KRED KonaRed Corporation New (CE)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – Nature of Organization

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

 

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

Basis of Presentation and Fiscal Year

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

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 June 30, 2016 and December 31, 2015.

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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 periods ended June 30, 2016 and June 30, 2015, the Company wrote off accounts receivable totaling $172 and $5,508, respectively. There were no allowances for doubtful accounts recorded for the period ended June 30, 2016 or the year ended December 31, 2015.

 

Inventories

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

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

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

Revenue Recognition

Sales revenue consists of amounts earned from customers through the sales of its finished products via wholesale and direct online retail channels. The Company also operates a branded ingredients division that sells raw material fruit powder and extracts to wholesale customers. Sales revenue is recognized when persuasive evidence of an arrangement exists, price is fixed or determinable, title to and risk of loss for the product has passed, which is generally when the products are received by the customers, and collectability is reasonably assured. Customers accept goods FOB shipping point. Goods are sold on a final sale basis and in the normal course of business the Company does not accept sales returns. In 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 June 30, 2016 and December 31, 2015.

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.

Reclassification

The financial statements for the period ended June 30, 2015 have been reclassified to conform to the 2016 presentation.

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

Derivative financial instruments

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

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

As of June 30, 2016, the Company had outstanding a senior convertible note (the "VDF Note") with a balance of $626,313, net of a discount of $17,691. The Company determined the VDF Note had an embedded derivative valued at $14,526 at June 30, 2016 due to Sr. Note One having a provision which required adjustments to the conversion price to compensate for dilutive stock issuance events unrelated to the VDF Note. As of December 31, 2015, the VDF Note had a balance of $453,298, net of a discount of $15,974 and the embedded derivative liability was valued at $11,807. During the period ended June 30, 2016, $175,000 of principal was added to the VDF Note. This was comprised of patent license fee payments of $75,000 and $100,000 which were rolled over to the VDF Note.

The net amount of the Change in Fair Value of Derivatives for the six month period ended June 30, 2016 was a gain of $1,631, which included the net amount of mark-to-market value changes in the embedded derivatives liabilities of the VDF Note.

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.

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 periods ended June 30, 2016 and June 30, 2015.

 

 

 

 

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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:

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.

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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.

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.

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

Advertising

Costs for advertising are expensed when incurred. Advertising costs totaled $20,105 and $105,505 for the six month periods ended June 30, 2016 and June 30, 2015, respectively. The Company also incurs marketing expenses for product promotion and investor relations which are combined with advertising to form the advertising and marketing line item in our statement of operations. Excluding advertising, these other promotional costs $137,568 and $93,040 for the six month periods ended June 30, 2016 and June 30, 2015, respectively.

During the six month periods ended June 30, 2016 and June 30, 2015: (a) depreciation for furniture and equipment of $1,048 and $1,048 was respectively recorded; and (b) depreciation for warehouse fixtures of $174 and $174 was respectively recorded. Accumulated depreciation for all fixed assets totaled $5,649 at June 30, 2016.

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

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

Recent Accounting Pronouncements

In July , 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2015-11, Simplifying the Measurement of Inventory, which requires that inventory be measured within the scope of the Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this Update are to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. This ASU conforms with the Company's current protocol for evaluating inventory and the Company will prospectively implement adoption of this ASU. The Company does not expect the adoption of the ASU to have a significant impact on our consolidated financial statements.

 

 

 

 

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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 $21,693,879 as of June 30, 2016; and has a incurred a net loss for the current six month period of $1,612,490. 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. During the six month period ended June 30, 2016, cash proceeds from this equity line totaled $309,286 and raised net cash proceeds of $13,650 during the subsequent period referenced in these financial statements. Additionally during the period ended June 30, 2016 the Company has raised additional net funds of $171,000 and $394,000, respectively, from two private placement unit offerings.

 

 

 

 

During the period ended June 30, 2016, the Company initially wrote down inventory by $43,868 during the first three months of this period and then reclassified the write down as reserved inventory available for use in the second three months of this period. This inventory was then used for marketing purposes and removed from reserved inventory and recorded as a marketing expense during the second three month period. During the year ended December 31, 2015, the Company wrote down inventory by $26,760 to account for expired inventory which had been write-off and disposed of, and for minor manufacturing process shrinkages. The Company recognized $nil and $nil recovery in inventory allowance respectively for the period ended June 30, 2016 and the year ended December 31, 2015. At June 30, 2016 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 June 30, 2016 and December 31, 2015 were comprised of prepayments of $3,400 for office expenses and $5,953 for manufacturing runs, respectively.

NOTE 6 – Fixed Assets

Fixed assets at June 30, 2016 and December 31, 2015 respectively comprised: (a) furniture and equipment totaling $6,591 and 2,434, net of accumulated depreciation of $4,611 and $3,563; and (b) warehouse fixtures totaling $2,434 and $2,608, net of accumulated depreciation of $1,038 and $864.

 

 

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 – Short Term Debt and Short Term Convertible Notes Payable

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. During the six month period ended June 30, 2016, the Company made payments on the September 2015 Notes totaling $97,500 and a t June 30, 2016, the balance on the September 2015 Notes was $124,040, including accrued interest of $20,000 and net of unamortized discounts totaling $42,176 related to the inducement warrants and unamortized OIDs totaling $6,284. During the period ended June 30, 2016, $83,436 of the warrants discount was recorded as an amortization expense and $12,432 of the OIDs were recorded as interest expense. Subsequent to the period ended June 30, 2016, the Company has made timely submission of the payments due on the tenth month anniversaries of Issuance Date.

 

 

 

 

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 – Short Term Debt and Short Term Convertible Notes Payable (continued)

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. At June 30, 2016, the balance on the December 2015 Note was $74,937, including accrued interest of $8,800 and net of unamortized OID of $4,263. During the six month period ended June 30, 2016, timely payment of the first installment of $39,600 was made on June 3, 2016 and $4,972 of the OID was recorded as interest expense.

 

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 – Short Term Debt and Short Term 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. 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 six month period ended June 30, 2016, $81,736 of the discount was recorded as an amortization expense and $9,082 of the OID was recorded as interest expense. 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. At June 30, 2016, the recorded balance on LPC Note One was $158,183, net of an unamortized discount of $82,636 and an unamortized OID of $9,181. For the six month period ended June 30, 2016 and the year ended December 31, 2015, accrued interest of $5,404 and $4,688, respectively was paid via issuance of 90,286 and 66,964 restricted common shares.

 

 

 

 

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 – Short Term Debt and Short Term Convertible Notes Payable (continued)

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. LPC Note Two has a $30,000 original issuance discount ("OID") which resulted in net proceeds of $270,000. The Company has the right to prepay LPC Note Two, pursuant to the terms thereof, at any time, provided it pays a prepayment amount of 120% of the then outstanding balance, accrued interest and interest payable from the date of prepayment to the Maturity Date. LPC Note Two provides for customary events of default such as failing to timely make payments and the occurrence of certain fundamental defaults, as described in LPC Note Two. LPC Note Two is not secured and is subordinated to the VDF Note, ranks equally with LPC Note One, and ranks above other debt issued by the Company. The principal amount of LPC Note Two and all accrued interest is convertible at the option of LPC into shares of our common stock at any time at a fixed Conversion Price of $0.05 per share, subject to adjustments for stock splits, stock dividends, stock combinations or other similar transactions as provided in LPC Note Two. At no time may LPC Note Two be converted into shares of our common stock if such conversion would result in LPC and its affiliates owning an aggregate of shares of our common stock in excess of 4.99% of the then outstanding shares of our common stock, provided such percentage may increase to 9.99% upon not less than 61 days prior written notice.   As an inducement for the loan, the Company granted LPC a six year warrant to purchase 5,000,000 shares of our common stock at an exercise price of $0.07 per share valued using a Black-Scholes model at $253,098. At issuance date, LPC Note Two also included a beneficial conversion feature ("BCF") of $102,600 because the exercise price of LPC Note Two was set below the market price of our stock when the note was executed. Since the combined warrant discount and BCF exceeded the face value of the note less OID, the warrant discount for LPC Note Two was capped at $167,400, resulting in a total discount of $270,000. This warrant has a cashless exercise right.   At June 30, 2016, the recorded balance on LPC Note Two was $163,366, net of an unamortized discount of $122,970 and an unamortized OID of $13,664. During the six month period ended June 30, 2016, $121,634 of the  discount was recorded as an amortization expense and $13,514 of the OID was recorded as interest expense. 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. For the six month period ended June 30, 2016 and the year ended December 31, 2015, accrued interest of $7,561 and $1,583, respectively was paid via issuance of 151,680 and 31,667 restricted common shares.

 

 

 

 

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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 License fee payments and accrued interest. During the year ended December 31, 2015, we rolled-over License fee payments totaling $300,000 plus accrued interest for the year $18,481 for a total addition to the VDF Note of $318,481. At December 31, 2015, the VDF Note had an outstanding balance $453,298, net of a discount of $15,974 resulting from the embedded derivative. At June 30, 2016, the VDF Note had an outstanding balance $626,313, net of a discount of $17,691 resulting from the embedded derivative. During the period ended June 30, 2016, $2,633 amortization of the derivative discount on the VDF Note was recorded. 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; 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; on March 31, 2016, the Conversion Price was adjusted to $0.3434 based on our issuance of stock and warrants to third parties; and on June 30, 2016, the Conversion Price was adjusted to $0.2883 based on our issuance of stock and warrants to third parties.

 

 

 

 

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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 year ended December 31, 2015 and the period ended June 30, 2016:

 

The lattice methodology was used to value the derivative liabilities related to the convertible notes, with the following assumptions.

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 10 – Related Party Transactions

For the six month period ended June 30, 2016: (i) compensation of $54,166; (ii) office rent of $7,800; (iii) issuance of 150,366 restricted common shares at a cost of $0.05404 per share, for aggregate deemed compensation of $8,125; (iv) issuance of 333,781 restricted common shares at a cost of $0.049 for aggregate deemed compensation of $16,355; (v) issuance of 164,841 restricted common shares at a cost of $0.0497 per share for deemed aggregate compensation of $8,193; and (vi) a firm jointly owned by Mr. Roberts and his spouse which shares warehouse facilities with the Company was owed $1,605 at June 30, 2016 for a portion of rent due, such payable which was recorded as a related party account payable. For the six month period ended June 30, 2015: (i) compensation of $65,000; (ii) office rent of $7,800; and (iii) Black-Scholes expense amortization of $109,572 related to 1,500,000 options granted on December 19, 2014 of which 750,000 vested on June 30, 2015 and 750,000 vested on December 31, 2015.

For the six month period ended June 30, 2016: (i) compensation of $114,584; (ii) issuance of 318,081 restricted common shares at a cost of $0.05404 per share, for aggregate deemed compensation of $17,188; (iii) issuance of 254,441 restricted common shares at a cost of $0.049 per share, for aggregate deemed compensation of $12,468; and (iv) issuance of 348,702 restricted common shares at a cost of $0.0497 per share for deemed aggregate compensation of $17,330. For the six month period ended June 30, 2015: nil transactions due to hiring date being August 10, 2015.

(Former) Chief Financial Officer, Secretary and Treasurer; spouse of CEO.

For the six month period ended June 30, 2016: a firm jointly owned by Mr. and Mrs. Roberts which shares warehouse facilities with the Company was owed $1,605 at June 30, 2016 for a portion of rent due, such payable which was recorded as a related party account payable. For the six month period ended June 30, 2015: accounting services fees of $3,500.

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 10 – Related Party Transactions (continued)

Independent Director One:

For the six month period ended June 30, 2016: (i) purchase by Independent Director One of 1,875,000 units priced at $0.04 per unit for aggregate proceeds of $75,000 with each unit including one restricted common share and one five year warrant exercisable at $0.055 per share in Unit Offer One; (ii) purchase by Independent Director One of 500,000 units priced at $0.04 per unit for aggregate proceeds of $20,000 with each unit including one restricted common share and one five year warrant exercisable at $0.055 per share in Unit Offer Two. For the six month period ended June 30, 2015: (i) issuance by the Company to Independent Director One of 1,700,000 restricted common shares valued at $0.1402 per share for an aggregate deemed cost of $238,340 as an inducement fee for a $500,000 loan provided on June 5, 2015; (ii) repayment by the Company of $50,000 toward the loan on June 26, 2015; and (iii) accrual of $3,978 interest on the loan at June 30, 2015.

At June 30, 2016 and December 31, 2015, the Company had related party accounts payable of $1,605 and $3,156, respectively; related party accounts receivable of $nil and $18,000, respectively; and shareholder loans (excluding the loan provided by Independent Director One in 2015) 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 June 30, 2016, there were 134,143,345   shares of our common stock issued and outstanding.

2016 Share Transactions

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 11 – Equity (continued)

In February 2016, 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. The fair market value of the shares based on closing market prices on dates of sale was $227,160 and the embedded value of these warrants based on a Black-Scholes option pricing model was $182,910. T hese 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.

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 11 – Equity (continued)

On March 31, 2016 we issued 318,081 restricted common shares at $0.05404 per share at market close price on date of grant as compensation to our President & COO for aggregate deemed compensation totaling $17,188. T hese shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On March 31, 2016 we issued 462,663 restricted common shares at $0.05404 per share at market close price on date of grant as compensation to our CFO for aggregate deemed compensation totaling $25,000. T hese shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act of 1933, as amended) in offshore transactions in which we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended.

On March 31, 2016 we issued 600 restricted common shares at $0.0509 per share at market close price on date of grant to Employee One for compensation of $31. T hese shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

In April and May 2016, we executed a private placement unit offering which raised $394,000 through the sale of 9,850,000 units. This offering terminated on May 31, 2016 and was priced at $0.04 per unit with each unit being comprised of one restricted common share price plus one five year warrant exercisable to purchase one restricted common share at $0.055 per share. The fair market value of the shares based on closing market prices on dates of sale was $532,443 and the embedded value of these warrants based on a Black-Scholes option pricing model was $426,730. T hese shares were issued to nine US persons who are accredited investors (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended) or qualified under the terms Rule 506 Regulation D, and in issuing these shares we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On May 20, 2016 we issued 10,000 restricted common shares at $0.054 per share at market close price on date of grant to Employee One for compensation of $540. T hese shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On May 20, 2016 we issued 5,000 restricted common shares at $0.054 per share at market close price on date of grant to an employee for compensation of $270. T hese shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On May 20, 2016, we issued 68,000 restricted common shares at $0.054 per share at market close price on date of grant to a professional athlete ("Ambassador Three") for endorsement services rendered for deemed compensation of $3,672. T hese shares were issued to US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

 

 

 

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 11 – Equity (continued)

On May 20, 2016, we issued 8,500 restricted common shares at $0.054 per share at market close price on date of grant to a professional athlete ("Ambassador Six") for endorsement services rendered for deemed compensation of $459. T hese shares were issued to US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On June 30, 2016 we issued 164,841 restricted common shares at $0.0497 per share at market close price on date of grant as compensation to our CEO for aggregate deemed compensation totaling $8,193. T hese shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On June 30, 2016 we issued 348,702 restricted common shares at $0.0497 per share at market close price on date of grant as compensation to our President & COO for aggregate deemed compensation totaling $17,330. T hese 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

(Unaudited)

NOTE 11 – Equity (continued)

On June 30, 2016 we issued 507,202 restricted common shares at $0.0497 per share at market close price on date of grant as compensation to our CFO for aggregate deemed compensation totaling $25,208. T hese 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.

2015 Share Transactions

On February 6, 2015 we issued 600 restricted common shares at $0.0752 per share at market close price on date of grant to Employee One for deemed compensation of $45. T hese 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

(Unaudited)

NOTE 11 – Equity (continued)

On February 6, 2015, we issued 11,000 restricted common shares at $0.0752 per share at market close price on date of grant to a professional athlete ("Ambassador One") for endorsement services rendered for deemed compensation of $827. T hese shares were issued to US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On June 5, 2015, we issued 1,700,000 restricted common shares at $0.1402 per share at market close price on date of grant for an aggregate deemed cost of $238,340 to a related party as a fee for a loan to the Company. T hese 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.

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

 

 

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 11 – Equity (continued)

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.

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

 

 

 

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 11 – Equity (continued)

On September 30, 2015 we issued 320,513 restricted common shares at $0.078 per share at market close price on date of grant as compensation to our CFO for deemed compensation totaling $25,000. T hese 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 at market close price on date of grant as compensation to our President & COO for deemed compensation of $39,178. T hese 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

(Unaudited)

NOTE 11 – Equity (continued)

On October 20, 2015, we issued 348,472 restricted common shares at an agreed price of $0.0699 per share at market close price on date of grant for aggregate deemed compensation of $24,358 to a beverage distributor per terms of a services agreement. T hese shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On October 21, 2015, we issued 1,381,025 restricted common shares at  $0.07241 per share at market close price on date of grant for aggregate deemed compensation of $100,000 to Service Provider One for services rendered. T hese shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On October 27, 2015, we issued 2,000,000 restricted common shares at $0.068 per share at market close price on date of grant for aggregate deemed compensation of $136,000 to Service Provider One for services rendered. T hese shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

On December 3, 2015, we issued 500,000 restricted common shares valued market close price on date of grant at $0.0601 for aggregate deemed proceeds of $30,050 to a lender as a fee for a loan to the Company. T hese shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

For the three month period ended December 31, 2015, we issued to LPC: (a) 66,964 restricted common shares valued at the LPC Note One Conversion Price of $0.07 for interest of $4,688 accrued on LPC Note One to December 31, 2015; and (b) 31,667 restricted common shares valued at the LPC Note Two Conversion Price of $0.05 for interest of $1,583 accrued on LPC Note Two to December 31, 2015. T hese shares were valued at market close price on date of grant   issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 11 – Equity (continued)

On December 31, 2015 we issued 1,262,047 restricted common shares at $0.05448 per share at market close price on date of grant   as compensation to our President & COO for deemed compensation of $68,750. T hese shares were issued to one US person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

Warrants:

2016 Warrant Transactions

During the three month period ended June 30, 2016,we executed a private placement unit offering which raised $394,000 through the sale of 9,850,000 units ('Unit Offer Two'). This offering terminated on May 31, 2016 and was priced at $0.04 per unit with each unit being comprised of one restricted common share price plus one five year warrant exercisable to purchase one restricted common share at $0.055 per share. The fair market value of the shares based on dates of sale was $532,443 and the embedded value of these warrants based on a Black-Scholes option pricing model was $426,730. None of these warrants have yet been exercised.

During the three month period ended March 31, 2016, we executed a private placement unit offering which raised $171,000 through the sale of 4,275,000 units ('Unit Offer One'). 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. The fair market value of the shares based on closing market prices on dates of sale was $227,160 and the embedded value of these warrants based on a Black-Scholes option pricing model was $182,910. None of these warrants have yet been exercised.

2015 Warrant Transactions

On June 15, 2015, as part of the 2015 Equity Line the Company amended 1,136,364 warrants (the "January 27, 2014 Warrants") which had been issued to LPC on January 27, 2014, to modify the exercise price from $0.65 to $0.15. None of these warrants have yet been exercised. The fair value of this warrant re-pricing was calculated based on the difference between Black Scholes option pricing model valuations on original grant date of January 27, 2014 and re-pricing date of June 15, 2015. This expense was recorded as a loss on equity modification of $41,753, with an offset to additional paid in capital.

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.

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

 

 

 

 

KONARED CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 11 – Equity (continued)

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.

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

*(based on US Treasury Constant Maturities matching estimated life)

The following table summarizes the Company's warrant activity for the period ended June 30, 2016 and the year ended December 31, 2015:

*  (remaining term as of June 30, 2016)

**(intrinsic value based on the closing share price of $0.0497 on June 30, 2016)

 

 

 

*  (remaining term as of June 30, 2016)

**(intrinsic value based on the closing share price of $0.0497 on June 30, 2016)

The following table summarizes information about the options outstanding at June 30, 2016: