BALANCE SHEETS
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
148,769
|
|
|
$
|
39,987
|
|
Accounts receivable
|
|
|
33,227
|
|
|
|
274,640
|
|
Accounts receivable - related party
|
|
|
18,000
|
|
|
|
3,600
|
|
Inventory
|
|
|
439,158
|
|
|
|
508,338
|
|
Prepaid expenses
|
|
|
5,953
|
|
|
|
16,000
|
|
Other current assets
|
|
|
—
|
|
|
|
652
|
|
TOTAL CURRENT ASSETS
|
|
|
645,107
|
|
|
|
843,217
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Fixed assets (net of accumulated depreciation)
|
|
|
10,247
|
|
|
|
12,691
|
|
TOTAL OTHER ASSETS
|
|
|
10,247
|
|
|
|
12,691
|
|
TOTAL ASSETS
|
|
$
|
655,354
|
|
|
$
|
855,908
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
211,429
|
|
|
$
|
195,183
|
|
Accounts payable - related party
|
|
|
3,156
|
|
|
|
—
|
|
Short term debt, net of discounts
|
|
|
235,237
|
|
|
|
—
|
|
Unearned revenue
|
|
|
1,434
|
|
|
|
3,443
|
|
Derivative liability
|
|
|
11,807
|
|
|
|
9,168
|
|
TOTAL CURRENT LIABILITIES
|
|
|
463,063
|
|
|
|
207,794
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Convertible notes payable, net of discounts
|
|
|
548,881
|
|
|
|
140,001
|
|
TOTAL LONG-TERM LIABILITIES
|
|
|
548,881
|
|
|
|
140,001
|
|
TOTAL LIABILITIES
|
|
|
1,011,944
|
|
|
|
347,795
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Preferred shares, 10,000 shares with par value $0.001 authorized; no shares
issued and outstanding at December 31, 2015 and December 31, 2014.
|
|
|
—
|
|
|
|
—
|
|
Common shares, 877,500,000 shares with par value $0.001 authorized;
108,769,514 and 83,496,530 shares issued and outstanding at December 31,
2015 and December 31, 2014, respectively
|
|
|
108,787
|
|
|
|
83,497
|
|
Additional paid in capital
|
|
|
19,616,012
|
|
|
|
16,705,636
|
|
Accumulated deficit
|
|
|
(20,081,389
|
)
|
|
|
(16,281,020
|
)
|
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
(356,590
|
)
|
|
|
508,113
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
$
|
655,354
|
|
|
$
|
855,908
|
|
The accompanying notes to financial statements are an integral part of these financial statements
STATEMENTS OF OPERATIONS
|
|
Year ended
December 31, 2015
|
|
|
Year ended
December 31, 2014
|
|
|
|
|
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
Product sales
|
|
$
|
571,824
|
|
|
$
|
1,124,994
|
|
Product sales - related party
|
|
|
39,600
|
|
|
|
35,947
|
|
Shipping and delivery
|
|
|
24,079
|
|
|
|
93,293
|
|
Total sales
|
|
|
635,503
|
|
|
|
1,254,234
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
541,069
|
|
|
|
1,094,037
|
|
GROSS MARGIN
|
|
|
94,434
|
|
|
|
160,197
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,502
|
|
|
|
3,931
|
|
Advertising and marketing
|
|
|
435,390
|
|
|
|
967,164
|
|
General and administrative expenses
|
|
|
2,992,549
|
|
|
|
3,792,560
|
|
Total operating expenses
|
|
|
3,434,441
|
|
|
|
4,763,655
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,340,007
|
)
|
|
|
(4,603,458
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(255,372
|
)
|
|
|
(1,007
|
)
|
Amortization expense - notes discounts
|
|
|
(128,200
|
)
|
|
|
—
|
|
Change in fair market value of derivative liabilities
|
|
|
(35,037
|
)
|
|
|
1,838
|
|
Loss on equity modification
|
|
|
(41,753
|
)
|
|
|
—
|
|
Total other income (expense)
|
|
|
(460,362
|
)
|
|
|
831
|
|
Loss before income taxes
|
|
$
|
(3,800,369
|
)
|
|
$
|
(4,602,627
|
)
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(3,800,369
|
)
|
|
$
|
(4,602,627
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.06
|
)
|
Basic and diluted weighted average shares outstanding
|
|
|
91,278,322
|
|
|
|
77,208,523
|
|
The accompanying notes to financial statements are an integral part of these financial statements
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
|
|
Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid In Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance – December 31, 2013
|
|
|
72,366,667
|
|
|
|
72,367
|
|
|
|
11,969,774
|
|
|
|
(11,678,393
|
)
|
|
|
363,748
|
|
Common shares issued for cash
|
|
|
1,818,182
|
|
|
|
1,818
|
|
|
|
998,182
|
|
|
|
—
|
|
|
|
1,000,000
|
|
Common shares issued under equity line
|
|
|
3,697,889
|
|
|
|
3,698
|
|
|
|
1,696,303
|
|
|
|
—
|
|
|
|
1,700,001
|
|
Common shares issued for services
|
|
|
4,052,759
|
|
|
|
4,053
|
|
|
|
837,655
|
|
|
|
—
|
|
|
|
841,708
|
|
Common shares issued for equity line underwriting fees
|
|
|
903,633
|
|
|
|
904
|
|
|
|
(904
|
)
|
|
|
—
|
|
|
|
—
|
|
Common shares issued as compensation
|
|
|
657,400
|
|
|
|
657
|
|
|
|
397,465
|
|
|
|
—
|
|
|
|
398,122
|
|
Additional paid-in capital related to option grants
|
|
|
—
|
|
|
|
|
|
|
|
807,161
|
|
|
|
—
|
|
|
|
807,161
|
|
Net loss – year ended December 31, 2014
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,602,627
|
)
|
|
|
(4,602,627
|
)
|
Ending balance – December 31, 2014
|
|
|
83,496,530
|
|
|
$
|
83,497
|
|
|
$
|
16,705,636
|
|
|
$
|
(16,281,020
|
)
|
|
$
|
508,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued for cash
|
|
|
3,333,334
|
|
|
|
3,333
|
|
|
|
346,667
|
|
|
|
—
|
|
|
|
350,000
|
|
Common shares issued under equity line
|
|
|
8,550,000
|
|
|
|
8,550
|
|
|
|
621,300
|
|
|
|
—
|
|
|
|
629,850
|
|
Common shares issued for services
|
|
|
6,344,022
|
|
|
|
6,345
|
|
|
|
591,926
|
|
|
|
—
|
|
|
|
598,271
|
|
Common shares issued for equity line underwriting fees
|
|
|
2,708,656
|
|
|
|
2,724
|
|
|
|
(2,724
|
)
|
|
|
—
|
|
|
|
—
|
|
Common shares issued as compensation
|
|
|
4,238,341
|
|
|
|
4,238
|
|
|
|
346,645
|
|
|
|
—
|
|
|
|
350,883
|
|
Common shares issued for interest payments
|
|
|
98,631
|
|
|
|
100
|
|
|
|
6,171
|
|
|
|
—
|
|
|
|
6,271
|
|
Additional paid-in capital related to option grants
|
|
|
—
|
|
|
|
—
|
|
|
|
220,960
|
|
|
|
—
|
|
|
|
220,960
|
|
Additional paid-in capital related to warrant issuances
|
|
|
—
|
|
|
|
—
|
|
|
|
453,046
|
|
|
|
—
|
|
|
|
453,046
|
|
Additional paid-in capital related to convertible notes beneficial conversion features
|
|
|
—
|
|
|
|
—
|
|
|
|
209,743
|
|
|
|
—
|
|
|
|
209,743
|
|
Additional paid-in capital related to convertible notes redemption
|
|
|
—
|
|
|
|
—
|
|
|
|
74,889
|
|
|
|
—
|
|
|
|
74,889
|
|
Additional paid-in capital related to equity modification
|
|
|
—
|
|
|
|
—
|
|
|
|
41,753
|
|
|
|
—
|
|
|
|
41,753
|
|
Net loss – year ended December 31, 2015
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,800,369
|
)
|
|
|
(3,800,369
|
)
|
Ending Balance – December 31, 2015
|
|
|
108,769,514
|
|
|
$
|
108,787
|
|
|
$
|
19,616,012
|
|
|
$
|
(20,081,389
|
)
|
|
$
|
(356,590
|
)
|
The accompanying notes to financial statements are an integral part of these financial statements
STATEMENTS OF CASH FLOWS
|
|
Year Ended
December 31, 2015
|
|
|
Year Ended
December 31, 2014
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,800,369
|
)
|
|
$
|
(4,602,627
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
6,020
|
|
|
|
2,204
|
|
Depreciation expense
|
|
|
2,444
|
|
|
|
1,983
|
|
Stock issued for compensation
|
|
|
350,883
|
|
|
|
398,123
|
|
Stock issued for services
|
|
|
598,272
|
|
|
|
841,707
|
|
Option grants expense
|
|
|
220,960
|
|
|
|
807,161
|
|
Change in fair market value of derivative liabilities
|
|
|
35,037
|
|
|
|
(1,838
|
)
|
Amortization of notes payable discounts
|
|
|
197,905
|
|
|
|
216
|
|
Loss on equity modification
|
|
|
41,753
|
|
|
|
—
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
220,993
|
|
|
|
(254,022
|
)
|
Inventory
|
|
|
69,180
|
|
|
|
(118,211
|
)
|
Prepaid expenses
|
|
|
10,047
|
|
|
|
(8,500
|
)
|
Other current assets
|
|
|
652
|
|
|
|
2,848
|
|
Accounts payable and accrued liabilities
|
|
|
19,402
|
|
|
|
(79,501
|
)
|
Accrued interest
|
|
|
19,281
|
|
|
|
—
|
|
Unearned revenue
|
|
|
(2,009
|
)
|
|
|
1,961
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(2,009,549
|
)
|
|
|
(3,008,496
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
—
|
|
|
|
(14,674
|
)
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
—
|
|
|
|
(14,674
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from short term debt
|
|
|
325,000
|
|
|
|
—
|
|
Proceeds from short term debt - related party
|
|
|
500,000
|
|
|
|
—
|
|
Repayments on short term debt - related party
|
|
|
(500,000
|
)
|
|
|
—
|
|
Proceeds from convertible notes payable
|
|
|
1,213,481
|
|
|
|
150,000
|
|
Repayments on convertible notes payable
|
|
|
(400,000
|
)
|
|
|
—
|
|
Proceeds from issuance of common stock for cash
|
|
|
979,850
|
|
|
|
2,700,001
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
2,118,331
|
|
|
|
2,850,001
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
108,782
|
|
|
|
(173,169
|
)
|
|
|
|
|
|
|
|
|
|
CASH, Beginning of Period
|
|
|
39,987
|
|
|
|
213,156
|
|
|
|
|
|
|
|
|
|
|
CASH, End of Period
|
|
$
|
148,769
|
|
|
$
|
39,987
|
|
The accompanying notes to financial statements are an integral part of these financial statements
KONARED CORPORATION
SUPPLEMENTAL DISCLOSURE OF
CA
SH FLOW INFORMATION
|
|
Year Ended
December 31, 2015
|
|
|
Year Ended
December 31, 2014
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
Interest
|
|
$
|
128,458
|
|
|
$
|
15,693
|
|
Taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
NON CASH INVESTING AND F
IN
ANCING ACTIVITIES
|
|
Year Ended
December 31, 2015
|
|
|
Year Ended
December 31, 2014
|
|
|
|
|
|
|
|
|
Discounts on derivative
|
|
$
|
241,710
|
|
|
$
|
11,006
|
|
Discounts on warrants
|
|
$
|
453,046
|
|
|
$
|
—
|
|
Interest paid by stock issuances
|
|
$
|
6,271
|
|
|
$
|
—
|
|
Shares issued as commitment fees - offering costs
|
|
$
|
2,724
|
|
|
$
|
904
|
|
Discounts from beneficial conversion features
|
|
$
|
209,743
|
|
|
$
|
—
|
|
Settlement of derivative liability
|
|
$
|
274,108
|
|
|
$
|
—
|
|
The accompanying notes to financial statements are an integral part of these financial statements
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – Nature of Organization
KonaRed Corporation (“KonaRed”, "KonaRed Corporation", "us", “we”, the “Registrant”, or the “Company”) was incorporated in the State of Nevada on October 4, 2010 as TeamUpSport Inc. Prior to, and in anticipation of, closing of an asset purchase agreement (the "Asset Agreement") with Sandwich Isles Trading Co, Inc., on September 9, 2013 our company effected a name change by merging with our wholly-owned Nevada subsidiary named “KonaRed Corporation” with our company as the surviving corporation under the new name “KonaRed Corporation”. On October 4, 2013 pursuant to the terms the Asset Agreement, we acquired substantially all of the assets, property and undertaking of the health beverage and food business (the "Business") operated under the name “KonaRed” from Sandwich Isles Trading Co., Inc. ("SITC") which was a private company incorporated in Hawaii on August 22, 2008 and dissolved on May 23, 2014. As a result of October 4, 2013 acquisition of the Business from Sandwich Isles Trading Co., Inc. ("SITC") we ceased to be a “shell company” as defined in Rule 12b-2 of the
Securities Exchange Act of 1934
(the “Exchange Act”).
NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Fiscal Year
These financial statements have been presented by the Company in accordance with accounting principles generally accepted in the United States and are expressed in U.S. dollars. The Company’s fiscal year-end is December 31st.
Use of Estimates
The preparation of these financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to recoverability of long-lived assets, and deferred income tax asset valuations. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between estimates and the actual results, future results of operations will be affected.
Financial Instruments
The Company’s financial instruments consist principally of cash, accounts receivable, inventory, accounts payable, notes payable and related party debt. The Company believes that the recorded values of all of these financial instruments approximate their current fair values because of the short term nature and respective maturity dates or durations.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. There were no cash equivalents recorded for the periods ended December 31, 2015 and December 31, 2014.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)
Accounts Receivable
Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. Bad debts expense or write offs of receivables are determined on the basis of loss experience, known and inherent risks in the receivable portfolio and current economic conditions. During the years ended December 31, 2015 and December 31, 2014, the Company wrote off accounts receivable totaling $6,020 and $2,204, respectively. There were no allowances for doubtful accounts recorded for the years ended December 31, 2015 and December 31, 2014.
Inventories
Inventories are composed of raw materials and finished goods. Our raw materials inventory is comprised of dried coffee fruit and other input components, such as labels, caps, and packaging materials. Our finished goods inventory process begins when we take possession of dried coffee fruit from coffee growers in Hawaii. We then ship the raw material to our California warehouse for storage and then send required quantities to subcontractors for value-added processing; or we ship the raw materials directly from Hawaii to the processors. For our beverage products which include coffee fruit, value-added processing then occurs whereby the dried coffee fruit is converted to liquid extract through water based extraction. The extracts are then shipped from the raw materials processors to our California warehouse or directly to our bottling contractors. The bottling contractors then add our proprietary extract to other ingredients to produce our finished goods. Our cold brew coffee is manufactured using a comparable process. Finished goods are shipped back to either our Company’s warehouse or third party transit agents and subsequently disseminated to either distributors or shipped directly to retailers. The process for production of our nutritional wellness products follows a similar manufacturing chain, but does not involve a bottling process.
Inventories are valued at the lower of cost, as determined on an average basis, or market. Market value is determined by reference to selling prices at, or around, balance sheet date or by management’s estimates based on prevailing market conditions. Management writes down the inventories to market value if it is below cost. Management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required. If a valuation allowance is required, an offsetting entry is made which expenses the reserved inventory to cost of goods sold during the period in which the valuation was required. Subsequently, if this reserved inventory is used in future periods, an offset is entered to cost of goods sold which decreases cost of goods sold during that subsequent period. Costs of raw material and finished goods inventories include purchase and related costs incurred in bringing the products to their present location and condition. Labor, direct and indirect overhead, and the processing, bottling and shipping costs incurred during 3
rd
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 3
rd
party manufacturers.
Income Taxes
In accordance with ASC 740 - Income Taxes, the provision for income taxes is computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
The Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in these financial statements is the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
No liability for unrecognized tax benefits was recorded as of December 31, 2015 and December 31, 2014.
Stock Based Payments
We account for share-based awards to employees in accordance with ASC 718 “Stock Compensation”. Under this guidance, stock compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the estimated service period (generally the vesting period) on the straight-line attribute method. Share-based awards to non-employees are accounted for in accordance with ASC 505-50 “Equity”, wherein such awards are expensed over the period in which the related services are rendered.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)
Derivative financial instruments
In accordance with ASC 820–10–35–37
Fair Value in Financial Instruments
; ASC 815
Accounting for
Derivative Instruments and Hedging Activities
; and ASC 815–40 (formerly Emerging Issues Task Force (“EITF”) Issue No. 00–19 and EITF 07–05), the Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations.
As of December 31, 2015, the Company had outstanding a senior convertible note (the "VDF Note") with a balance of $453,298, net of a discount of $15,974. The Company determined the VDF Note had an embedded derivative valued at $11,807 at December 31, 2015 due to Sr. Note One having a provision which required adjustments to the conversion price to compensate for dilutive stock issuance events unrelated to the VDF Note. As of December 31, 2014, the VDF Note had a balance of $140,001, net of a discount of $10,790 and the embedded derivative liability was valued at $9,168. During the period ended December 31, 2015, $318,481 of principal was added to the VDF Note. This was comprised of $300,000 of patent license fees which were rolled over to the VDF Note and accrued interest for the year ended December 31, 2015 of $18,481.
On January 20, 2015 the Company also issued an unsecured subordinate convertible debenture with a face value of $440,000 (the "Subordinated Debenture"), which after deducting a $40,000 original issue discount ('OID'), provided funds of $400,000. The Subordinated Debenture was initially valued as having a balance of $207,074, net of a discount of $232,926. The Company determined the Subordinated Debenture initially had an embedded derivative liability valued at $232,926 due to it providing for adjustments to the conversion price. On June 5, 2015, the Company redeemed the Subordinated Debenture and paid the lender a prepayment premium of $68,929, calculated as 15% of face value principal of $440,000 plus accrued interest of $19,529, for a total redemption payment of $528,458. $5,788 of the OID was amortized to interest expense over the life of the note and the repayment of the remaining balance of $34,212 OID was recorded as an interest expense at time of redemption.
Because there was a derivative liability recorded for the Subordinated Debenture, the derivative component was marked-to-market at time of redemption and the resulting net loss of $41,182 was added to the Change in Fair Value of Derivatives for the period ended December 31, 2015.
The net amount of the Change in Fair Value of Derivatives for the period ended December 31, 2015 was a loss of $35,037, which included the loss on the derivative loss on the Subordinated Debenture and the net amount of mark-to-market value changes in the embedded derivatives liabilities of the VDF Note of $6,145 for the year ended December 31, 2015.
There are no embedded derivatives in any other notes issued by the Company.
Research and Development
Costs incurred in developing the ability to create and manufacture products for sale are included in research and development. Once a product is commercially feasible and starts to sell to third party customers, the classification of such costs as development costs stops and such costs are recorded as costs of production, which are included in cost of goods sold. Research and development costs are expensed when incurred.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)
Basic and Diluted Net Loss per Share
The Company computes loss per share in accordance with ASC 260,
Earnings per Share.
ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock warrants and options, using the treasury stock method; and convertible preferred stock and convertible debt using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. The Company currently has options, warrants and convertible debt outstanding, and no convertible preferred stock has been issued. Common stock equivalents pertaining to the options, warrants and convertible debt were not included in the computation of diluted net loss per common share in these financial statements because the effect would have been anti-dilutive due to the net losses for the years ended December 31, 2015 and December 31, 2014.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and trade receivables. The Company places its cash with high credit quality financial institutions. At times such cash may be in excess of the FDIC limit. With respect to trade receivables, the Company routinely assesses the financial strength of its customers and, as a consequence, believes that the receivable credit risk exposure is limited.
Related parties
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
Fair Value Measurements
As defined in ASC 820 “Fair Value Measurements”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
The Company's Level 1 assets and liabilities consist of cash, accounts receivable, accounts receivable - related party, inventories net, of any inventory allowance, prepaid expenses, other current assets, accounts payable and accrued liabilities, accounts payable - related party, short term debt, net of discounts, and unearned revenue. Pursuant to ASC 820, the fair value of these assets and liabilities is determined based on Level 1 inputs, which consist of quoted prices in active markets for identical assets. Level 2 assets and liabilities consist of a derivative liability arising from a convertible note payable. Pursuant to ASC 820, the fair value of this liability is determined based on Level 2 inputs, which consisted of a valuation by an accredited third party expert. We do not currently have any assets or liabilities which are classified under the criterion of Level 3.
Level components:
|
|
As of
December 31,
2015
|
|
|
As of
December 31,
2014
|
|
Cash
|
|
$
|
148,769
|
|
|
$
|
39,987
|
|
Accounts receivable
|
|
|
33,227
|
|
|
|
274,640
|
|
Accounts receivable - related party
|
|
|
18,000
|
|
|
|
3,600
|
|
Inventories, net of allowance
|
|
|
439,158
|
|
|
|
508,338
|
|
Prepaid expenses
|
|
|
5,953
|
|
|
|
16,000
|
|
Other current assets
|
|
|
-
|
|
|
|
652
|
|
Acc/payable and accrued liabilities
|
|
|
211,429
|
|
|
|
195,183
|
|
Accounts payable - related party
|
|
|
3,156
|
|
|
|
-
|
|
Short term debt, net of discounts
|
|
|
235,237
|
|
|
|
-
|
|
Unearned revenue
|
|
|
1,434
|
|
|
|
3,443
|
|
Level 1 total
|
|
$
|
1,096,363
|
|
|
$
|
1,041,843
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
11,807
|
|
|
$
|
9,168
|
|
Level 2 total
|
|
$
|
11,807
|
|
|
$
|
9,168
|
|
|
|
|
-
|
|
|
|
-
|
|
Level 3 total
|
|
$
|
Nil
|
|
|
$
|
Nil
|
|
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)
It is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from the financial instruments which it holds.
Advertising
Costs for advertising are expensed when incurred. Advertising costs totaled $175,432 and $110,498 for the years ended December 31, 2015 and December 31, 2014, respectively. The Company also incurs marketing expenses for product promotion and investor relations which are combined with advertising to form the advertising and marketing line item in our statement of operations. Excluding advertising, these other promotional costs totaled $259,958 and $856,666 for the years ended December 31, 2015 and December 31, 2014, respectively.
Fixed Assets
Fixed assets are recorded at cost. Depreciation is calculated on a straight line method over the estimated useful lives of the various assets as follows:
ASSET
|
Depreciation Term
|
|
|
Furniture and equipment
|
5 - 7 years
|
Warehouse fixtures
|
10 years
|
During the years ended December 31, 2015 and December 31, 2014: (a) depreciation for furniture and equipment of $2,096 and $1,467 was respectively recorded; and (b) depreciation for warehouse fixtures of $348 and $516 was respectively recorded. Accumulated depreciation for all fixed assets totaled $4,427 at December 31, 2015.
Maintenance and repairs are expensed as incurred while renewals and betterments are capitalized.
Recent Accounting Pronouncements
In July , 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-11,
Simplifying the Measurement of Inventory,
which requires that inventory be measured within the scope of the Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those
fiscal years. The amendments in this Update are to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. This ASU conforms with the Company's current protocol for evaluating inventory and the Company will prospectively implement adoption of this ASU. The Company does not expect the adoption of the ASU to have a significant impact on our consolidated financial statements.
On April 7, 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs,
which requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The ASU is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted. The ASU requires retrospective application to all prior periods presented in the financial statements. The Company has elected not to early adopt ASU 2015-03.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies (continued)
In January 2015, the FASB issued ASU 2015-01,
Income Statement –Extraordinary and Unusual Items,
as part of its initiative to reduce complexity in accounting standards. This Update eliminates from GAAP the concept of extraordinary items. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.
Management does not anticipate that the adoption of these standards will have a material impact on the financial statements.
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations.
NOTE 3 – Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Since inception, the Company has incurred losses totaling $20,081,389 as of December 31, 2015; and has a incurred a net loss for the current year of $3,800,369. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. If necessary, the Company will pursue additional equity and/or debt financing while managing cash flows from operations in an effort to provide funds to meet its obligations on a timely basis and to support future business development. The financial statements do not contain any adjustments to reflect the possible future effects on the classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. To address these issues, on June 5, 2015 the Company entered into a new equity line share purchase agreement (the “2015 Purchase Agreement”), pursuant to which we may make sales of shares of our common stock, subject to certain limitations set forth in the 2015 Purchase Agreement. To December 31, 2015, cash proceeds from this equity line and related private placement offering of our common shares totaled $979,850. The Company also entered into five notes which raised net cash proceeds of $820,000 during the year ended December 31, 2015. Subsequent to the year ended December 31, 2015, the Company has raised an additional $235,740 from equity line sales of our common shares and $171,000 from a private placement unit offering.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 4 – Inventory
Inventory includes raw materials and finished goods. Finished goods contain direct materials and other manufacturing costs charged directly by third party manufacturing vendors. Inventory consists of the following:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
100,702
|
|
|
$
|
157,839
|
|
Finished goods
|
|
|
338,456
|
|
|
|
350,499
|
|
Inventory allowance
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
439,158
|
|
|
$
|
508,338
|
|
During the years ended December 31, 2015 and December 31, 2014, the Company respectively wrote down inventory by $26,760 and $49,249 to account for expired inventory which had been write-off and disposed of, and for minor manufacturing process shrinkages. The write off during the year ended December 31, 2014 included $18,732 of inventory which had been reserved in prior periods. The Company recognized $nil and $nil recovery in inventory allowance respectively for the years ended December 31, 2015 and December 31, 2014. At December 31, 2015 the Company had $nil of reserved inventory and all inventory was valued at full cost.
NOTE 5 – Prepaid Expenses and Other Current Assets
Prepaid expenses at December 31, 2015 were comprised a prepayment $5,953 for a manufacturing run and prepaid expenses $16,000 at December 31, 2014 were comprised of prepayments to two service providers.
Other current assets at December 31, 2015 were $nil and at December 31, 2014 totaled $652 which were comprised of a manufacturing deposit of $652. During the year ended December 31, 2014 a $3,500 rental deposit was written off.
NOTE 6 – Fixed Assets
Fixed assets at December 31, 2015 and December 31, 2014 respectively comprised: (a) furniture and equipment totaling $7,639 and $9,735, net of accumulated depreciation of $3,563 and $1,467; and (b) warehouse fixtures totaling $2,608 and $2,956, net of accumulated depreciation of $864 and $516.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 7 – Short Term Debt and Short Term Debt - Related Party
Short Term Debt
September 2015 Notes:
On September 30, 2015 ("Issuance Date")
,
subject to securities purchase agreements
we
issued two subordinated promissory notes (the “September 2015 Notes”) to two lenders (the “September 2015 Lenders”) in the aggregate amount of $250,000
(the "Original Principal")
. The September 2015 Notes bear interest at 8% per annum and this amount fully accrued upon execution of the loans and added $20,000 to the balance due at Issuance Date. The principal and interest is due and payable in full on September 30, 2016 (“Maturity Date”) with monthly prepayments of 3% of the Original Principal on the fourth through sixth monthly anniversaries of the Issuance Date and monthly prepayments or 10% of the Original Principal on the seventh through eleventh monthly anniversaries of the Issuance Date. The September 2015 Notes included an aggregate $25,000 original issuance discount ("OID") which resulted in net proceeds of $225,000.
The Company has the right to prepay the September 2015 Notes, pursuant to the terms thereof, at any time, provided it pays the then outstanding balance and accrued interest. The September 2015 Notes provide for customary events of default such as failing to timely make payments and the occurrence of certain fundamental defaults, as described in the September 2015 Notes. The interest rate shall be 18% upon the occurrence of an event of default and repayment of the note at an amount equal to 120% of the outstanding principal and interest due. The September 2015 Notes are not secured and are subordinated to senior notes issued by the Company.
As an inducement for the loans, the Company granted the September 2015 Lenders five-year warrant
s
to purchase an aggregate of 3,125,000 shares of our common stock at an exercise price of $0.08 per share valued using a Black-Scholes model at $167,788. The
w
arrants include cashless exercise rights.
At December 31, 2015, the balance on the September 2015 Notes was $125,672, including accrued interest of $20,000 and net of unamortized discounts totaling $125,612 related to the inducement warrants and an unamortized OID of $18,716. During the year ended December 31, 2015, $42,176 of the warrants discount was recorded as an amortization expense and $6,284 of the OIDs were recorded as interest expense. Subsequent to the year ended December 3, 2015, the Company has made timely payment of the payments due on the fourth to sixth monthly anniversaries of Issuance Date.
December 2015 Note:
On December 30, 2015 ("Issuance Date"), subject to a securities purchase agreement we issued a subordinated promissory note (the “December 2015 Note”) to one lender (the “December 2015 Lender”) in the aggregate amount of $110,000 (the "Original Principal"). The December 2015 Note bear interest at 8% per annum and this amount fully accrued upon execution of the loan and added $8,800 to the balance due at Issuance Date. The principal and interest is due and payable in full on December 3, 2016 (“Maturity Date”) and has a re-payment schedule which requires payments of $39,600 respectively on sixth, ninth and twelfth month anniversary dates of Issuance Date. The December 2015 Notes included an aggregate $10,000 original issuance discount ("OID") which resulted in net proceeds of $100,000. The Company has the right to prepay the December 2015 Note, pursuant to the terms thereof, at any time, provided it pays the then outstanding balance and accrued interest. The December 2015 Note provides for customary events of default such as failing to timely make payments and the occurrence of certain fundamental defaults, as described in the December 2015 Note. If there should be occurrence of an event of default, repayment of the note will be due at an amount equal to 120% of the outstanding principal and interest due. The Note is not secured and is subordinated to senior notes issued by the Company and ranks equally with other debt issued by the Company. As an inducement for the loan, the Company issued the December 2015 Lender 500,000 restricted common shares valued at $30,050. At December 31, 2015, the balance on the December 2015 Note was $109,565, including accrued interest of $8,800 and net of unamortized OID of $9,235. During the year ended December 31, 2015, $764 of the OID was recorded as interest expense.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 7 – Short Term Debt and Short Term Debt - Related Party
Short Term Debt - Related Party
Interim Note:
On June 5, 2015 (the “Issuance Date”), the Company issued a $500,000 note (the “Interim Note”) to a corporation affiliated with a director of the Company. This Note was classified as related party debt and had a maturity date of December 5, 2015. The Interim Note required two payments of $250,000 on the three and six month anniversaries of Issuance, allowed for re-payment at any time without penalty, and accrued interest at 12% per annum. 1,700,000 restricted common shares of the Company were issued to the lender as an inducement fee. As security for the Interim Note, the Company’s Chief Executive Officer pledged 3,333,333 shares of the Company (the "Pledge"), which he owns, as security for the Interim Note (the "Pledge Shares"). If the Company had defaulted on the Interim Note, the portion of the Pledge Shares equivalent to the amount due would have been released to re-pay the loan. The Company made early re-payments of $50,000 on June 23, 2015 and $211,556 on August 19, 2015 as full settlement of the first installment of Interim Note, including $11,556 of accrued interest then due; and on November 24, 2015 made early repayment of the second installment totaling $253,534, including $3,534 of accrued interest then due; and on that date the Pledge was dissolved. At December 31, 2015, the balance due on the Interim Note was $nil.
NOTE 8 – Convertible Notes Payable
VDF Note:
On January 28, 2014, we entered into a patent settlement with VDF FutureCeuticals, Inc.("VDF") with respect to a prior action filed by VDF. In connection with the License Agreement and other agreements which formed the settlement, we issued a senior convertible note (the "VDF Note") to VDF, whereby we promised to pay VDF a principal amount equal to the sum of: (i) the aggregate amount of accrued and unpaid license fee payments, plus (ii) accrued interest on the VDF Note. The maturity of the VDF Note is December 31, 2018 unless accelerated pursuant to an event of default or the License Agreement is terminated and all accrued and unpaid obligations under the VDF Note have been paid. Due to its term, the VDF Note is classified as long term debt. Interest on the note is 7% per annum, subject to an adjustment to 12% for events of default. On the maturity date, we must pay VDF all principal, unpaid interest and late charges, if any, and we have the right, subject to certain limitations, to prepay principal at any time and from time to time. The VDF Note is secured through the Pledge and Security Agreement executed with VDF and is senior to any other debt issued by the Company. At any time VDF has the option to convert any principal outstanding on the VDF Note into shares of our common stock at a Conversion Price determined by the terms of the VDF Note. Key terms of the VDF Note include that: (i) VDF is granted an adjustment to the conversion price upon the issuance of shares of our common stock, stock options or other convertible securities; (ii) no indebtedness shall rank senior to the payments due under the VDF Note unless prior written consent of VDF is obtained; and (iii) payments under the VDF Note are secured by a Security Agreement. The VDF Note provides that we may, at our option, roll-over to the VDF Note quarterly $75,000 License fee payments and accrued interest. During the year ended December 31, 2015, we rolled-over License fee payments of $300,000 plus accrued interest for the year $18,481 for a total addition to the VDF Note of $318,481. During the year ended December 31, 2014, we rolled-over License fee payments of $150,000 plus accrued interest for the year of $791 for a total addition to the VDF Note of $150,791. At December 31, 2015, the VDF Note had an outstanding balance $453,298, net of a discount of $15,974 resulting from the embedded derivative; and at December 31, 2014 the outstanding balance was $140,001, net of a discount of $10,790.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 8 – Convertible Notes Payable (continued)
Originally the Conversion Price of the Senior Convertible Note was $0.65 per share. On December 19, 2014, this was adjusted to $0.6163 per share based on our issuance of stock options. On January 20, 2015 the Conversion Price was adjusted to $0.5623 based on our issuance of an unsecured subordinate convertible debenture to a third party; on June 15, 2015 the Conversion Price was adjusted to $0.5572 as the result of re-pricing of warrants issued to a third party; on September 30, 2015 the Conversion Price was adjusted to $0.4536 based on our issuance of a fixed conversion price convertible debenture to a third party, and issuances of warrants and stock to third parties; and on December 31, 2015 the Conversion Price was adjusted to $0.3823 based on our issuance of a fixed conversion price convertible debenture to a third party, and issuances of warrants and stock to third parties.
Subordinate Debenture:
On January 20, 2015, we entered into a convertible debt purchase agreement with a third party, for the issuance of up to $1,100,000 of unsecured subordinated convertible debentures (the “Subordinate Debenture”) maturing 18 months from each issuance date and the Company issued to the lender an Unsecured Subordinate Debenture with a face value principal amount of $440,000 (which includes $40,000 in original issue discount) for $400,000 in cash. Due to its term, the Unsecured Subordinate Debenture was classified as short term debt. The Unsecured Subordinate Debenture was initially valued as having a balance of $207,074, net of a discount of $232,926. The Company determined this note initially had an embedded derivative liability valued at $232,926 due to the convertible note agreement providing for adjustments to the conversion price. On June 5, 2015, the Company redeemed this note and paid the lender a prepayment premium of $68,929, calculated as 15% of face value principal of $400,000 plus accrued interest and OID of $59,529, for a total redemption payment of $528,458. Because there was a derivative liability recorded for this note, the derivative component of the note was marked-to-market at time of redemption and the resulting net loss of $41,182 was recorded at redemption as an amortization expense. $5,788 OID was amortized to interest expense over the life of the note and the repayment of the remaining $34,212 OID was recorded as an interest expense at time of redemption. Repayment of the Unsecured Subordinate Debenture effected a termination of the Convertible Debt Purchase Agreement. This variable rate convertible debenture is now repaid in full and extinguished.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 8 – Convertible Notes Payable (continued)
LPC Note One:
On August 18, 2015,
we
issued a Senior Convertible Note (“LPC Note One”) to
a third party ("LPC")
in the amount of $250,000. LPC Note One was issued pursuant to the terms of a Securities Purchase Agreement and bears interest at the rate of 5% per annum (or 18% upon the occurrence of an event of default). Principal and interest is due and payable in full on December 31, 2016 (the “Maturity Date”).
Due to its term, the Convertible Note is classified as long term debt.
Interest may be paid via issuance of the Company’s common stock if the Company meets certain conditions that would allow the issuance of the Company’s common stock without any trading restrictions. For the period ended December 31, 2015 $4,688 of accrued interest was paid via issuance of 66,964 restricted common shares priced at the Conversion Price of LPC Note One of $0.07 per clause 2(a) of LPC Note One. LPC Note One has a $25,000 original issuance discount ("OID") which resulted in net proceeds of $225,000.
The Company has the right to prepay LPC Note One, pursuant to the terms thereof, at any time, provided it pays a prepayment amount of 120% of the then outstanding balance, accrued interest and interest payable from the date of prepayment to the Maturity Date. LPC Note One provides for customary events of default such as failing to timely make payments and the occurrence of certain fundamental defaults, as described in LPC Note One.
LPC
Note One is not secured and is subordinated to the VDF Note, ranks equally with LPC Note Two, and ranks above other debt issued by the Company. The principal amount of LPC Note One and all accrued interest is convertible at the option of LPC into shares of our common stock at any time at a
fixed C
onversion Price of $0.07 per share, subject to adjustments for stock splits, stock dividends, stock combinations or other similar transactions as provided in LPC Note One.
At no time may LPC Note One be converted into shares of our common stock if such conversion would result in LPC
and its affiliates owning an aggregate of shares of our common stock in excess of 4.99% of the then outstanding shares of our common stock, provided such percentage may increase to 9.99% upon not less than 61 days prior written notice.
As an inducement for the loan, the Company granted LPC a six year warrant to purchase 3,750,000 shares of our common stock at an exercise price of $0.10 per share valued using a Black-Scholes model at $277,014. At issuance date, LPC Note One also included a beneficial conversion feature ("BCF") of $107,143 because the exercise price of LPC Note One was set below the market price of our stock when the note was executed. Since the combined warrant discount and BCF exceeded the face value of the note less OID, the warrant discount for LPC Note One was capped at $117,857, resulting in a total discount of $225,000. Th
is w
arrant has a cashless exercise right.
At December 31, 2015, the recorded balance on LPC Note One was $67,365, net of an unamortized discount of $164,372 and an unamortized OID of $18,263. During the year ended December 31, 2015, $60,628 of the discount was recorded as an amortization expense and $6,737 of the OID was recorded as interest expense.
LPC Note Two:
On November 23, 2015, we issued a Senior Convertible Note (“LPC Note Two”) to a third party ("LPC") in the amount of $300,000. LPC Note Two was issued pursuant to the terms of a Securities Purchase Agreement and bears interest at the rate of 5% per annum (or 18% upon the occurrence of an event of default). Principal and interest is due and payable in full on December 31, 2016 (the “Maturity Date”). Due to its term, the Convertible Note is classified as long term debt. Interest may be paid via issuance of the Company’s common stock if the Company meets certain conditions that would allow the issuance of the Company’s common stock without any trading restrictions. For the period ended December 31, 2015 $1,583 of accrued interest was paid via issuance of 31,667 restricted common shares priced at the Conversion Price of LPC Note Two of $0.05 per clause 2(a) of LPC Note Two. LPC Note Two has a $30,000 original issuance discount ("OID") which resulted in net proceeds of $270,000.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 8 – Convertible Notes Payable (continued)
The Company has the right to prepay LPC Note One, pursuant to the terms thereof, at any time, provided it pays a prepayment amount of 120% of the then outstanding balance, accrued interest and interest payable from the date of prepayment to the Maturity Date. LPC Note Two provides for customary events of default such as failing to timely make payments and the occurrence of certain fundamental defaults, as described in LPC Note Two.
LPC Note
One is not secured and is subordinated to the VDF Note, ranks equally with LPC Note One, and ranks above other debt issued by the Company. The principal amount of LPC Note Two and all accrued interest is convertible at the option of LPC into shares of our common stock at any time at a
fixed C
onversion Price of $0.05 per share, subject to adjustments for stock splits, stock dividends, stock combinations or other similar transactions as provided in LPC Note Two.
At no time may LPC Note Two be converted into shares of our common stock if such conversion would result in LPC
and its affiliates owning an aggregate of shares of our common stock in excess of 4.99% of the then outstanding shares of our common stock, provided such percentage may increase to 9.99% upon not less than 61 days prior written notice.
As an inducement for the loan, the Company granted LPC a six year warrant to purchase 5,000,000 shares of our common stock at an exercise price of $0.07 per share valued using a Black-Scholes model at $253,098. At issuance date, LPC Note Two also included a beneficial conversion feature ("BCF") of $102,600 because the exercise price of LPC Note Two was set below the market price of our stock when the note was executed. Since the combined warrant discount and BCF exceeded the face value of the note less OID, the warrant discount for LPC Note Two was capped at $167,400, resulting in a total discount of $270,000. Th
is w
arrant has a cashless exercise right.
At December 31, 2015, the recorded balance on LPC Note Two was $28,218, net of an unamortized discount of $244,604 and an unamortized OID of $27,178. During the year ended December 31, 2015, $25,396 of the discount was recorded as an amortization expense and $2,822 of the OID was recorded as interest expense.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 9 – Derivatives
In connection with the issuance of debt or equity instruments, the Company may sell options or warrants to purchase our common stock. In certain circumstances, the convertible debt, options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as embedded derivative features which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.
The Company's derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income in the period in which the changes occur. For options, warrants and bifurcated embedded derivative features that are accounted for as derivative instrument liabilities, the Company estimates fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The valuation techniques require assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option.
The following table summarizes the convertible debt derivative activity for the period ending December 31, 2015:
Description
|
|
Convertible
Notes
|
|
Total
|
Fair Value at December 31, 2013
|
$
|
—
|
$
|
—
|
Increase due to issuance of senior convertible debenture
|
|
11,006
|
|
11,006
|
Change in Fair Value
|
|
(1,838)
|
|
(1,838)
|
Fair Value at December 31, 2014
|
$
|
9,168
|
$
|
9,168
|
Increase due to issuance of subordinate convertible debenture
|
|
241,710
|
|
241,710
|
Reduction due to redemption of subordinate convertible debenture
|
|
(274,108)
|
|
(274,108)
|
Change in Fair Value
|
|
35,037
|
|
35,037
|
Fair Value at December 31, 2015
|
$
|
11,807
|
$
|
11,807
|
For the year ended December 31, 2015 the change in the fair market value of the derivative liability of $35,037 was recorded as Other Expense. For the year ended December 31, 2014, the change in the fair market value of the derivative liability of $(1,838) were recorded as Other Income.
The lattice methodology was used to value the derivative liabilities related to the convertible notes, with the following assumptions.
Assumptions:
|
December 31, 2015
|
December 31, 2014
|
|
|
|
Dividend yield
|
0.00%
|
0.00%
|
Risk-free rate for term
|
1.31%
|
1.65%
|
Volatility
|
133%
|
117%
|
Maturity dates
|
3 years
|
4 years
|
Stock Price
|
$0.055
|
$0.141
|
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 10 – Related Party Transactions
During the years ended December 31, 2015 and December 31, 2014, related party transactions included:
Chief Executive Officer, Director, Board Chair
For the year ended December 31, 2015: (i) cash compensation of $130,000; (ii) Black-Scholes expense amortization of $220,960 related to 2,500,000 options granted on December 19, 2014 of which 750,000 vested on June 30, 2015 and 750,000 vested on December 31, 2015; and (iii) the loan of two vehicles by the CEO to the Company for the sole use by two sales staff in return for the Company providing $37,421 toward lease and loan payments on the vehicles. For the year ended December 31, 2014: (i) cash compensation of $130,000; (ii) issuance of 250,499 shares as past services compensation at $0.627 per share, totaling $157,063; (iii) cancelation of December 12, 2013 option grant totaling 1,000,000 unvested options; and (iv) Black-Scholes expense recording and amortization totaling $159,825 related to 2,500,000 options granted on December 19, 2014 (1,000,000 of which vested immediately and 750,000 which vested on each of June 30, 2015 and December 31, 2015).
President and Chief Operating Officer
For the period ended December 31, 2015: (i) cash compensation, including COBRA benefits, of $116,526 for the period from August 10 (employment start date) to December 310, 2015; (ii) issuance on August 10, 2015 of a signing bonus of 1,333,333 restricted common shares at $0.107 per share for aggregate deemed compensation of $142,667; (iii) issuance on October 2, 2015 of 502,283 restricted common shares at $0.078 per share for aggregate deemed compensation of $39,178; and (iv) issuance on December 31, 2015 of 1,262,047 restricted common shares at $0.05448 per share for aggregate deemed compensation of $68,750. At December 31, 2015, the Company had an account payable of $3,156 due to the President & COO for expenses related to the year ended December 3,1 2015. For the year ended December 31, 2014: n/a.
Chief Financial Officer, Secretary and Treasurer
For the year ended December 31, 2015: (i) cash compensation of $125,000; (ii) issuance on April 30, 2015 of 131,579 restricted common shares at a price of $0.19 per share for aggregate deemed compensation of $25,000; (iii) issuance on July 9, 2015 of 320,513 restricted common shares at $0.1102 per share for aggregate deemed compensation of $25,000; (iv) issuance on October 2, 2015 of 320,513 restricted common shares at $0.078 per share for aggregate deemed compensation of $25,000; and (v) issuance on December 31, 2015 of 458,926 restricted common shares at $0.05448 per share for aggregate deemed compensation of $25,000. For the year ended December 31, 2014: (i) cash payment of consulting fees of $22,500 for services provided from January 1 to March 17, 2014; (ii) cash compensation of $76,500 for period from March 18 to December 31, 2014; (ii) issuance on April 15, 2014 of 50,000 shares at $0.80 per share for aggregate deemed compensation of $40,000; (iii) issuance on August 19, 2014 of 25,000 shares at $0.373 per share for aggregate deemed compensation of $9,325; and (iv) Black-Scholes expense recording of $114,236 for 750,000 options granted on December 19, 2014 which vested immediately. Share payments and options grants were executed by issuances to Mr. Dawe's holding company GBG Management Services Inc.
Former Vice-President and Chief Operating Officer
For the year ended December 31, 2015: n/a. For the year ended December 31, 2014: (i) Compensation and termination settlement of $47,613 for period of May 1 to August 14, 2014; and (ii) issuance of 25,000 shares as compensation at $0.62 per share, totaling $15,000.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 10 – Related Party Transactions (continued)
Former Chief Financial Officer, Secretary and Treasurer; spouse of President and CEO
For the year ended December 31, 2015: cash compensation of $3,875 for accounting services. For the year ended December 31, 2014: (i) cash compensation as CFO of $23,175 from January 1 to March 17, 2014; (ii) cash compensation as employee of $20,325 for period from March 18 to December 31, 2014; (iii) cancelation of December 12, 2013 option grant of 1,000,000 options which fully vested on grant date; and (v) Black-Scholes expense recording of $152,314 for 1,000,000 options granted on December 19, 2014 which vested immediately.
(Currently serving) Director; (former) Chief Scientific Officer
For the year ended December 31, 2015: cash compensation or $4,000 for consulting services. For the year ended December 31, 2014: (i) Payment of $60,000 as the final installment of CSO contract buy-out negotiated during fiscal 2013; (ii) issuance of 83,167 shares for past services compensation as director at $0.627 per share, totaling $51,146; (iii) cancelation of December 12, 2013 option grant totaling 1,000,000 unvested options; and (iv) Black-Scholes expense recording of $152,314 for 1,000,000 options granted on December 19, 2014 which vested immediately.
Independent Director One:
For the year ended December 31, 2015: payment of $19,447 as interest and issuance of 1,700,000 restricted common shares at $0.1402/share as an inducement fee of $238,340 for a short term loan of $500,000 to the Company. For the year ended December 31, 2014: (i) issuance of 83,167 shares for past services compensation as director at $0.627 per share, totaling $51,146; (ii) cancelation of January 7, 2014 option grant totaling 750,000 options; and (iii) Black-Scholes expense recording of $114,236 for 750,000 options granted on December 19, 2014 which vested immediately.
Independent Director Two:
For the year ended December 31, 2015: $39,600 of revenue was derived from product sales to a company owned by Independent Director Two and at December 31, 2015 the Company had an account receivable due of $18,000 related to these sales. For the year ended December 31, 2014: (i) issuance of 83,167 shares for past services compensation as director at $0.627 per share, totaling $51,146; (ii) Black-Scholes expense recording of $114,236 for 750,000 options granted on December 19, 2014 which vested immediately; and (iii) $35,947 of revenue was derived from product sales to a company owned by Independent Director Two and at December 31, 2014 the Company had an account receivable due of $3,600 related to these sales.
At December 31, 2015 and December 31, 2014, the Company had related party accounts payable of $nil and $nil, respectively; and shareholder loans of $nil and $nil, respectively.
NOTE 11 – Equity
Overview:
Our authorized capital stock consists of 877,500,000 shares of common stock, with a par value of $0.001 per share; and 10,000 shares of preferred stock at a par value of $0.001. The holders of common stock have dividend rights, liquidation rights and voting rights of one vote for each share of common stock. There are no preferred shares issued and outstanding and the terms of any future preferred shares issuances will be as determined by the Board of Directors. As of December 31, 2015, there were 108,769,514 shares of our common stock issued and outstanding.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – Equity (continued)
2015 Share Transactions
On February 6, 2015 we issued 600 restricted common shares at $0.0752 per share to an employee ("Employee One") for compensation. These share issuances were issued based on market close price on issue date for deemed payments totaling of $45. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On February 6, 2015, we issued 11,000 restricted common shares at $0.0752 per share to a professional athlete ("Ambassador One") for endorsement services rendered. These shares were issued at market close price on issue date for deemed compensation of $827. These shares were issued to US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On April 30, 2015 we issued 131,579 restricted common shares at $0.19 per share as compensation to our CFO. These shares were valued per terms of his compensation agreement for aggregate deemed compensation totaling $25,000. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.
On May 1, 2015, we issued 300,000 restricted common shares to a third party for professional services rendered, such issuance which was valued at $0.20 per share for a deemed aggregate proceeds of $60,000, such grant being valued based on market close price on issue date. These shares were issued to one U.S. person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On June 5, 2015, we issued 1,700,000 restricted common shares valued market close price on date of issue at $0.1402 for aggregate deemed proceeds of $238,340 to a related party as a fee for a loan to the Company. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.
On June 9, 2015 we issued 1,200 restricted common shares at $0.14 per share to Employee One for compensation. These share issuances were issued based on market close price on issue date for deemed payments totaling of $168. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – Equity (continued)
2015 Equity Line:
On June 16, 2015, we entered into a $10,250,000 purchase agreement (the "2015 Purchase Agreement") and registration rights agreement (the "2015 Registration Rights Agreement") (collectively the "2015 Equity Line") with an Illinois limited liability company ("LPC"). As part of the 2015 Equity Line, on June 15, 2015, the Company amended a warrant which had been issued to LPC on January 27, 2014, to modify the exercise price from $0.65 to $0.15. The fair value of this warrant re-pricing was calculated based on the difference between Black Scholes option pricing model valuations on original grant date of January 27, 2014 and re-pricing date of June 15, 2015. This expense was recorded as a loss on equity modification of $41,753, with an offset to additional paid in capital. Upon signing the 2015 Purchase Agreement, LPC purchased 1,666,667 shares of our common stock at $0.15 per share for proceeds of $250,000 as an initial purchase under the agreement. These shares were issued to a U.S. person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended. Subsequently, under the terms of the 2015 Registration Rights Agreement, we filed a Registration Statement on Form S-1 with the U.S. Securities and Exchange Commission (“SEC”) covering the initially issued shares and subsequent shares that may be issued to LPC. This Form S-1 was filed on July 6, 2015 and was deemed Effective by the SEC on July 16, 2015. Under the 2015 Equity Line we have the right, in our sole discretion, over a 30-month period to sell up to an additional $10 million of our common stock to LPC in amounts from up to 150,000 shares per sale to up to 350,000 shares per sale, depending on certain conditions as set forth in the 2015 Purchase Agreement. There are no upper limits to the price LPC may pay to purchase our common stock and the purchase price of shares of Common Stock sold pursuant to the 2015 Purchase Agreement will be based on prevailing market prices of our Common Stock at the time of sales without any fixed discount, and the Company will control the timing and amount of any sales of Common Stock to LPC. In addition, the Company may direct LPC to purchase additional amounts as accelerated purchases if on the date of a regular purchase the closing sale price of the Common Stock is not below the threshold price as set forth in the 2015 Purchase Agreement. LPC shall not have the right nor the obligation to purchase any shares of our common stock on any business day that the price of our common stock is below the floor price as set forth in the 2015 Purchase Agreement. The 2015 Equity Line may be terminated by us at any time at our discretion without any monetary cost to us. The 2015 Purchase Agreement contains customary representations, warranties, covenants, closing conditions and indemnification and termination provisions by, among and for the benefit of the parties. LPC has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company’s shares of common stock. In consideration for entering into the 2015 Equity Line, we issued to LPC 2,666,667 shares of our common stock as a commitment fee and may issue up to an additional 666,666 shares as commitment fees pro rata if and when we sell to LPC up to an additional $10 million of our common stock. The 2015 Equity Line may be terminated by us at any time at our discretion without any monetary cost to us. Actual sales of shares of Common Stock to LPC under the 2015 Equity Line will depend on a variety of factors to be determined by the Company from time to time, including (among others) market conditions, the trading price of the Common Stock and determinations by the Company as to available and appropriate sources of funding for the Company and its operations. During the period ended December 31, 2015 we issued 8,550,000 sale shares and 41,989 per sale commitment shares under the 2015 Equity Line for aggregate cash proceeds of $629,850. Proceeds received by the Company are used for general corporate purposes.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – Equity (continued)
On June 30, 2015, 1,666,667 shares of restricted common shares were issued to investor, unrelated to LPC, under a securities purchase agreement dated June 30, 2015 at a price of $0.06 per share for aggregate proceeds of $100,000. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended. These shares were included in the Registration Statement on Form S-1 filed on July 6, 2015,which was made Effective by the SEC on July 16, 2015.
On July 6, 2015, we issued 6,025 restricted common shares at $0.1188 per share to Ambassador One for professional athlete endorsement services rendered. These shares were issued at market close price on issue date for deemed compensation of $716. These shares were issued to US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On July 9, 2015 we issued 226,860 restricted common shares at $0.1102 per share as compensation to our CFO. These shares were valued per terms of his compensation agreement for aggregate deemed compensation totaling $25,000. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.
On August 11, 2015, we issued 1,333,333 restricted common shares to our new President & Chief Operating Officer at $0.107. These shares were valued based on market close price on issue date for deemed proceeds of $142,667. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On September 15, 2015, we issued 1,000 restricted common shares at $0.075 per share to Employee One for compensation. These share issuances were issued based on market close price on issue date for deemed payments totaling of $75. These shares were issued to US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On September 18, 2015, we issued 26,000 restricted common shares at $0.0901 per share to a consultant for services rendered. These share issuances were issued based on market close price on issue date for deemed payments totaling of $2,343. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On September 24, 2015, we issued 12,500 restricted common shares at $0.0829 per share to a professional athlete ("Ambassador Two") for endorsement services rendered. These share issuances were issued based on market close price on issue date for deemed payments totaling of $1,036. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – Equity (continued)
On September 30, 2015, we issued 9,000 restricted common shares at $0.078 per share to Ambassador One for endorsement services rendered. These share issuances were issued based on market close price on issue date for deemed payments totaling of $702. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On September 30, 2015, we issued 50,000 restricted common shares at $0.078 per share to a consultant for services rendered. These share issuances were issued based on market close price on issue date for deemed payments totaling of $3,900. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On September 30, 2015 we issued 320,513 restricted common shares at $0.078 per share as compensation to our CFO. These shares were valued per terms of his compensation agreement for aggregate deemed compensation totaling $25,000. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.
On September 30, 2015 we issued 502,283 restricted common shares at $0.078 per share as compensation to our President & COO. These shares were valued per terms of his compensation agreement for aggregate deemed compensation totaling $39,178. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended..
On October 20, 2015, we issued 348,472 restricted common shares at an agreed price of $0.0699 per share for aggregate deemed compensation of $24,358 to a beverage distributor per terms of a services agreement. These shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On October 21, 2015, we issued 1,381,025 restricted common shares at a contractually agreed price of $0.07241 per share for aggregate deemed compensation of $100,000 to a service provider ("Service Provider") for services rendered. These shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On October 27, 2015, we issued 2,000,000 restricted common shares at a contractually agreed price of $0.068 per share for aggregate deemed compensation of $136,000 to Service Provider for services rendered. These shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – Equity (continued)
On December 3, 2015, we issued 500,000 restricted common shares valued market close price on date of issue at $0.0601 for aggregate deemed proceeds of $30,050 to a lender as a fee for a loan to the Company. These shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On December 8, 2015, we issued to LPC: (a) 66,964 restricted common shares valued at the LPC Note One Conversion Price of $0.07 for interest of $4,688 accrued on LPC Note One to December 31, 2015; and (b) 31,667 restricted common shares valued at the LPC Note Two Conversion Price of $0.05 for interest of $1,583 accrued on LPC Note Two to December 31, 2015. These shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On December 31, 2015 we issued 458,926 restricted common shares at $0.05448 per share as compensation to our CFO. These shares were valued per terms of his compensation agreement for aggregate deemed compensation totaling $25,000. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.
On December 31, 2015 we issued 1,262,047 restricted common shares at $0.05448 per share as compensation to our President & COO. These shares were valued per terms of his compensation agreement for aggregate deemed compensation totaling $68,750. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended..
2014 Share Transactions
On January 27, 2014, we issued 1,818,182 units to two investors in a non-brokered private placement, at a purchase price of $0.55 per unit for gross proceeds of $1,000,000. Each unit consisted of one share of our common stock and one non-transferable common share purchase warrant, with each warrant entitling the holder to acquire one additional share of our common stock at a price of $0.65 per share for a period of six years. We issued: (i) 681,818 of these units to one non-US person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in an offshore transaction in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended; and (ii) 1,136,364 of these units to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these units to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended. Pursuant to the securities purchase agreements with each investor, we also agreed to file a Form S-1 registration statement related to the transaction with the SEC covering the shares underlying the units (excluding shares issuable upon exercise of the warrants); such Form S-1, which also included shares related to our Equity Line (detailed below), was filed and subsequently deemed Effective by the SEC on May 8, 2014.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – Equity (continued)
2014 Equity Line:
On February 3, 2014, we entered into an Equity Line Agreement and a Registration Rights Agreement with an Illinois limited liability company ("LPC"), pursuant to which we have the right to sell to LPC up to $12,000,000 in shares of our common stock, subject to certain limitations set forth in the 2014 Equity Line Agreement. The Term of the 2014 Equity Line was thirty months and shares under the 2014 Equity Line were registered with the SEC in a Form S-1 which was deemed Effective on May 8, 2014. The 2014 Equity Line is no longer effective due to our stock being below the floor price and because the Form S-1 has now become stale. In consideration for entering into the Equity Line Agreement, we issued LPC 872,727 common shares as a commitment fee and could issue up to 218,182 additional shares on a per share basis. During the year ended December 31, 2014, we issued 30,906 additional commitment shares during 17 transactions. The cost of the 903,633 shares issued for 2014 Equity Line underwriting fees were recorded as an addition of $904 to common stock and a subtraction of $904 from Additional Paid in Capital. During the year ended December 31, 2014 we issued 3,697,889 shares under the Equity Line for aggregate proceeds of $1,700,001.
On April 14, 2014, we issued 50,000 restricted shares at $0.80 closing market price per share to a consultant ('CFO consultant') for aggregate deemed compensation totaling $40,000. These shares were issued to one non-US person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.
On May 1, 2014, 25,000 restricted common shares were issued to our former Vice President & Chief Operating Officer as a signing bonus at a price of $0.62 per share based on market close price on issue date, for aggregate deemed compensation of $15,500. These shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On May 22, 2014 KonaRed Corporation filed a Form S-8 Registration Statement to register a total of 4,000,000 shares with the SEC to be used for director, officer and employee compensation share issuances. An initial group of these shares (the "Award Shares") were then separately registered under the Securities Act, by filing on June 4, 2014, as amended, a Post-Effective amendment
to the Form S-8 Registration Statement which contained a re-offer prospectus in reference to the Award Shares. Allocation of the Award Shares included a compensation bonus of 250,499 shares to our CEO and 83,167 Award Shares to each of our three other directors at a price of $0.627 per share
based on market close price on issue date
,
for aggregate deemed compensation for past services of $313,500.
On August 19, 2014, we issued 25,000 restricted shares at $0.373 closing market price per share to CFO consultant for aggregate deemed compensation totaling $9,325. These shares were issued to one non-US person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.
On October 1, 2014, 50,000 restricted common shares were issued to an employee for prior services rendered at a price of $0.3449 based on market close price on issue date for deemed compensation of $17,245. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – Equity (continued)
On October 1, 2014, 7,400 restricted common shares were issued to Employee One for prior services rendered at a price of $0.3449 based on market close price on issue date for deemed compensation of $2,552. These shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On October 21, 2014, we issued 352,759 restricted common shares at a contractually agreed price of $0.2835 per share for aggregate deemed compensation of $100,000 to a service provider ("Service Provider") for services rendered. These shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On December 1, 2014, we issued 2,000,000 restricted common shares at $0.251 closing market price for aggregate deemed compensation of $502,000 to Service Provider for services rendered. These shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On December 31, 2014, we issued 1,700,000 restricted common shares at $0.141 closing market price for aggregate deemed compensation of $239,700 to Service Provider for services rendered. These shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
Warrants
2015
On June 15, 2015, as part of the 2015 Equity Line the Company amended 1,136,364 warrants (the "January 27, 2014 Warrants") which had been issued to LPC on January 27, 2014, to modify the exercise price from $0.65 to $0.15. None of these warrants have yet been exercised. The fair value of this warrant re-pricing was calculated based on the difference between Black Scholes option pricing model valuations on original grant date of January 27, 2014 and re-pricing date of June 15, 2015. This expense was recorded as a loss on equity modification of $41,753, with an offset to additional paid in capital.
On August 18, 2015, as an inducement for execution of LPC Note #1, the Company granted LPC six year warrants (the "August 18, 2015 Warrants") to purchase 3,750,000 shares of restricted common stock at an exercise price of $0.10 per share. Because these warrants are related to issuance of debt, the value of the warrant was required to be recorded as a discount to LPC Note #1 with an offset to additional paid in capital. The original costing of the warrants using a Black-Scholes option pricing model was $277,014, but this amount was reduced to a discount of $117,857 based on the net amount of the face value of the LPC Note #1 of $250,000, less the OID of $25,000, less the BCF of $107,143. These warrants include a cashless exercise right and have the same ownership limitation included in LPC Note #1. None have yet been exercised.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – Equity (continued)
On September 30, 2015, as an inducement for execution of the September 2015 Notes, the Company granted the September 2015 Lenders five-year warrant
s
(the "September 30, 2015 Warrants") to purchase an aggregate of 3,125,000 shares of our common stock at an exercise price of $0.08 per share. These warrants include cashless exercise rights and none have yet been exercised. Because these warrants were related to issuance of debt, the value of the warrants based on a Black-Scholes option pricing model was required to be recorded as a discount of $167,788 to the September 2015 Notes with an offset to additional paid in capital.
On November 23, 2015, as an inducement for execution of LPC Note #2, the Company granted LPC six year warrants (the "November 23, 2015 Warrants") to purchase 5,000,000 shares of restricted common stock at an exercise price of $0.07 per share. Because these warrants are related to issuance of debt, the value of the warrants was required to be recorded as a discount to LPC Note #2 with an offset to additional paid in capital. The original costing of the warrants using a Black-Scholes option pricing model was $253,098, but this amount was reduced to a discount of $167,400 based on the net amount of the face value of the LPC Note #1 of $300,000, less the OID of $30,000, less the BCF of $102,600. The
se w
arrants include a cashless exercise right and has the same ownership limitation included in LPC Note #2. None have yet been exercised.
2014
On January 27, 2014, we issued 681,818 units to an investor in a non-brokered private placement at a purchase price of $0.55 per unit for gross proceeds of $375,000. Each unit was comprised of one common share and one six year warrant exercisable into one common share at a price of $0.65 per share. None of these warrants have yet been exercised.
On January 27, 2014, we issued 1,136,364 units to LPC in a non-brokered private placement at a purchase price of $0.55 per unit for gross proceeds of $625,000. Each unit was comprised of one common share and one six year warrant exercisable into one common share at a price of $0.65 per share. None of these warrants have yet been exercised. As referenced in the above information regarding 2015, on June 15, 2015, as part of the 2015 Equity Line the Company amended 1,136,364 warrants which had been issued to LPC on January 27, 2014, to modify the exercise price from $0.65 to $0.15.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – Equity (continued)
The fair valuations for warrants which were required to be valued were done on date of grant using a Black Scholes option pricing model with the following assumptions:
Warrant
|
Risk free
rate*
|
Dividend
yield
|
Volatility
period
|
Volatility
rate
|
Estimated
life
|
Exercise
Price
|
Grant Date
Stock price
|
|
|
|
|
|
|
|
|
November 23, 2015 Warrants
|
0.85%
|
0.0%
|
2.0 years
|
89%
|
6.0 years
|
$0.17
|
$0.17
|
September 30, 2015 Warrants
|
1.37%
|
0.0%
|
2.0 years
|
89%
|
5.0 years
|
$0.08
|
$0.08
|
August 18, 2015 Warrants
|
1.78%
|
0.0%
|
2.0 years
|
89%
|
6.0 years
|
$0.10
|
$0.10
|
January 27, 2014 Warrants (re-priced)
|
1.56%
|
0.0%
|
2.0 years
|
91%
|
4.65 years
|
$0.15
|
$0.14
|
January 27, 2014 Warrants (original)
|
1.56%
|
0.0%
|
2.0 years
|
91%
|
4.65 years
|
$0.65
|
$0.14
|
October 4, 2013 Warrants
|
1.40%
|
0.0%
|
5 years
|
429%
|
1.5 years
|
$0.65
|
$0.65
|
*(based on US Treasury Constant Maturities matching estimated life)
The following table summarizes the Company’s warrant activity for the years ended December 31, 2015 and December 31, 2014:
|
Number of
Warrants
|
|
Weighted-Average
Exercise Price
|
Weighted-Average Remaining Term
(in years)*
|
|
Intrinsic
Value**
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
3,966,666
|
$
|
0.65
|
2.79
|
$
|
Nil
|
January 27, 2014 - Granted with Units
|
1,818,182
|
|
0.65
|
4.08
|
|
Nil
|
Outstanding at December 31, 2014
|
5,784,848
|
$
|
0.63
|
3.20
|
$
|
Nil
|
August 18, 2015 - Granted for loan fee
|
3,750,000
|
|
0.10
|
5.64
|
|
Nil
|
September 30, 2015 - Granted for loan fee
|
3,125,000
|
|
0.08
|
4.75
|
|
Nil
|
November 23, 2015 - Granted for loan fee
|
5,000,000
|
|
0.07
|
5.90
|
|
Nil
|
Outstanding at December 31, 2015
|
17,659,848
|
$
|
0.24
|
4.76
|
$
|
Nil
|
* (remaining term as of December 31, 2015)
**(intrinsic value based on the closing share price of $0.055 on December 31, 2015)
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – Equity (continued)
Options:
On November 25, 2013, the Company issued 250,000 three year options (the "November 25, 2013 Options") to purchase 250,000 restricted shares of common stock to a consultant ("Consultant") for past services rendered. The options vested immediately and are exercisable at $0.70 per share. The cost of these options was recorded as $173,806 at November 25, 2013 using a Black-Scholes option pricing model based on inputs shown in the table below.
On December 12, 2013, the Company adopted an incentive stock option plan (the "Stock Option Plan"). The Stock Option Plan allows for the issuance of up to 11,000,000 options to acquire 11,000,000 restricted shares of the Company's common stock, with a maximum exercise period of ten years, to be granted to eligible employees, officers, directors, and consultants. On December 12, 2013 3,000,000 options were granted under the Stock Option Plan to directors and officers of the Company.
With respect to the options granted on December 12, 2013, for the years ended December 31, 2013 and December 31, 2014 Black-Scholes valuation costs were recorded as follows: (a) service period amortization of $47,141 for 2013 for 1,000,000 five year options granted to CEO exercisable at $0.45 per share with vesting after October 4, 2014 if the share price of the Company was above $1.00 per share; (b) service period amortization of $47,141 for 2013 for 1,000,000 five year options granted to (former) CSO ("Director One") exercisable at $0.45 per share with vesting after October 4, 2014 if the share price of the Company was above $1.00 per share; (c) expensing of $732,886 in 2013 for 1,000,000 five year options granted to (former) CFO exercisable at $0.74 per share which vested immediately. On December 19, 2014, all of above options grants were cancelled with the consent of the grantees.
Due to the cancellation on December 19, 2014 of the unvested options which had been granted to the CEO and former CSO on December 12, 2013 and the 750,000 vested options which had been granted to Director Two on January 7, 2014, prior Black-Scholes expenses for these options were reversed for the year ended December 31, 2014.
On December 19, 2014, 6,750,000 options (the "December 19, 2014 Options") were granted under the Stock Option Plan. Black-Scholes valuation costs for these options were recorded as follows based on the input factors detailed in the table below: (1) During the year ended December 31, 2014: (a) expensing of $152,314 for 1,000,000 five year options granted to CEO exercisable at $0.17 per share which vested immediately; (b) 2014 service period amortization of $7,511 for 1,500,000 options granted to CEO exercisable at $0.17 per share of which 750,000 vest on June 30, 2015, and 750,000 vest on December 31, 2015; (c) expensing of $152,314 each for individual grants of 1,000,000 five year options each granted to Director One and Employee exercisable at $0.17 per share which vested immediately; (d) expensing of $114,236 each for individual grants of 750,000 five year options each granted to Director Two, Director Three, and CFO exercisable at $0.17 per share which vested immediately; and (2) During the year ended December 31, 2015: $220,960 for 2015 service period amortization for 1,500,000 options granted to CEO December 19, 2014 of which 750,000 vested on June 30, 2015; and 750,000 of which vested on December 31, 2015.
The expensing and amortization of all options grants have been credited to Additional Paid-In Capital.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – Equity (continued)
The fair valuations for outstanding options were done on date of grant using a Black Scholes option pricing model with the following assumptions:
Option
|
Risk free rate*
|
Dividend yield
|
Volatility period
|
Volatility
rate
|
Estimated life
|
Exercise
Price
|
Grant Date Stock price
|
|
|
|
|
|
|
|
|
December 19, 2014 Options
|
0.85%
|
0.0%
|
2.5 years
|
205%
|
2.5 years
|
$0.17
|
$0.17
|
November 25, 2013 Options
|
0.57%
|
0.0%
|
3 years
|
34%
|
1.0 years
|
$0.70
|
$0.72
|
*(based on US Treasury Constant Maturities matching estimated life)
A summary of changes in outstanding stock options for the year ended December 31, 2015 and December 31, 2014 is as follows:
|
Number of
Options
|
|
Weighted-Average
Exercise Price
|
Weighted-Average Remaining
Contractual Term
(in years)*
|
|
Intrinsic
Value**
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
3,250,000
|
$
|
0.90
1
|
0.70
1
|
$
|
-
|
January 7, 2014 – Grant to director
|
750,000
|
|
-
|
-
|
|
-
|
December 19, 2014 - Cancellations
|
(3,750,000)
|
|
-
|
-
|
|
-
|
December 19, 2014 - Grants to directors, officers and employee
|
6,750,000
|
|
0.17
|
4.97
|
|
nil
|
Outstanding at December 31, 2014
|
7,000,000
|
$
|
0.19
|
3.86
|
$
|
-
|
(no option issuances were made in 2015)
|
-
|
|
-
|
-
|
|
-
|
Outstanding at December 31, 2015
|
7,000,000
|
$
|
0.19
|
3.86
|
$
|
-
|
* (remaining term as of December 31, 2015)
**(intrinsic value based on the closing share price of $0.055 on December 31, 2015)
1
(Weighted average price and term for 2013 Outstanding Balance is based on 250,000 non-cancelled options issued in 2013)
The following table summarizes information about the options outstanding at December 31, 2015:
|
|
Options Outstanding
|
|
Options Exercisable
|
Exercise
Prices
|
|
Options
Outstanding
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value**
|
Weighted
Average
Remaining Contractual Life (years)*
|
|
Options
Outstanding
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value**
|
Weighted
Average
Remaining Contractual Life (years)*
|
|
|
|
|
|
|
|
|
|
|
|
$0.70
|
|
250,000
|
$0.70
|
$nil
|
0.90
|
|
250,000
|
$0.70
|
$nil
|
0.90
|
$0.17
|
|
6,750,000
|
$0.17
|
$nil
|
3.97
|
|
6,750,000
|
$0.17
|
$nil
|
3.97
|
Totals
|
|
7,000,000
|
$0.19
|
$nil
|
3.86
|
|
7,000,000
|
$0.19
|
$nil
|
3.86
|
* (remaining term as of December 31, 2015)
**(intrinsic value based on the closing share price of $0.055 on December 31, 2015)
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – Commitments and Contingencies
Lease
Our company shares a lease for a 10,000 square foot facility in San Clemente, California, with Malie, Inc., (“Malie”) a company owned by our CEO and his spouse, who is the CEO of Malie. The current lease has a term of June 1, 2014 to May 31, 2016 and presently requires total lease payments of $10,139 per month, of which the Company's portion is $7,790 per month. On February 25, 2016, the Company and Malie extended the lease for an additional 24 month term and committed to total lease payments of $10,466 for June 1, 2016 to May 31, 2017 and $10,793 for June 1, 2017 to May 31, 2018. The Company's portion of payments under the extended term arrangements are $6,461 for June 1, 2016 to May 31, 2017 and $6,663 for June 1, 2017 to May 31, 2018. For the year ended December 31, 2015 our Company paid a total of $92,479 (averaging $7,707 per month) of the total lease expense of $120,360 (averaging $10,030 per month). For the year ended December 31, 2014, our Company paid a total $90,471 (averaging $7,539 per month) of the total lease expense of $117,744 (averaging $9,812 per month).
Total remaining commitments due under the lease include:
Year
|
Amount
|
2016
|
$123,957
|
2017
|
$127,227
|
2018
|
$53,965
|
2019 and thereafter
|
$Nil
|
Litigation
On December 30, 2015, our former beverage distributor, Splash Beverage Group ('SBG'), filed the following action in Broward County Circuit Court, Florida: Splash Beverage Group, Inc. v. KonaRed Corporation Case No. 15-022541 CACE 09 regarding the Company's cancellation of the beverage distribution agreement ("CDA") and the sales and marketing agreement ('SMA") the parties had executed on April 23, 2014. The Company had cancelled the SMA on September 16, 2015 and the CDA on September 23, 2015. The Company believes SBG's allegations are both factually and legally unfounded and the likelihood of a material loss in this matter is considered to be remote and any damages the Company may pay are not currently estimable.
On September 22, 2015 we settled a claim from two related parties that a service provider engaged by SBG to provide social media postings services to the Company had violated the copyrights of two related clients regarding certain pictures used by the service provider. We had received this claim on March 27, 2015 and settled the matter for a net payment of $75,000, of which the Company's insurance providers paid $59,000 and the company paid $16,000.
Various lawsuits, claims and other contingencies arise in the ordinary course of the Company’s business activities. As of the date of these financial statements, other than the aforementioned contingency we know of no threatened or pending lawsuits, claims or other similar contingencies.
VDF Agreements
On January 28, 2014 we entered into a coffee fruit patent license, Coffeeberry
®
trademark license and raw materials supply agreement (the "License Agreement") with VDF FutureCeuticals, Inc. ("VDF"). This arrangement included a settlement agreement (the "Settlement Agreement") and is structured on a series of agreements to settle claims asserted by and against the parties with respect to an action filed by VDF against our predecessor company SITC; and resolve a petition for cancellation of certain trademark registrations filed by SITC. Copies of the agreements which formed the settlement were included with our filing of a Current Report on Form 8-K on February 3, 2014. A summary of each agreement is as follows:
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – Commitments and Contingencies (continued)
1. Settlement Agreement
Under the Settlement Agreement the parties mutually filed voluntary dismissals with respect to the foregoing claim and petition for cancelation. The parties released each other from liability arising or accruing prior to January 28, 2014 for past monetary damages for any patent infringements and all other claims that the parties brought or could have brought prior to January 28, 2014. In addition, our Company agreed to formally abandon all pending patent applications directed to coffee berries or coffee berry technology and cancel with prejudice all trademark proceedings.
2. License Agreement
The License Agreement comprises a coffee fruit patent license, Coffeeberry
®
trademark license and raw materials supply agreement. The key elements include:
(a) Patents and Trademark License
In exchange for our ongoing compliance with certain Alternative Minimum Payments and royalties (and the terms and conditions related to raw materials discussed below), VDF granted us a non-exclusive, non-transferrable, non-sublicensable license to use and practice certain VDF patent rights and a non-exclusive license to use certain VDF trademarks and trademark rights.
(b) Raw Materials
VDF will supply us with raw materials. We are also permitted to have raw materials manufactured by a third party (subject to some limitations) solely for the use in the products that we sell. Additionally, we must share with VDF all details of certain input raw materials.
The License Agreement requires us to make quarterly payments, which may be a base amount (an "Alternative Minimum Payment", or "AMP"), or be grossed up to a higher amount subject to our use of rights under the License. The amount and schedule for the remaining AMPs is as follows:
Three Month Period Ended
|
Due Date
|
Amount
|
|
|
|
March 31, 2016
|
May 15, 2016
|
$75,000
|
June 30, 2016
|
August 14, 2016
|
$100,000
|
September 30, 2016
|
November 14, 2016
|
$100,000
|
December 31, 2016
|
February 14, 2017
|
$100,000
|
March 31, 2017
|
May 15, 2017
|
$100,000
|
June 30, 2017
|
August 14, 2017
|
$100,000
|
September 30, 2017
|
November 14, 2017
|
$100,000
|
December 31, 2017
|
February 14, 2018
|
$100,000
|
March 31, 2018
|
May 15, 2018
|
$100,000
|
June 30, 2018
|
August 14, 2018
|
$125,000
|
September 30, 2018
|
November 14, 2018
|
$125,000
|
December 31, 2018
|
February 14, 2019
|
$125,000
|
March 31, 2019
|
May 15, 2019
|
$125,000
|
Each quarter end thereafter
|
45 days after each quarter end
|
$150,000
|
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – Commitments and Contingencies (continued)
AMP's are due forty five days after the end of each reporting period and we may rollover AMPs to the VDF senior convertible note (the "VDF Note"). During the year ended December 31, 2015, we rolled over four AMPs to VDF Note and during the year ended December 31, 2014, we made one cash license payment and rolled over three AMPs to the VDF Note.
3. VDF Note
The VDF Note is a senior convertible note with a maturity date of December 31, 2018. Payment requirements are accelerated: (i) pursuant to an event of default; or (ii) if the License Agreement is terminated. Interest on the Senior Convertible Note is 7% per annum, subject to adjustment to 12% for events of default. On the maturity date, we must pay VDF all principal, unpaid interest and late charges, if any, and we have the right, subject to certain limitations, to prepay principal at any time and from time to time. No indebtedness of our company shall rank senior to the payments due under the VDF Note unless prior written consent of VDF is obtained; and payments under the note are secured by the Security Agreement as described below. At any time and at the option of VDF, any principal outstanding under the VDF Note may be converted into restricted common shares of the Company based on the terms of the VDF Note. As described above in Note 8 - Long Term Debt, the conversion price of the VDF Note is presently $0.3823 per share.
4. Pledge and Security Agreement
Under the Pledge and Security Agreement, we pledged collaterally assigned and granted to VDF a security interest in all of our right, title and interest, whether now owned or hereafter acquired, in and to our Company’s property to secure the prompt and complete payment and performance of obligations existing under any of the agreements.
5. Warrant
We issued VDF a warrant (the "VDF Warrant") entitling VDF, from any time after the occurrence of a Warrant Exercise Event until the fifteenth anniversary of the issuance of the VDF Warrant, to purchase from our Company, shares of our common stock representing ten percent (10%) of our fully diluted outstanding shares of common stock at a purchase price of $0.001 per share. A Warrant Exercise Event comes into being if any of the following events occur:
i.
|
our Company reports $25,000,000 or more of gross sales in any fiscal year in our audited financial
statements for such fiscal year;
|
ii.
|
our Company has a class of securities listed for trading on the New York Stock Exchange, the
American Stock Exchange or NASDAQ;
|
iii.
|
our Company maintains an aggregate market capitalization of our company’s outstanding capital
stock of at least $125,000,000 for twenty (20) consecutive trading days based on the closing prices
for the shares of our common stock as reported on the OTC Bulletin Board; or
|
iv.
|
our Company has a change of control as defined in the VDF Warrant.
|
No circumstances have yet occurred which classify as a Warrant Exercise Event and therefore there is no right in place for VDF to exercise the VDF Warrant.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – Commitments and Contingencies (continued)
6. Registration Rights Agreement
Under the Registration Rights Agreement we granted VDF, or an assignee, demand registration rights and incidental registration rights with respect to: (i) any shares of our common stock issued upon conversion of the VDF Note; (ii) any shares of our common stock issued upon exercise of the VDF Warrant; and (iii) any shares of our common stock acquired by VDF or an assignee from our Company after the date of the Registration Rights Agreement upon exercise or conversion of other convertible securities that are acquired by VDF or an assignee from our Company after the date of the Registration Rights Agreement. Pursuant to VDF’s demand registration right, at any time or from time to time, a holder or holders holding a majority of registrable securities then outstanding may require our Company to use our best efforts to effect the registration under the Securities Act of 1933, as amended, of all or part of their respective registrable securities (subject to any limits that may be imposed by the Securities and Exchange Commission pursuant to Rule 415 under the Securities Act), by delivering a written request to our company. In addition to the registration rights granted to VDF, there are restrictions on our granting of registration rights to other parties.
7. Investor Rights Agreement
Under the Investor Rights Agreement VDF has the right to designate that number of nominees to our board of directors such that the total number of directors designated by VDF is in proportion to its percentage ownership of the outstanding voting power of the Company. 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.
NOTE 13 – 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
|
%
|
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 13 – Income Taxes (continued)
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
|
|
|
$
|
—
|
|
|
|
$
|
(16,632,964
|
)
|
|
|
|
|
|
$
|
(5,821,537
|
)
|
|
$
|
5,821,537
|
|
|
$
|
—
|
|
The total valuation allowance for the year ended December 31, 2015 is $5,821,537 which increased by $839,059 for the year ended December 31, 2015.
As of December 31, 2015 and December 31, 2014, 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, 2015 and December 31, 2014 and no interest or penalties have been accrued as of December 31, 2015 and December 31, 2014. As of December 31, 2015 and December 31, 2014, 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.
NOTE 14 – Concentration Risks
Our revenue is derived from sales of our beverage products, nutritional products and ingredient raw materials. Our beverage sales made up approximately 63% and 90% respectively of total sales during the years ended December 31, 2015 and December 31, 2014. For the years ended December 31, 2015 and December 31, 2014, beverage sales were concentrated by customer based on our former distributor SBG accounting for 13% and 47% of respective annual sales, and combined sales from two major retail store chains accounting for respective annual sales of 26% and 20%. Together these three companies accounted for respective sales totals of 39% and 67% for the years ended December 31, 2015 and December 31, 2014. On September 23, 2015 we have terminated our distribution agreement with SBG and in May 2015 we ended sales to one of the major retail stores due to a change in their pricing which was applicable to all vendors. 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.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 14 – Concentration Risks (continued)
At year end December 31, 2015, our accounts receivable had a concentration of 76% among three customers. At year end December 31, 2014, our accounts receivable had a concentration of 82% owing from SBG.
These concentration of our accounts receivable create 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 15 – Subsequent Events
Subsequent to the year ended December 31, 2015, the Company issued 4,650,000, Sale Shares and 15,724 per sale Commitment Shares under the 2015 Equity Line for aggregate proceeds of $235,740.
Subsequent to the year ended December 31, 2015, the Company made shares issuances to staff and service providers. In issuing these shares we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended. These included: (a) 651,269 restricted common shares to a service provider on January 8, 2016 at a negotiated price of $0.05 per share for deemed aggregate compensation of $32,563; (b) 600 restricted common shares to Employee One on January 1, 2016 at market close price of $0.0614 per share for deemed aggregate compensation of $37; (c) 5,000 restricted common shares to an employee on January 11, 2016 at market close price of $0.064 per share for deemed compensation of $320; and (d) 3,500 restricted common shares at market close price of $0.0559 on March 4, 2015 to a professional athlete endorser for deemed compensation of $196.
Subsequent to the year ended December 31, 2015, on February 1, 2016, the Company's CEO and President & COO executed the following changes to their employment agreements which were approved by the Compensation Committee: (a) temporarily lower the CEO's annual cash compensation by 25% to $97,500 until January 1, 2017, unless reset sooner under the terms of his agreement addendum, and add a share bonus plan using $130,000 per annum as the grant calculation base; and (b) temporarily lower the President & COO's 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.
Subsequent to the year ended December 31, 2015, in February 2015 we executed a private placement unit offering which raised $171,000 through the sale of 4,275,000 units. This offering terminated on March 29, 2016 and was priced at $0.04 per unit with each unit being comprised of one restricted common share price plus one five year warrant exercisable to purchase one restricted common share at $0.055 per share. These shares were issued to four US persons who are accredited investors (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended) or qualified under the terms Rule 506 Regulation D, and in issuing these shares we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
It was management's assessment that there were no other events which should be classified as subsequent events for the period of these financial statements.