax
Benefit |
|||||||||||||||
|
2010
|
$
|
(2,163,191
|
)
|
2030
|
$
|
(757,117
|
)
|
$
|
757,117
|
$
|
—
|
|||||||||
|
2011
|
$
|
(2,707,508
|
)
|
2031
|
$
|
(947,628
|
)
|
$
|
947,628
|
$
|
—
|
|||||||||
|
2012
|
$
|
(2,895,416
|
)
|
2032
|
$
|
(1,013,396
|
)
|
$
|
1,013,396
|
$
|
—
|
|||||||||
|
2013
|
$
|
(3,912,278
|
)
|
2033
|
$
|
(1,369,297
|
)
|
$
|
1,369,297
|
$
|
—
|
|||||||||
|
2014
|
$
|
(2,557,259
|
)
|
2034
|
$
|
(895,040
|
)
|
$
|
895,040
|
$
|
—
|
|||||||||
|
2015
|
$
|
(2,397,312
|
)
|
2035
|
$
|
(839,059
|
)
|
$
|
839,059
|
$
|
—
|
|||||||||
|
2016
|
$
|
(2,022,201
|
)
|
2036
|
$
|
(707,770
|
)
|
$
|
707,770
|
$
|
—
|
|||||||||
|
$
|
(18, 655,165
|
)
|
$
|
(6,529,307
|
)
|
$
|
6,529,307
|
$
|
—
|
|||||||||||
The total valuation allowance for the year ended December 31, 2016 is $6,529,307 which increased by $707,770 for the year ended December 31, 2016.
As of December 31, 2016 and December 31, 2015, the Company has no unrecognized income tax benefits. The Company's policy for classifying interest and penalties associated with unrecognized income tax benefits is to include such items as tax expense. No interest or penalties have been recorded during the years ended December 31, 2016 and December 31, 2015 and no interest or penalties have been accrued as of December 31, 2016 and December 31, 2015. As of December 31, 2016 and December 31, 2015, the Company did not have any amounts recorded pertaining to uncertain tax positions.
The tax years from 2010 and forward remain open to examination by federal and state authorities due to net operating loss and credit carry-forwards. The Company is currently not under examination by the Internal Revenue Service or any other taxing authorities.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 15 – Concentration Risks
Our revenue is derived from sales of our beverage products, nutritional products and ingredient raw materials. Our beverage sales made up approximately 84% and 63% respectively of total sales during the years ended December 31, 2016 and December 31, 2015. For the year ended December 31, 2016, the concentration of our beverage sales comprised sales to three major retail chain store customers totaling 43%. For the year ended December 31, 2015, the concentration of our beverage sales comprised sales to five major retail customers totaling 58%. Although the market for our products is elastic and current purchasers of our products are replaceable, our concentration of sales creates risk to future revenues. As of December 31, 2016 and December 31, 2015 our purchases from suppliers comprised a concentration of 79% from three suppliers and 73% from five suppliers, respectively. Although we have a selection of suppliers available to produce our products, our concentration of purchases creates risk to future revenues. As of December 31, 2106 and December 31, 2015, our accounts receivable had a concentration of 67% among five customers and 76% among three customers, respectively. The concentration of our accounts receivable creates a potential risk to future working capital in the event that we were not able to collect all, or a majority, of outstanding accounts receivable balances.
NOTE 16 – Subsequent Events
Subsequent to the year ended December 31, 2016, we issued 250,000 restricted common shares at $0.0484 per share to a new director at market close price on date of grant as an inducement fee for joining our Board for a deemed cost of $12,100. These shares were issued to one accredited investor (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, 2016, we issued 340,000 restricted common shares at $0.0488 per share to a related party at market close price on date of grant as an inducement fee extension of the maturity of a promissory note for a deemed cost of $16,592. 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.
Subsequent to the year ended December 31, 2016, we issued 340,000 restricted common shares at $0.07 per share to a third party lender at market close price on date of grant as an inducement fee for a $100,000 promissory note for a deemed cost of $23,800. 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.
Subsequent to the year ended December 31, 2016, we issued 1,625,000 common shares at $0.04 per share for conversion by September 2015 Note Two Purchaser of the remaining $65,000 due on September 2015 Note Two. This conversion fully paid the note and no further payments are due. These shares were issued to one US person with reliance on the exemptions from registration requirements provided in the Securities Act of 1933, as amended, Section 4(1) and Rule 144.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 16 – Subsequent Events (continued)
Subsequent to the year ended December 31, 2016, we issued 990,000 common shares at $0.04 per share for conversion by December 2015 Lender of the remaining $39,600 due on the December 2015 Note. This conversion fully paid the note and no further payments are due. These shares were issued to one accredited investor with reliance on the exemptions from registration requirements provided in the Securities Act of 1933, as amended, Section 4(1) and Rule 144.
Subsequent to the year ended December 31, 2016, we issued 4,500,000 common shares at $0.05 per share for conversion by LPC of $225,000 principal due on LPC Note Two which decreased the balance due on the note from $300,000 to $75,000. These shares were issued to one accredited investor with reliance on the exemptions from registration requirements provided in the Securities Act of 1933, as amended, Section 4(1) and Rule 144.
Subsequent to the year ended December 31, 2016, we issued 1,100,000 restricted common shares at $0.0548 per share at market close price on date of grant for consultant services rendered for a deemed cost of $60,280. These shares were issued to one accredited investor (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, 2016, as compensation to a retiring director we re-priced 750,000 options he held from an exercise price of $0.17 per share to an exercise price of $0.05 per share and issued him an additional 150,000 options with the same three year remaining maturity. The exercise price of the new options was set on date of grant and these options vested immediately. The combined Black-Scholes options pricing model cost of the transactions was $13,785.
Subsequent to the year ended December 31, 2016, we remedially executed a private placement related to Unit Offer #3 which raised $15,000 through the sale of 375,000 units. Each unit was priced at $0.04 per unit and comprised of one restricted common share price plus one five year warrant exercisable to purchase one restricted common share at $0.055 per share. The fair market value of the shares and embedded value of the warrants is included in the valuations done for Unit Offer #3. 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.
Subsequent to the year ended December 31, 2016, we issued 1,063,782 five year options with an exercise price of $0.0559 set on date of grant to our CEO as compensation. These options vested immediately and had a Black-Scholes options pricing model cost of $59,411.
Subsequent to the year ended December 31, 2016, we issued 2,476,377 five year options with an exercise price of $0.0559 set on date of grant to our President & COO as compensation. These options vested immediately and had a Black-Scholes options pricing model cost of $138,302.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 16 – Subsequent Events (continued)
Subsequent to the year ended December 31, 2016, we issued 653,842 restricted common shares to a company wholly owned by our CFO at a price of $0.0559 on date of grant as compensation for a deemed cost of $36,550. 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.
Subsequent to the year ended December 31, 2016, we issued 1,500,000 restricted common shares to two unit offering subscribers for exercises of warrants they held at $0.055 per share for proceeds of $82,500. These subscribers 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.
It was management's assessment that there were no other material events which should be classified as subsequent events for the period of these financial statements.
There were no disagreements with our accountants regarding accounting and financial disclosure matters.
A. Disclosure Controls and Procedures.
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") our management conducted an evaluation (under the supervision and with the participation of our Chief Executive Officer, Shaun Roberts, and our Chief Financial Officer, John Dawe) as of the end of the period covered by this Annual Report on Form 10-K, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, Mr. Roberts and Mr. Dawe each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act, (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) is accumulated and communicated to our management, including Mr. Roberts and Mr. Dawe, as appropriate to allow timely decisions regarding required disclosure.
B. Management's Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. Management's assessment was based on criteria set forth in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon this assessment, management concluded that, as of December 31, 2016, our internal control over financial reporting was not effective, based upon those criteria, as a result of the identification of the material weaknesses described below.
A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
Specifically, management identified the following control weaknesses: (i) the Company has not implemented measures that would prevent one individual from overriding the internal control system. The Company does not believe that this control weakness has resulted in deficient financial reporting because the Chief Financial Officer is aware of his responsibilities under the SEC's reporting requirements and personally certifies the financial reports; and (ii) The Company utilizes accounting software that does not prevent erroneous or unauthorized changes to previous reporting periods and/or can be adjusted so as not to provide an adequate audit trail of entries made in the accounting software.
Accordingly, while the Company has identified certain material weaknesses in its system of internal control over financial reporting, it believes that it has taken reasonable steps to ascertain that the financial information contained in this report is in accordance with generally accepted accounting principles. Management has determined that current resources would be appropriately applied elsewhere and when resources permit, they will alleviate material weaknesses through various steps.
C. Changes in Internal Control Over Financial Reporting.
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during our last fiscal quarter (our fourth fiscal quarter) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
The following individuals serve as executive officers and directors of our company. All directors of our company hold office until the next annual meeting of our stockholders or until their successors have been elected and qualified. The executive officers of our company are appointed by our board of directors and hold office until their death, resignation or removal from office.
|
Name
|
Positions Held
with the Company |
Age
|
Date First Elected or Appointed
|
|
Shaun Roberts
|
Chief Executive Officer, Director, Board Chair
|
47
|
October 4, 2013
|
|
Kyle Redfield
|
President and Chief Operating Officer, Director*
|
35
|
August 10, 2015
|
|
John Dawe
|
Chief Financial Officer, Secretary & Treasurer
|
57
|
March 18, 2014
|
|
Gonzalo Camet
|
Director, Member of Compensation Committee
|
46
|
October 4, 2013
|
|
Richard Fischler
|
Director
|
52
|
December 1, 2016
|
|
Bradley Paris
|
Director, Member of Compensation Committee
|
43
|
October 4, 2016
|
|
Steven Schorr
|
Director
|
63
|
October 4, 2013
|
*(Mr. Redfield was also appointed as a Director on October 4, 2016)
Business Experience
The following is a brief account of the education and business experience during at least the past five years of each director and executive officer, indicating the person's principal occupation during that period, and the name and principal business of the organization in which such occupation and employment were carried out.
Shaun Roberts - Chief Executive Officer, Director, and Board Chair
Mr. Roberts is a co-founder of the business and has been Chief Executive Officer, Director and Board Chair since its inception in 2008. Mr. Roberts oversees all operations and raised the capital which formed our business. On a day to day basis Mr. Roberts manages processes for raising capital, product development, sales, distribution and marketing. He started his career as Los Angeles sales manager for Waxie Sanitary Supply in 1994, the largest privately held janitorial supply company in the U.S. Mr. Roberts then worked as Western Regional Sales Manager for ABM, Inc. from 1996 to 1998, a facility management services and fortune 1000 company. Mr. Robert's co-founded Fluid Concepts, LLC in 1998, which developed, created and sold industrial and retail eco-friendly cleaning products into the southern California marketplace. In 2003, Mr. Roberts co-founded Malie, Inc., a spa and beauty products company which now has retail locations in the U.S. and Japan and wholesale distribution around the globe. Mr. Roberts' role at Fluid Concepts and Malie were reduced to a board member position in 2008. Mr. Roberts attended the economics program of San Diego State University from 1990-1993.
We believe that Mr. Roberts is qualified to serve on our board of directors because of his knowledge of our current operations in addition to his education and business experiences described above.
Kyle Redfield - President and Chief Operating Officer, Director
On August 10, 2015, Kyle Redfield was hired as the Company's President and Chief Operating Officer and on that date, Mr. Roberts resigned his position as President in favor of Mr. Redfield. For the four and a half years prior to joining the Company, Mr. Redfield was General Manager of Industrial Sales at POM Wonderful, LLC, and a member of its Executive Management Team. POM Wonderful is a major fresh fruit, beverage and fruit extracts company. The Wonderful Company, parent company to POM Wonderful, generated $3.5 billion in sales as of October 2014. At POM Wonderful, Mr. Redfield's achievements included the start-up of the Industrial Division and growing POM Wonderful's revenue significantly within his tenure. Mr. Redfield managed a global sales team, designed and implemented all sales and marketing support materials, while overseeing all marketing, overhead and operational trade expenditures. While expanding national and global sales reach and revenue growth, he created multiple processes for customer service, shipping, technical and regulatory compliance, finance and production, and was responsible for full management of profit & loss, overhead, and budgeting. Prior to his position with POM Wonderful, Mr. Redfield was Director of Sales for B&D Nutritional Products from 2007 to 2011; and was an account executive at Five Points Capital, Inc. during 2006. Mr. Redfield's role at the Company is to oversee KonaRed's global sales efforts, new product development, staff management, forecasting, production, distribution and day-to-day operations. Under his direction, the Company introduced its highly successful new line of Cold Brew Coffees and sales of this new product line have contributed substantially to the Company's year over year sales increase. Mr. Redfield received a Bachelor of Economics degree from the University of Colorado in May, 2006.
We believe Mr. Redfield is qualified to serve on our board of directors because of his industry experience, education, and knowledge of our current operations and because he has led and implemented corporate initiatives that have resulted in dramatic increase in the company's margins, sales growth and operating efficiency since joining the company.
John Dawe - Chief Financial Officer, Secretary and Treasurer
On March 18, 2014, John Dawe was engaged as our Chief Financial Officer, Secretary & Treasurer. Mr. Dawe brings over 34 years of financial, business, and executive level experience to KonaRed, having served as Treasurer, VP Finance, and CEO for various finance-related entities. Mr. Dawe's experience includes profitably managing a $1.1 billion asset portfolio as treasurer of Canada's fourth largest credit union. He has substantial expertise running start-up companies and in 2002 founded DAS Corporate Services Inc. a private company which provided management and reporting services for small U.S. publicly traded companies. Since 2006, Mr. Dawe has also wholly owned and been President of GBG Management Services Inc., a private company which provides small business management consulting services. Mr. Dawe remains as President of both DAS and GBG, but is no longer active in their day to day management. His responsibilities at KonaRed include all facets of capital management and control, financial contract negotiation, and public reporting. Mr. Dawe received a Bachelor of Commerce degree from the University of British Columbia in May, 1983 and earned the designation of Chartered Financial Analyst in 1988.
Gonzalo Camet - Director, Member of Compensation Committee
Gonzalo Camet was an early investor in our predecessor company SITC and has provided advisor services to our business over the course of its development. On October 4, 2013, Mr. Camet was appointed to the board of directors and subsequently appointed as a Member of the Compensation Committee of the Board. Mr. Camet is one of the main shareholders of JJC Holding Corp and between 2001 to 2015 was Chief Financial Officer of the JJC Group of Companies, one of the largest engineering and construction businesses in Peru. Mr. Camet also served as Chief Financial Officer of the agricultural division of the JJC Group of Companies from 2001 to 2015. Mr. Camet now resides in Spain where he is establishing a real estate investment business.
We believe Mr. Camet is qualified to serve on the board of directors because of his knowledge and experience in strategic business development and finance.
Richard Fischler - Director
On December 16, 2016 we appointed Mr. Richard N. Fischler to our board of directors. Mr. Fischler's appointment fulfilled a provision of the Securities Purchase Agreement executed with PCF Holdings Group, LLC on December 6, 2016. Richard Fischler is the founder, CEO and President of Creative Flavor Concepts, Inc. ('CFC') and has over 14 years experience in the Flavor and Product Formulation industry. Prior to founding CFC in 2005, he held the position of Vice President, Marketing and Sales at Affinity Flavors, Inc. from 2002 to 2005. During the prior 18 years, Mr. Fischler worked in the Real Estate Advisory industry and held a series of senior level positions with Violy Byorum & Partners (New York, NY), PriceWaterhouseCoopers (New York, NY), Deloitte & Touche LLP (Los Angeles, CA and New York, NY), Kenneth Leventhal & Company (Los Angeles, CA), and Cushman & Wakefield (Los Angeles, CA). In 1986, Mr. Fischler received a BS Business Administration from the University of Southern California.
We believe Mr. Fischler is qualified to serve on the Board because of his expertise in flavors and product formulation, which includes flavor application and process oversight for a variety of product types including beverage, supply chain oversight, and overall product knowledge.
Bradley Paris - Director, Member of Compensation Committee
On October 4, 2016 we appointed Mr. Bradley E. Paris to our board of directors. Bradley Paris has worked as an executive in the food and beverage industry leading a range of business functions. Mr. Paris spent 12 years with POM Wonderful, LLC and its parent company, now named The Wonderful Company. While at POM, Mr. Paris was Vice President & General Manager of the company's fresh fruit and industrial ingredient divisions in which he led periods of dramatic growth. After leaving POM in 2013, he was President of a startup frozen food venture called Wild Veggie that was part of the Otsuka Company holding group. He returned briefly to POM Wonderful in 2015 serving as Interim CFO/COO before accepting a role as COO for coconut water company Harmless Harvest. In 2016, Mr. Paris joined meal replacement startup Soylent as COO. Mr. Paris earned his undergraduate degree from Duke University in Civil & Environmental Engineering and received an MBA from Kellogg (Northwestern) and currently resides in Los Angeles.
We believe Mr. Paris is qualified to serve on the board because of his knowledge and extensive experience in the food & beverage industry as well as with the supermarket and club store channels in which we sell our products.
Steven M. Schorr - Director
Mr. Schorr is a co-founder of the business and was our Chief Scientific Officer prior to retirement from this role in 2013. From inception in 2008 to 2013, Mr. Schorr played a key role in the KonaRed product conception, design and development, manufacturing and production, directing scientific research and legal management. Subsequent to retirement, Mr. Schorr has continued his role as a member of the board of directors of the Company. Mr. Schorr is the author of 20 U.S. and international patents, including five patents related to aeroponic technology (the process of growing plants in an air or mist environment without the use of soil). Mr. Schorr is also a director of Bioponic Phytoceuticals, Inc., a private company engaged in the development, formulation and production of products for sale in the global complementary alternative medicine and natural product markets.
We believe that Mr. Schorr is qualified to serve on our board of directors because of his knowledge of coffee berry chemistry and our current operations in addition to his education and business experiences described above.
James S. Tonkin - Director
On January 20, 2017 we appointed Mr. James S. Tonkin to our board of directors. Mr. Tonkin is the Founder and President of HealthyBrandBuilders and has spent over 43 years in the beverage and food industries and is a well-known speaker, teacher and entrepreneur mentor. He has designed and implemented national infrastructure for dozens of clients and has successfully created and implemented business and financial strategies for domestic and international firms focusing on production and manufacturing, branding, sales, marketing and distribution. Mr. Tonkin's expertise spans the gamut from domestic cheese to potato chips, fortified pet waters to nutraceutical-functional and enhanced beverages. He has been heralded as the beverage expert or "guru" in the functional and nutraceutical beverage segments. As a recognized leader, he is a frequent speaker having served as keynote speaker at the Australian Beverage Summit- Melbourne Australia, Global Bottled Water Congress-Mexico City, International Dairy Congress- Athens. He has presided over many presentations at WorldNutra Conferences, where he sat as an Advisory Board Member, as well as Nutracon and Natural Products Expos East and West and Healthy Foods Conferences. He often leads panels at "Focus on the Future Forums" and Supplyside East and West for Virgo Publishing.
We believe Mr. Tonkin is qualified to serve on our Board because of his extensive knowledge and experience in the food & beverage industry.
William Van Dyke - Director, Member of Compensation Committee
On January 20, 2017 Mr. Van Dyke retired from our Board. On March 18, 2014, we appointed Mr. William Van Dyke to our Board. Mr. Van Dyke has been the chairman and CEO of B&D Nutritional Ingredients since 1993. As the founder, Mr. Van Dyke has been the pivotal force behind B&D Nutritional's development into a full-service, North American sales and marketing company. His sales and marketing career in the dietary supplement industry spans more than 30 years. As the Council for Responsible Nutrition's 2000-2002 Chairman, Mr. Van Dyke has served on numerous committees throughout his 20-year involvement with CRN. Mr. Van Dyke has also served on the board of directors for other industry organizations.
Mr. Van Dyke was qualified to serve on our board of directors because of his specialized industry knowledge in addition to his education and business experience in finance, and the Dietary Supplement and Functional Food category.
Family Relationships
There are no family relationships among our directors or officers.
Involvement in Certain Legal Proceedings
None of our directors or executive officers have been involved in any of the following events during the past ten years:
(a) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
(b) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
(c) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;
(d) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
(e) being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease- and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
(f) being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Audit Committee
The duties of an audit committee have been undertaken to date by the full board or directors.
Compensation Committee
The Compensation Committee is comprised of two independent directors and is responsible for the review of all executive compensation matters.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires executive officers and directors, and persons who beneficially own more than 10% of any class of our equity securities to file initial reports of ownership and reports of changes in ownership with the Commission. Executive officers, directors and beneficial owners of more than 10% of any class of our equity securities are required by Commission regulations to furnish us with copies of all Section 16(a) forms they file.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(d), and certain written representations from executive officers and directors, we are unaware of any required reports that were not timely filed, including compliance with the requirements of the Sarbanes-Oxley Act.
Code of Ethics
We have adopted a Code of Ethics that applies to, and which has been signed by our: Chief Executive Officer, President and Chief Operating Officer, Chief Financial Officer, Secretary & Treasurer, and all directors; and which will be signed by all persons holding similar positions in the future. This code is incorporated by reference herein as Exhibit 14.1. Upon request, the Company will furnish a copy of this Code of Ethics by mail to any person without charge. Such requests should be made in writing and mailed to: KonaRed Corporation 1101 Via Callejon #200, San Clemente, CA USA 92673-4230, attn: KonaRed Corporation Code of Ethics Request.
Director Compensation
There are no standard compensation agreements in place with any director for services as a director. During the years ended December 31, 2016 and December 31, 2015, cash compensation payments to directors comprised $nil and $nil, respectively. During the year ended December 31, 2016, non-cash compensation paid to directors included 150,000 restricted common shares valued at $8,850 issued to Bradley Paris as an inducement to join our board; and there were nil transactions for the year ended December 31, 2015.
Summary of stock and option awards for services as a director:
|
Name
|
Option
Awards
(#)
|
Option
Awards
($)
|
Stock
Awards
($)
|
Total
Compensation ($)
|
||||
|
For the year ended December 31, 2016:
|
||||||||
|
Gonzalo Camet
|
Nil
|
$
|
Nil
|
$
|
Nil
|
$
|
Nil
|
|
|
Richard Fischler
|
Nil
|
$
|
Nil
|
$
|
Nil
|
$
|
Nil
|
|
|
Bradley Paris
|
Nil
|
$
|
Nil
|
$
|
150,000
|
$
|
8,850
|
|
|
Kyle Redfield
|
Nil
|
$
|
Nil
|
$
|
Nil
|
$
|
Nil
|
|
|
Shaun Roberts
|
Nil
|
$
|
Nil
|
$
|
Nil
|
$
|
Nil
|
|
|
Steven Schorr
|
Nil
|
$
|
Nil
|
$
|
Nil
|
$
|
Nil
|
|
|
William Van Dyke
|
Nil
|
$
|
Nil
|
$
|
Nil
|
$
|
Nil
|
|
|
For the year ended December 31, 2015:
|
||||||||
|
Gonzalo Camet
|
Nil
|
$
|
Nil
|
$
|
Nil
|
$
|
Nil
|
|
|
Shaun Roberts
|
Nil
|
$
|
Nil
|
$
|
Nil
|
$
|
Nil
|
|
|
Steven Schorr
|
Nil
|
$
|
Nil
|
$
|
Nil
|
$
|
Nil
|
|
|
William Van Dyke
|
Nil
|
$
|
Nil
|
$
|
Nil
|
$
|
Nil
|
|
Subsequent to the year ended December 31, 2016, as a retirement bonus for his good service to the board, 750,000 options which had previously been granted to William Van Dyke were adjusted from an exercise price of $0.17 per share to an exercise price of $0.05 per share and Mr. Van Dyke was granted an additional 150,000 three year options exercisable at $0.05 per share which vested immediately. The Black-Scholes expense for these transactions was $13,785.
Subsequent to the year ended December 31, 2016, 250,000 restricted common shares valued at $12,100 were issued to James S. Tonkin as an inducement to join our board.
The summary compensation table below covers all compensation paid by our Company to the following persons who we will collectively refer to as the Named Executive Officers, for all services rendered in all capacities to us for the fiscal years ended December 31, 2016 and December 31, 2015. These named executive officers include: (a) all individuals serving as the principal executive officer of the Company during the years ended December 31, 2016 and December 31, 2015; (b) each of two most highly compensated executive officers of our Company other than its principal executive officer who were serving as executive officers at December 31, 2016 and December 31, 2015 whose compensation exceeded $100,000; and (c) up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as executive officer at December 31, 2016 or December 31, 2015.
Summary Compensation Table – Years Ended December 31, 2016 and December 31, 2015
|
Name and Principal Positions
|
Fiscal
Year
|
Salary
($)
|
Restricted Stock Awards/SARs(1)
($)
|
Securities Underlying Options/SARs(1)
(#)
|
All Other
Compensation(2)
($)
|
|
Shaun Roberts
CEO
|
2016
2015
|
$105,624
$130,000
|
$68,799
$Nil
|
Nil
Nil
|
$Nil
$220,960(3)
|
|
Kyle Redfield(4)
President & COO
|
2016
2015
|
$223,439
$116,526
|
$242,487
$250,595
|
Nil
Nil
|
$Nil
$Nil
|
|
John Dawe(5)
CFO and Secretary & Treasurer
|
2016
2015
|
$117,188
$125,000
|
$74,116
$100,000
|
Nil
Nil
|
$Nil
$Nil
|
Notes:
(1) SAR's are "Stock Appreciation Rights". We have to date not issued any SARs. LTIP's are "Long-Term Incentive Plans". We have to date not created any LTIPs.
(2) Other than for Mr. Roberts, Mr. Redfield, and Mr. Dawe, there are no employment agreements in place which include compensatory plans or arrangements for our executive officers resulting from resignation, retirement, or other termination of employment, or from a change of control. As detailed below, there are employment agreements in place for Mr. Roberts, Mr. Redfield and Mr. Dawe, which include compensatory plans or arrangements for our executive officers resulting from resignation, retirement, or other termination of employment, or from a change of control. As stated in their agreements, Mr. Roberts and Mr. Dawe would each receive one and a half times annual total compensation based on Involuntary Termination Unrelated to Change of Control; and two times annual total compensation for Involuntary Termination Related to Change of Control.
(3) Amortization expense for options granted to Mr. Roberts in 2014 which vested in 2015 is recorded as other compensation.
(4) Mr. Redfield joined the Company on August 10, 2015.
(5) Share payments and option grants to Mr. Dawe are made to GBG Management Services, Inc., a company wholly owned by Mr. Dawe.
Employment Contracts and Termination of Employment and Change in Control Arrangements
With respect to our Named Executives, we have the following agreements in place:
Shaun Roberts – Chief Executive Officer
On October 4, 2013, we entered into an executive employment agreement with Mr. Roberts as our company's President and Chief Executive Officer for an annual base salary of $130,000 for a 3 year term, with additional one year renewal periods provided, however, that within the sixty to ninety day period prior to the expiration of the Initial Term or any Renewal Term, at its discretion, the Compensation Committee of the Board of Directors may propose such amendments to the Agreement as it deems appropriate. Mr. Roberts is also eligible to participate in a target bonus and year-end bonus plan whereby Mr. Roberts is eligible to receive a cash bonus or securities bonus based on milestones described in further detail in the employment agreement. Mr. Roberts is also eligible to receive benefits made generally available by our Company and shall be reimbursed for all reasonable out-of-pocket business expenses. In the event of: (i) an involuntary termination of Mr. Robert's employment for any reasons other than cause, death or disability; or (ii) Mr. Robert's resignation for good reason, he shall be entitled to: (A) 1.5 times his annual base salary and target bonus, paid in a single lump sum in cash on the 60th day following the termination date; (B) for a period of up to 18 months following the termination date, Mr. Roberts and where applicable, his spouse and eligible dependents, will continue to be eligible to receive applicable medical coverage as described in the employment agreement; and (C) with respect to any outstanding stock options held by Mr. Roberts as of the termination date that are not vested and exercisable as of such date, our Company shall accelerate the vesting and such options will remain exercisable until the earlier of (i) a period of one year after the termination date or (ii) the original term of the option; and (D) Mr. Roberts shall receive any amounts earned, accrued or owing but not yet paid to him as of his termination date. In the event Mr. Roberts employment is terminated on account of: (i) an involuntary termination by our Company for any reason other than cause, death or disability; or (ii) Mr. Roberts voluntarily terminates employment with our Company on account of a resignation for good reason, in either case that occurs: (x) at the same time as, or within the 12 month period following, the consummation of a change of control; or (y) within the 60 day period prior to the date of a change of control where the change in control was under consideration at the time of Mr. Robert's termination date, then he shall be entitled to: (A) 2 times his annual base salary and target bonus; (B) for a period of up to 24 months following the termination date, Mr. Roberts and where applicable, his spouse and eligible dependents, will continue to be eligible to receive applicable medical coverage as described in the employment agreement; (C) with respect to any outstanding stock options held by Mr. Roberts as of the termination date that are not vested and exercisable as of such date, our Company shall accelerate the vesting and such options will remain exercisable until the earlier of: (i) a period of one year after the termination date, or (ii) the original term of the option; and (D) Mr. Roberts shall receive any amounts earned, accrued or owing but not yet paid to him as of his termination date. During the term of the employment agreement and for a period of 1 year from the termination of the agreement, Mr. Roberts shall not be employed by a direct competitor in the coffee fruit business, directly or indirectly. Mr. Roberts employment agreement was amended on February 1, 2016 to temporarily lower annual cash compensation by 25% to $97,500 until January 1, 2017, unless reset sooner under the terms of the Agreement Addendum, and add a share bonus plan using $130,000 per annum as the grant calculation base.
Kyle Redfield – President and Chief Operating Officer
Mr. Redfield's compensation includes a base salary of $275,000 per annum paid biweekly and a standard quarterly bonus of 100% of quarterly base salary to be paid in cash subject to certain conditions, or through issuances of restricted common shares of the Company. The Agreement has a three year term and automatically renews for additional one year renewal periods provided, however, that within the sixty to ninety day period prior to the expiration of the Initial Term or any Renewal Term, at its discretion, the Compensation Committee of the Board of Directors may propose such amendments to the Agreement as it deems appropriate. Should Mr. Redfield exceed a set of mutually agreed performance targets, his base salary shall be increased to a level of $325,000 per annum at the six month anniversary of the Effective Date of the Agreement.
The Agreement provides that heath care and other benefits generally made available to other executives of the company will be provided to Mr. Redfield and that he shall be reimbursed for all reasonable out-of-pocket business expenses. If Mr. Redfield is terminated during the first twelve months of this Agreement he will be paid three months base salary within sixty days following termination. During any subsequent period, upon termination Mr. Redfield would receive the initial three months base salary severance for his first twelve months of employment, plus three months additional base salary for each subsequent twelve month period of employment, such additional severance to be pro-rated for the period during which Termination occurred. Taken together, all severance would not exceed a payment of twelve months base salary. Mr. Redfield was issued 1,333,333 restricted common shares of the Company as a signing bonus and will receive additional issuances of 1,333,333 restricted common shares each on the twelve month and twenty four month anniversaries of Effective Date. The Agreement has a non-compete clause wherein, during the term of the Agreement and for a period of two years from the termination of the Agreement, Mr. Redfield agrees not to be employed by a direct competitor in the coffee fruit business, directly or indirectly. Mr. Redfield's employment agreement was amended on February 1, 2016 to temporarily lower annual cash compensation by 25% to $206,250 until January 1, 2017, unless reset sooner under the terms of the Agreement Addendum, and add a share bonus plan using $275,000 per annum as the grant calculation base.
John Dawe – Chief Financial Officer, Secretary and Treasurer
On December 29, 2014, we entered into an executive employment agreement with John Dawe as our Company's Chief Financial Officer, and Secretary and Treasurer for an annual base salary of $125,000 paid in equal monthly installments. Mr. Dawe will also be granted a bonus of 100% of base salary per annum to be paid, subject to the Company having sufficient cash resources, in quarterly cash payments; or restricted common shares of the Company. The Agreement has a three year term and automatically renews for additional one year renewal periods provided, however, that within the sixty to ninety day period prior to the expiration of the Initial Term or any Renewal Term, at its discretion, the Compensation Committee of the Board of Directors may propose such amendments to the Agreement as it deems appropriate. Mr. Dawe's Agreement excludes healthcare, but otherwise will receive benefits made generally available by our company and shall be reimbursed for all reasonable out-of-pocket business expenses and is also eligible to participate in any future target bonus system, if implemented, and is eligible to receive a one-time bonus if certain strategic goals are met. In the event of: (i) an involuntary termination of Executive's employment for any reasons other than cause, death or disability; or (ii) resignation for good reason, he shall be entitled to: (A) one and one-half times (or two times, in the event of a Change of Control) his annual compensation paid in a single lump sum in cash on the 60th day following the termination date; and (B) with respect to any outstanding Company stock options held as of his Termination Date that are not vested and exercisable as of such date, the Company shall accelerate the vesting of stock options, if any, which would have vested and become exercisable within the eighteen month period after Termination Date, such options to remain exercisable until the earlier of: (A) a period of one year after Termination Date; or (B) the original term of the option; and (C) he shall receive any amounts earned, accrued or owing but not yet paid to him as of Termination Date. During the term of the employment agreement and for a period of 1 year from the termination of the agreement, Mr. Dawe shall not be employed by a direct competitor in the coffee fruit business, directly or indirectly. Mr. Dawe may opt to have his shares compensation, and/or options grants issued to either, or a combination of, DAS Corporate Services Inc. or GBG Management Services Inc., which are companies controlled by him. Mr. Dawe's Agreement was amended on November 10, 2015 to change the type of stock which might be granted from being S-8 registered common shares to being restricted common shares; and on October 4, 2016 Mr. Dawe's employment agreement was amended to temporarily lower annual cash compensation by 25% to $93,750 and his quarterly bonus was temporarily amended to provide metrics for quarterly salary component of $100,000 per annum, both changes which will terminate at June 30, 2017 at which time his original agreement will be reset.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Shares of our Company are traded on the OTCQB over-the-counter market system under the trading symbol: KRED. In addition to the stock grant commitments which are included in executive compensation agreements, the following equity compensation plans existed at the end of our most recently completed fiscal year:
On December 12, 2013, the Company adopted a shareholder approved 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.
|
Equity Compensation Plan Information
|
|||
|
Plan Category
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights
|
Weighted average exercise
price of outstanding options, warrants and rights
|
Number of securities remaining available for future issuance
|
|
Stock Option Plan, approved by shareholders
|
6,750,000 restricted
common shares
|
$0.17 per share
|
4,250,000 restricted
common shares
|
Additionally, on May 27, 2014 the Company adopted a Form S-8 share compensation plan totaling 5,000,000 registered shares reserved for issuance. 500,000 shares were issued under this plan during the year ended December 31, 2014, leaving a balance of 4,500,000 registered potentially issuable shares.
Stock Option Grants
During the years ended December 31, 2016 and December 31, 2015, the following options grants made to Named Executive Officers:
|
Option/SAR(1) Grants in Last Fiscal Year Issued to Executive
|
||||||
|
Name
|
Fiscal
Year
|
Number of
Securities
Underlying Options
or SAR's
|
Percent of Total Options or SARs Granted to Employee in Fiscal Year(1)
|
Exercise
Price
($/share)
|
Expiration
Date
|
Grant Date
Value ($)
|
|
Shaun Roberts
1101 Via Callejon #200, San Clemente, CA 92673-4230
|
2016
2015
|
Nil
Nil
|
Nil
Nil
|
n/a
n/a
|
n/a
n/a
|
$Nil
$Nil
|
|
Kyle Redfield
1101 Via Callejon #200, San Clemente, CA 92673-4230
|
2016
2015
|
Nil
Nil
|
Nil
Nil
|
n/a
n/a
|
n/a
n/a
|
$Nil
$Nil
|
|
John Dawe
1101 Via Callejon #200, San Clemente, CA 92673-4230
|
2016
2015
|
Nil
Nil
|
Nil
Nil
|
n/a
n/a
|
n/a
n/a
|
$Nil
$Nil
|
Notes:
(1) SAR's are "Stock Appreciation Rights".
|
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Issued to Executive
|
|||||||
|
Name
|
Fiscal Year
|
Shares Acquired on Exercise
(#)
|
Value Realized
($)
|
Number of Securities
Underlying Unexercised Options/SARs at
Fiscal year-end
(#)
|
Value of Unexercised
In-the-Money Options/SARs
at Fiscal year-end(1)
($)
|
||
|
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
||||
|
Shaun Roberts
1101 Via Callejon #200, San Clemente, CA 92673-4230
|
2016
2015
|
Nil
Nil
|
$Nil
$Nil
|
2,500,000
2,500,000
|
n/a
n/a
|
$Nil
$Nil
|
n/a
n/a
|
|
Kyle Redfield
1101 Via Callejon #200, San Clemente, CA 92673-4230
|
2016
2015
|
Nil
Nil
|
$Nil
$Nil
|
n/a
n/a
|
n/a
n/a
|
$Nil
$Nil
|
n/a
n/a
|
|
John Dawe
1101 Via Callejon #200, San Clemente, CA 92673-4230
|
2016
2015
|
Nil
Nil
|
$Nil
$Nil
|
750,000
750,000
|
n/a
n/a
|
$Nil
$Nil
|
n/a
n/a
|
Notes:
(1) Based on December 31, 2016 closing trade price of $0.0499 per share.
Under SEC rules, a person (or group of persons) is deemed to be a "beneficial owner" of a security if he or she, directly or indirectly, has or shares the power to vote or to direct the voting of such security, or the power to dispose of or to direct the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. A person is also deemed to be a beneficial owner of any security, which that person has the right to acquire within 60 days, such as options or warrants to purchase our common stock.
The following table provides certain information regarding the ownership of our common stock, as of April 12, 2017 by each person known to us to own more than 5% of our outstanding common stock.
Security ownership of certain beneficial owners.
|
Security Ownership of Certain Beneficial Owners
|
|||
|
Title of Class
|
Name and Address of Beneficial Owner
|
Amount and Nature
of Beneficial Owner(1)
|
Percent
of Class (2)
|
|
Common Stock
|
Shaun Roberts
1101 Via Callejon #200,
San Clemente, CA 92673-4230
|
14,367,773(3)
|
8%
|
|
Common Stock
|
Gonzalo Camet
1101 Via Callejon #200,
San Clemente, CA 92673-4230
|
10,715,222(4)
|
6%
|
|
Common Stock
|
Steven Schorr
1101 Via Callejon #200,
San Clemente, CA 92673-4230
|
8,634,647(5)
|
5%
|
|
Common Stock
|
PCF Holdings Group LLC
c/o 1101 Via Callejon #200,
San Clemente, CA 92673-4230
|
37,831,242(6)
|
17.5%(6)
|
Notes:
(1) Except as otherwise indicated, we believe that the beneficial owners of the common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Common stock subject to options or warrants currently exercisable or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage ownership of the person holding such option or warrants, but are not deemed outstanding for purposes of computing the percentage ownership of any other person.
(2) The denominator for this percentage calculation is based on the 178,347,287 issued and outstanding common shares of the Company as of April 12, 2016. Exercised option shares are added to total shares issued and outstanding to calculate the ownership percentage of each party, but exercised option shares of the other party are not included in the denominator for the other party.
(3) Shaun Roberts owns 9,803,991 shares of the Company and has been issued 4,563,782 fully vested options to purchase 4,563,782 shares. Mr. Roberts also beneficially owns 1,000,000 vested options to purchase 1,000,000 shares which have been issued to his spouse. In total, Mr. Roberts beneficially controls 14,367,773 shares.
(4) Gonzalo Camet owns 7,590,222 shares of the Company and has been issued 2,375,000 warrants and 750,000 fully vested options to respectively purchase 2,375,000 and 750,000 shares of the Company. In total, Mr. Camet beneficially controls 10,715,222 shares.
(5) Steven Schorr owns 7,634,647 shares of the Company and has been issued 1,000,000 fully vested options to purchase 1,000,000 shares. In total, Mr. Schorr beneficially controls 8,634,647 shares.
(6) The designees of PCF Holding Group, LLC, which includes director Richard Fischler who owns 2,500,000 shares, as a group own 12,500,000 shares of the Company and have been issued 37,500,000 warrants to purchase 37,500,000 shares. In total, PCF Holdings Group, LLC beneficially controls 50,000,000 shares, however the Purchase Agreement executed with PCF Holdings Group, LLC limits their ownership to a maximum of 17.5% of the issued and outstanding shares of the Company which translates to a current ownership of 37,831,242 if sufficient warrants were exercised to achieve that level.
The following table provides certain information regarding the ownership of our common stock, as of April 12, 2016 by: (i) each of our Named Executive officers; (ii) each of our directors; and (iii) all of our executive officers and directors as a group.
|
Security Ownership of Management
|
|||
|
Title of Class
|
Name and Address of Beneficial Owner
|
Amount and Nature
of Beneficial Owner(1)
|
Percent of
Class (2)
|
|
Common Stock
|
Shaun Roberts - CEO, Director, Board Chair
1101 Via Callejon #200, San Clemente, CA 92673-4230
|
14,367,773(3)
|
8%
|
|
Common Stock
|
Kyle Redfield - President & COO, Director
1101 Via Callejon #200, San Clemente, CA 92673-4230
|
10,124,763(4)
|
4%
|
|
Common Stock
|
John Dawe - CFO, Secretary & Treasurer
1101 Via Callejon #200, San Clemente, CA 92673-4230
|
4,012,625(5)
|
2%
|
|
Common Stock
|
Gonzalo Camet - Director
1101 Via Callejon #200, San Clemente, CA 92673-4230
|
10,715,222(6)
|
6%
|
|
Common Stock
|
Steven Schorr - Director
1101 Via Callejon #200, San Clemente, CA 92673-4230
|
8,634,647(7)
|
5%
|
|
Common Stock
|
Richard Fischler - Director
1101 Via Callejon #200, San Clemente, CA 92673-4230
|
2,500,000(8)
|
1%
|
|
Common Stock
|
Bradley Paris - Director
1101 Via Callejon #200, San Clemente, CA 92673-4230
|
150,000(9)
|
Less than 1%
|
|
Common Stock
|
James S. Tonkin - Director
1101 Via Callejon #200, San Clemente, CA 92673-4230
|
250,000(10)
|
Less than 1%
|
|
Common Stock
|
All Directors and Officers as a Group
|
50,755,030
|
28%
|
Notes:
(1) Except as otherwise indicated, we believe that the beneficial owners of the common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Common stock subject to options or warrants currently exercisable or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage ownership of the person holding such option or warrants, but are not deemed outstanding for purposes of computing the percentage ownership of any other person.
(2) The denominator for this percentage calculation is based on the 178,347,287 issued and outstanding common shares of the Company as of April 12, 2016.
(3) Shaun Roberts owns 9,803,991 shares of the Company and has been issued 4,563,782 fully vested options to purchase 4,563,782 shares. Mr. Roberts also beneficially owns 1,000,000 fully vested options to purchase 1,000,000 shares which have been issued to his spouse. In total, Mr. Roberts beneficially controls 14,367,773 shares.
(4) Kyle Redfield owns 7,648,386 shares of the Company and has been issued 2,476,377 fully vested options to purchase 2,476,377 shares. In total, Mr. Redfield beneficially controls 10,124,763 shares.
(5) John Dawe owns 3,262,625 shares of the Company indirectly through his holding company GBG Management Services Inc. and directly owns 750,000 fully vested stock options. In total, Mr. Dawe beneficially controls 4,012,625 shares.
(6) Gonzalo Camet owns 7,590,222 shares of the Company and has been issued 2,375,000 warrants and 750,000 options to respectively purchase 2,375,000 and 750,000 shares of the Company. In total, Mr. Camet beneficially controls 10,715,222 shares.
(7) Steven Schorr owns 7,634,647 shares of the Company and 1,000,000 fully vested options to purchase 1,000,000 shares. In total, Mr. Schorr beneficially controls 8,634,647 shares.
(8) Richard Fischler owns 2,500,000 shares of the Company and beneficially controls 2,500,000 shares. Mr. Fischler is also a member of the PCF Holdings Group, LLC designees.
(9) Bradley Paris owns 150,000 shares of the Company and beneficially controls 150,000 shares.
(10) James S. Tonkin owns 250,000 shares of the Company and beneficially controls 250,000 shares.
Change in Control
We are not aware of any arrangement that might result in a change in control in the future.
Certain Business Relationships
During the years ended December 31, 2016 and December 31, 2015, our company shared 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. Malie's occupancy will end on April 30, 2016, at which time we will assume all lease payments until we acquire a new sublessee tenant.
In its capacity as the Audit Committee, the Board of Directors pre-approves all audit (including audit-related) and permitted non-audit services to be performed by the independent auditors. The Board of Directors annually approves the scope and fee estimates for the year-end audit to be performed by the Corporation's independent auditors for the fiscal year. With respect to other permitted services, the Board of Directors pre-approves specific engagements, projects and categories of services on a fiscal year basis, subject to individual project and annual maximums. To date, the Company has not engaged its auditors to perform any non-audit related services.
Audit Fees
The aggregate fees billed for the last two fiscal years for professional services rendered by the principal accountant for the audit of the Company's annual financial statements and review of financial statements included in the Company's Form 10-Qs, or services that are normally provided by the accountant in connection with statutory and regulatory engagements for those fiscal years was:
2016: $37,997 – M&K CPAs, PLLC
2015: $43,750 – M&K CPAs, PLLC
Audit - Related Fees
The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountants that are reasonably related to the performance of the audit or review of the Company's financial statements and are not reported in the preceding paragraph:
The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountants that are reasonably related to the performance of the audit or review of the Company's financial statements and are not reported in the preceding paragraph:
2016: $Nil – M&K CPAs, PLLC
2015: $Nil – M&K CPAs, PLLC
Tax Fees
The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning was:
The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning was:
2016: $Nil – M&K CPAs, PLLC
2015: $Nil – M&K CPAs, PLLC
All Other Fees
The aggregate fees billed in each of the last two fiscal years for the products and services provided by the principal accountant, other than the services reported in paragraphs (1), (2), and (3) was:
The aggregate fees billed in each of the last two fiscal years for the products and services provided by the principal accountant, other than the services reported in paragraphs (1), (2), and (3) was:
2016: $Nil – M&K CPAs, PLLC
2015: $Nil – M&K CPAs, PLLC
|
Exhibit
Number
|
Description
|
Filed
|
|
(3)
|
Articles of Incorporation and Bylaws
|
|
|
3.1
|
Articles of Incorporation
|
(attached as an exhibit to our Registration Statement on Form S-1, filed on August 22, 2011)
|
|
3.2
|
Bylaws
|
(attached as an exhibit to our Registration Statement on Form S-1, filed on August 22, 2011)
|
|
3.3
|
Articles of Merger dated effective September 9, 2013
|
(attached as an exhibit to our current report on Form 8-K, filed on September 13, 2013)
|
|
3.4
|
Certificate of Change dated effective September 9, 2013
|
(attached as an exhibit to our current report on Form 8-K, filed on September 13, 2013)
|
|
(10)
|
Material Contracts
|
|
|
10.1
|
Binding Letter agreement dated June 5, 2013 with Sandwich Isles Trading Company, Inc.
|
(attached as an exhibit to our current report on Form 8-K, filed on June 11, 2013)
|
|
10.2
|
Asset Purchase Agreement dated October 4, 2013 with Sandwich Isles Trading Co. Inc.
|
(attached as an exhibit to our current report on Form 8-K, filed on October 10, 2013)
|
|
10.3
|
Employment Agreement dated October 4, 2013 with Shaun Roberts
|
(attached as an exhibit to our current report on Form 8-K, filed on October 10, 2013)
|
|
10.4
|
2013 Stock Option Plan
|
(attached as an exhibit to our current report on Form 8-K filed on January 10, 2014)
|
|
10.5
|
Form of Stock Option Agreement (US persons)
|
(attached as an exhibit to our current report on Form 8-K filed on January 10, 2014)
|
|
10.6
|
Form of Stock Option Agreement (non-US persons)
|
(attached as an exhibit to our current report on Form 8-K filed on January 10, 2014)
|
|
10.7
|
Form of securities purchase agreement (non US purchaser)
|
(attached as an exhibit to our current report on Form 8-K, filed on February 3, 2014)
|
|
10.8
|
Form of securities agreement (US purchaser)
|
(attached as an exhibit to our current report on Form 8-K, filed on February 3, 2014)
|
|
10.9
|
Form of warrant certificate (non US Purchaser)
|
(attached as an exhibit to our current report on Form 8-K, filed on February 3, 2014)
|
|
10.10
|
Form of warrant certificate (US Purchaser)
|
(attached as an exhibit to our current report on Form 8-K, filed on February 3, 2014)
|
|
10.11
|
Senior Convertible Note
|
(attached as an exhibit to our current report on Form 8-K, filed on February 3, 2014)
|
|
10.12
|
Pledge and Security Agreement
|
(attached as an exhibit to our current report on Form 8-K, filed on February 3, 2014)
|
|
10.13
|
Warrant
|
(attached as an exhibit to our current report on Form 8-K, filed on February 3, 2014)
|
|
10.14
|
Registration Rights Agreement
|
(attached as an exhibit to our current report on Form 8-K, filed on February 3, 2014)
|
|
10.15
|
Investor Rights Agreement
|
(attached as an exhibit to our current report on Form 8-K, filed on February 3, 2014)
|
|
10.17
|
Services Agreement with John Dawe executed December 29, 2014
|
(attached as an exhibit to our current report on Form 8-K, filed on December 29, 2014)
|
|
10.18
|
Convertible Debenture Purchase Agreement, dated as of January 20, 2015, by and between KonaRed Corporation and Group 10 Holdings, LLC
|
(attached as an exhibit to our current report on Form 8-K filed on January 23, 2015)
|
|
10.19
|
Subordinated Promissory Note issued to Solait Corp June 5, 2015
|
(attached as an exhibit to our current report on Form 8-K filed on June 6, 2015)
|
|
Exhibit
Number
|
Description
|
Filed
|
|
(10)
|
Material Contracts (continued)
|
|
|
10.20
|
Purchase Agreement, dated as of June 16, 2015, by and between KonaRed Corporation and Lincoln Park Capital Fund, LLC
|
(attached as an exhibit to our current report on Form 8-K, filed on June 18, 2015)
|
|
10.21
|
Registration Rights Agreement, dated as of June 16, 2015, by and between KonaRed Corporation and Lincoln Park Capital Fund, LLC
|
(attached as an exhibit to our current report on Form 8-K, filed on June 18, 2015)
|
|
10.22
|
Amended and Restated Warrant issued to Lincoln Park Capital Fund, LLC
|
(attached as an exhibit to our current report on Form 8-K, filed on June 18, 2015)
|
|
10.23
|
Form of subscription agreement executed June 29, 2015
|
(attached as an exhibit to our Form S-1, filed on July 6, 2015)
|
|
10.24
|
Employment Agreement by and between KonaRed Corporation and Kyle Redfield executed August 10, 2015
|
(attached as an exhibit to our current report on Form 8-K, filed on August 11, 2015)
|
|
10.25
|
Purchase Agreement, dated as of August 18, 2015, by and between KonaRed Corporation and Lincoln Park Capital Fund, LLC
|
(attached as an exhibit to our current report on Form 8-K filed on August 18, 2015)
|
|
10.26
|
Senior Convertible Note issued to Lincoln Park Capital Fund, LLC August 18, 2015
|
(attached as an exhibit to our current report on Form 8-K filed on August 18, 2015)
|
|
10.27
|
Warrant issued to Lincoln Park Capital Fund, LLC August 18, 2015
|
(attached as an exhibit to our current report on Form 8-K filed on August 18, 2015)
|
|
10.28
|
Subordinated Promissory Note issued to Solait Corp June 5, 2015
|
(attached as an exhibit to our current report on Form 8-K filed on June 6, 2015)
|
|
10.29
|
Purchase Agreement, dated as of September 30, 2015, by and between KonaRed Corporation and Black Mountain Equities Inc.
|
(attached as an exhibit to our current report on Form 8-K filed on October 1, 2015)
|
|
10.30
|
Subordinated Promissory Note issued to Black Mountain Equities Inc. September 30, 2015
|
(attached as an exhibit to our current report on Form 8-K filed on October 1, 2015)
|
|
10.31
|
Warrant issued to Black Mountain Equities Inc. September 30, 2015
|
(attached as an exhibit to our current report on Form 8-K filed on October 1, 2015)
|
|
10.32
|
Purchase Agreement, dated as of September 30, 2015, by and between KonaRed Corporation and Gemini Master Fund, Ltd.
|
(attached as an exhibit to our current report on Form 8-K filed on October 1, 2015)
|
|
10.33
|
Subordinated Promissory Note issued to Gemini Master Fund, Ltd. September 30, 2015
|
(attached as an exhibit to our current report on Form 8-K filed on October 1, 2015)
|
|
10.34
|
Warrant issued to Gemini Master Fund, Ltd. September 30, 2015
|
(attached as an exhibit to our current report on Form 8-K filed on October 1, 2015)
|
|
10.35
|
Purchase Agreement, dated as of November 23, 2015, by and between KonaRed Corporation and Lincoln Park Capital Fund, LLC
|
(attached as an exhibit to our current report on Form 8-K filed on November 23, 2015)
|
|
10.36
|
Senior Convertible Note issued to Lincoln Park Capital Fund, LLC November 23, 2015
|
(attached as an exhibit to our current report on Form 8-K filed on November 23, 2015)
|
|
10.37
|
Warrant issued to Lincoln Park Capital Fund, LLC November 23, 2015
|
(attached as an exhibit to our current report on Form 8-K filed on November 23, 2015)
|
|
10.38
|
Purchase Agreement, dated as of December 3, 2015, by and between KonaRed Corporation and Vista Capital Investments LLC
|
(attached as an exhibit to our current report on Form 8-K filed on December 4, 2015)
|
|
10.39
|
Subordinated Promissory Note issued to Vista Capital Investments LLC. December 3, 2015
|
(attached as an exhibit to our current report on Form 8-K filed on December 4, 2015)
|
|
10.40
|
Form of unit offers form of subscription agreement including warrant (applicable to all 2016 unit offers)
|
(attached as an exhibit to our annual report on Form 10-K filed on April 13, 2016)
|
|
Exhibit
Number
|
Description
|
Filed
|
|
(10)
|
Material Contracts (continued)
|
|
|
10.45
|
Settlement Agreement, dated as of October 18, 2016 by and between KonaRed Corporation and Splash Beverages Group, Inc.
|
(attached as an exhibit to our current report on Form 8-K filed on October 21, 2016)
|
|
10.46
|
Supply Agreement, dated October 28, 2016 by and between KonaRed Corporation, Flavor Producers, Inc. and Creative Flavor Concepts, Inc.
|
(attached as an exhibit to our current report on Form 8-K filed on December 7, 2016)
|
|
10.50
|
Purchase Agreement, dated as of December 6, 2016, by and between KonaRed Corporation and PCF Holdings Group, LLC
|
(attached as an exhibit to our current report on Form 8-K filed on December 7, 2016)
|
|
10.51
|
Form of warrants issued to PCF Holdings Group, LLC
|
(attached as an exhibit to our current report on Form 8-K filed on December 7, 2016)
|
|
10.52
|
Notes Maturities Extension Agreement, dated as of December 16, 2016 by and between KonaRed Corporation and Lincoln Park Capital Fund, LLC
|
(attached as an exhibit to our current report on Form 8-K filed on December 20, 2016)
|
|
10.53
|
Warrant issued to Lincoln Park Capital Fund, LLC December 16, 2016
|
(attached as an exhibit to our current report on Form 8-K filed on December 20, 2016)
|
|
10.55
|
Resignation Letter received from Director William Van Dyke January 20, 2017
|
(attached as an exhibit to our current report on Form 8-K filed on January 23, 2017)
|
|
10.56
|
Notes Maturity Extension Agreement, dated as of January 27, 2017 by and between KonaRed Corporation and Gonzalo Camet
|
(attached as an exhibit to our current report on Form 8-K filed on January 30, 2017)
|
|
(14)
|
Code of Ethics
|
|
|
14.1
|
Code of Ethics
|
(attached as an exhibit to our annual report on Form 10-K filed on March 8, 2014)
|
|
(31)
|
Certifications
|
|
|
(101)
|
Interactive Data File
|
|
|
101.INS
|
XBRL Instance Document
|
Filed herewith
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
Filed herewith
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
Filed herewith
|
|
101.DEF
|
Taxonomy Extension Definition Linkbase Document
|
Filed herewith
|
|
101.LAB
|
Taxonomy Extension Labels Linkbase Document
|
Filed herewith
|
|
101.PLE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
Filed herewith
|
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
| KONARED CORPORATION | |||
|
|
By:
|
/s/ Shaun Roberts | |
| Shaun Roberts | |||
| Chief Executive Officer, Director and Board Chair | |||
| Dated: April 12, 2016 | |||
| /s/ John Dawe | |||
| John Dawe, CFA | |||
| Chief Financial Officer, Secretary & Treasurer | |||
|
Dated: April 12, 2016
|
|||
Pursuant to the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
/s/ Shaun Roberts
|
Dated: |
April 12, 2016
|
||
|
Shaun Roberts
|
|
|||
|
Chief Executive Officer, Director
|
|
|||
| and Board Chair | ||||
| /s/ John Dawe | Dated: | April 12, 2016 | ||
| John Dawe, CFA | ||||
| Chief Financial Officer, Secretary | ||||
| & Treasurer | ||||
| /s/ Gonzalo Camet | Dated: | April 12, 2016 | ||
| Gonzalo Camet | ||||
| Director | ||||
| /s/ Richard Fischler | Dated: | April 12, 2016 | ||
| Richard Fischler | ||||
| Director | ||||
| /s/ Bradley Paris | Dated: | April 12, 2016 | ||
| Bradley Paris | ||||
| Director | ||||
| /s/ Kyle Redfield | Dated: | April 12, 2016 | ||
| Kyle Redfield | ||||
| Director | ||||
| /s/ Steven Schorr | Dated: | April 12, 2016 | ||
| Steven Schorr | ||||
| Director | ||||
| /s/ James S. Tonkin | Dated: | April 12, 2016 | ||
| James S. Tonkin | ||||
| Director |
105