The accompanying notes to financial statements are an integral part of these financial statements
The accompanying notes to financial statements are an integral part of these financial statements
The accompanying notes to financial statements are an integral part of these financial statements
The accompanying notes to financial statements are an integral part of these financial statements
The accompanying notes to financial statements are an integral part of these financial statements
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 September 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 September 30, 2016 and September 30, 2015, the Company wrote off accounts receivable totaling $172 and $nil, respectively. There were no allowances for doubtful accounts recorded for the period ended September 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 September 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 December 31, 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 September 30, 2016, the Company had outstanding a senior convertible note (the "VDF Note") with a balance of $755,975, net of a discount of $17,353. The Company determined the VDF Note had an embedded derivative valued at $11,823 at September 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 September 30, 2016, $275,000 of principal was added to the VDF Note. This was comprised of patent license fee payments of totaling $275,000 which were rolled over to the VDF Note.
The net amount of the Change in Fair Value of Derivatives for the nine month period ended September 30, 2016 was a loss of $5,928, 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 September 30, 2016 and September 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.
Level components:
|
As of
September 30, 2016
|
As of
December 31, 2015
|
Cash
|
$118,117
|
$148,769
|
Accounts receivable
|
213,662
|
33,227
|
Accounts receivable - related party
|
1,800
|
18,000
|
Inventories
|
347,160
|
439,158
|
Prepaid expenses
|
-
|
5,953
|
Acc/payable and accrued liabilities
|
530,111
|
211,429
|
Accounts payable - related party
|
-
|
3,156
|
Short term convertible notes, net of discounts
|
435,774
|
-
|
Short term debt, net of discounts
|
77,111
|
235,237
|
Short term debt - related party
|
101,337
|
-
|
Long term convertible note, net of discount
|
755,975
|
548,881
|
Unearned revenue
|
792
|
1,434
|
Level 1 total
|
$2,581,839
|
$1,645,244
|
|
|
|
Derivative liability
|
$11,823
|
$11,807
|
Level 2 total
|
$11,823
|
$11,807
|
|
-
|
-
|
Level 3 total
|
$Nil
|
$Nil
|
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 for the nine month period ended September 30, 2016 totaled $47,802 and $108,499 for the nine month period ended September 30, 2016. 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 were $215,592 and $160,548 for the nine month periods ended September 30, 2016 and September 30, 2015, respectively.
Fixed Assets
Fixed assets are recorded at cost. Depreciation is calculated on a straight line method over the estimated useful lives of the various assets as follows:
ASSET
|
Depreciation Term
|
|
|
Furniture and equipment
|
5 - 7 years
|
Warehouse fixtures
|
10 years
|
During the nine month periods ended September 30, 2016 and September 30, 2015: (a) depreciation for furniture and equipment of $1,572 and $1,572 was respectively recorded; and (b) depreciation for warehouse fixtures of $261 and $261 was respectively recorded. Accumulated depreciation for all fixed assets totaled $6,260 at September 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 $22,750,975 as of September 30, 2016; and has a incurred a net loss for the current nine month period of $2,669,586. 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, during the nine month period ended September 30, 2016 the Company received a loan of $100,000 from a director and raised $786,000 through several private placement equity offerings and $322,936 through share sales under its 2015 Purchase Agreement Equity Line. On August 11, 2016 the last shares which had been registered under the 2015 Equity Line were sold. Subsequently there has not been a new registration statement on Form S-1 filed which would allow for further share sales under the 2015 Purchase Agreement. We anticipate we will continue to raise funds through private placement equity sales in the near future.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – Inventory
Inventory includes raw materials and finished goods. Finished goods contain direct materials and other manufacturing costs charged directly by third party manufacturing vendors. Inventory consists of the following:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
100,504
|
|
|
$
|
100,702
|
|
Finished goods
|
|
|
246,656
|
|
|
|
338,456
|
|
Inventory allowance
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
347,160
|
|
|
$
|
439,158
|
|
During the period ended September 30, 2016, the Company initially wrote down inventory by $43,868 during the first three months of this nine month period and then reclassified the write down as reserved inventory available for use in the second three months of this nine month 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 September 30, 2016 and the year ended December 31, 2015. At September 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 September 30, 2016 were $nil; and for the year ended December 31, 2015 were comprised of $5,953 for manufacturing runs.
NOTE 6 – Fixed Assets
Fixed assets at September 30, 2016 and December 31, 2015 respectively comprised: (a) furniture and equipment totaling $6,067 and $2,434, net of accumulated depreciation of $5,135 and $3,563; and (b) warehouse fixtures totaling $2,347 and $2,608, net of accumulated depreciation of $1,125 and $864.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 – Short Term Debt, Short Term Debt - Related Party & Short Term Convertible Notes
September 2015 Notes:
On September 30, 2015 ("Issuance Date")
,
subject to securities purchase agreements
we
issued two subordinated promissory notes ("September 2015 Note One" and "September 2015 Note Two", collectively, the "September 2015 Notes") to two lenders (the "September 2015 Lenders"). The September 2015 Notes provided for customary events of default such as failing to timely make payments and the occurrence of certain fundamental defaults, as described in the September 2015 Notes. The 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 were not secured and are subordinated to senior notes issued by the Company.
September 2015 Note One had a face value of $100,000 and September 2015 Note Two had a face value of $150,000. The interest rate on each note was 8% per annum and this amount fully accrued upon issuance and added $8,000 to September 2015 Note One and $12,000 to September 2015 Note Two to bring the total balances due on each note to $108,000 and $162,000, respectively. The September 2015 Notes each included a 10% original issuance discount ("OID") which resulted in total net proceeds to the Company of $225,000.
As an inducement for the loans, the September 2015 Lenders received five‑year warrant
s, with cashless exercise rights,
to purchase restricted shares of our common stock at an exercise price of $0.08 per share.
September 2015 Note One Lender received 1,250,000 warrants which was
valued using a Black-Scholes model at $67,115; and
September 2015 Note Two Lender received 1,875,000 warrants which was
valued using a Black-Scholes model at $100,673.
At December 31, 2015, the balance on September 2015 Note One was $50,269. This included the face value of $100,000 plus accrued interest of $8,000 and was net of an unamortized warrant discount totaling $50,245 and an unamortized OID discount of $7,486. During the year ended December 31, 2015, $16,870 of the warrant discount was recorded as an amortization expense and $2,514 of the OID was recorded as interest expense.
During the nine month period ended September 30, 2016, the Company timely made a series of scheduled cash payments on September 2015 Note One totaling $49,000, and on August 30, 2016 redeemed the balance of $59,000 due through issuance of 1,475,000 shares valued at $95,875 based on a market close price of $0.065 per share on date of issuance. The $36,875 difference between the cash redemption balance and the value of the shares redemption was recorded as non-cash interest expense. During the nine month period ended September 30, 2016, the remaining $50,245 of the warrant discount on September 2015 Note One
was recorded as an amortization expense and the remaining $7,486 OID was recorded as interest expense. The
September 2015 Note One is now fully repaid and there are no further payments due.
At December 31, 2015, the balance on September 2015 Note Two was $75,403. This included the face value of $150,000 plus accrued interest of $12,000 and was net of an unamortized warrant discount totaling $75,367 and an unamortized OID discount of $11,230. During the year ended December 31, 2015, $25,306 of the warrant discount was recorded as an amortization expense and $3,770 of the OID was recorded as interest expense.
During the nine month period ended September 30, 2016, the Company timely made a series of scheduled cash payments on September 2015 Note One totaling $88,500, and prior to scheduled redemption date, on September 23, 2016 the lender extended the maturity date of the note to November 14, 2016 in exchange for the right to convert the balance of $73,500 into common shares of the Company at a price of $0.04 per share. On date of issuance, the Company's closing share price was $0.0605 and this created a beneficial conversion feature which was valued at $37,699
for the conversion right, of which $5,071 was recorded as an amortization expense during the period ended September 3, 2016.
During the nine month period ended September 3, 2016, the $72,872 of the
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 – Short Term Debt, Short Term Debt - Related Party & Short Term Convertible Notes (continued)
warrant discount on September 2015 Note Two
was recorded as an amortization expense and $10,858 of the OID was recorded as interest expense. At September 30, 2016, the balance on September
2015 Note Two
was $39,260. This included the remaining face value and accrued interest totaling $73,500 and was net of an unamortized conversion right discount of $32,598 and an unamortized OID discount of $1,642.
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 bears interest at 8% per annum and this amount fully accrued upon execution of the loan and added $8,800 to the balance due at Issuance Date. The principal and interest 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 including accrued interest was $109,565, net of an unamortized OID of $9,235. During the year ended December 31, 2015, $764 of the OID was recorded as interest expense. At September 30, 2016, the balance on the December 2015 Note including accrued interest was $37,851, net of unamortized OID of $1,749. During the nine month period ended September 30, 2016, the Company timely made two scheduled cash payments totaling $79,200, and during this period $7,486 of the OID was recorded as interest expense.
Short Term Debt - Related Party:
On July 31, 2016 (the "Issuance Date"), the Company issued a $100,000 note (the "RP Note") to a director of the Company for a loan. The RP Note has a maturity date of January 27, 2017 and
is classified as short term related party debt.
The RP Note bears interest at 8% per annum due at maturity and may be prepaid in whole, or in part, at any time before each maturity date without prepayment penalty. 340,000 restricted common shares of the Company were issued to the lender as a fee valued at $0.0456 per share based on market for an aggregate cost $15,504. At September 30, 2016, the balance due on the RP Note was $101,337 including $1,337 of accrued interest for the period ended September 30, 2016.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 – Short Term Debt, Short Term Debt - Related Party & Short Term Convertible Notes (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") and LPC Note One is now
classified as short term convertible debt.
Interest may be paid via issuance of the Company's common stock if the Company meets certain conditions that would allow the issuance of the Company's common stock without any trading restrictions. LPC Note One has a $25,000 original issuance discount ("OID") which resulted in net proceeds of $225,000.
The Company has the right to prepay LPC Note One, pursuant to the terms thereof, at any time, provided it pays a prepayment amount of 120% of the then outstanding balance, accrued interest and interest payable from the date of prepayment to the Maturity Date. LPC Note One provides for customary events of default such as failing to timely make payments and the occurrence of certain fundamental defaults, as described in LPC Note One.
LPC
Note One is not secured and is subordinated to the VDF Note, ranks equally with LPC Note Two, and ranks above other debt issued by the Company. The principal amount of LPC Note One and all accrued interest is convertible at the option of LPC into shares of our common stock at any time at a
fixed 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, which includes a cashless exercise provision, 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.
During the year ended December 31, 2015, $60,628 of the discount was recorded as an amortization expense, $6,737 of the OID was recorded as interest expense, and accrued interest of $4,688 was paid through issuance of 90,286 restricted common shares. At December 31, 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 nine month period ended September 30, 2016, $123,053 of the discount was recorded as an amortization expense, $13,673 of the OID was recorded as interest expense, and accrued interest of $9,514 was paid via issuances of 135,915 restricted common shares. At September 30, 2016, the recorded balance on LPC Note One was $204,092, net of an unamortized discount of $41,317 and an unamortized OID of $4,591.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 – Short Term Debt, Short Term Debt - Related Party & Short Term Convertible Notes (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"). LOC Note Two is now classified as short term convertible term debt. Interest may be paid via issuance of the Company's common stock if the Company meets certain conditions that would allow the issuance of the Company's common stock without any trading restrictions. LPC Note Two has a $30,000 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, which includes a cashless exercise provision, 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.
During the year ended December 31, 2015, $25,396 of the discount was recorded as an amortization expense, $2,822 of the OID was recorded as interest expense, and accrued interest of $7,561 was paid via issuance of 151,680 restricted common shares. At December 31, 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 nine month period ended September 30, 2016, $183,119 of the discount was recorded as an amortization expense, $20,346 of the OID was recorded as interest expense, and accrued interest of $9,514 was paid via issuances of 228,340 restricted common shares. At September 30, 2016, the recorded balance on LPC Note Two was $231,323, net of an unamortized discount of $61,485 and an unamortized OID of $6,832.
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. During the nine month period ended September 30, 2016, we rolled-over License fee payments totaling $275,000 and recorded accrued interest of $29,056 on the note. At September 30, 2016, the VDF Note had an outstanding balance $755,975, net of a discount of $17,353 resulting from the embedded derivative.
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; on June 30, 2016, the Conversion Price was adjusted to $0.2883 based on our issuance of stock and warrants to third parties; and on September 30, 2016, the Conversion Price was adjusted to $0.2606 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.
Also as shown in the table below, prior to conversion into shares, in 2015 the Company repaid in cash a variable rate convertible note which had been issued in 2015. The Company no longer has any variable rate convertible debt outstanding and at September 30, 2016 the anti-dilution clause of the VDF Senior Convertible Note was the only liability of the Company which created a derivative liability.
The following table summarizes the convertible debt derivative activity for the year ended December 31, 2015 and the period ended September 30, 2016:
Description
|
|
Total
|
Fair Value of derivative liabilities at December 31, 2014
|
$
|
9,168
|
Increase due to issuance of convertible debentures
|
|
241,710
|
Reduction due to redemption of convertible debentures
|
|
(274,108)
|
Change in Fair Value
|
|
35,037
|
Fair Value of derivative liabilities at December 31, 2015
|
$
|
11,807
|
Increase due to issuance of convertible debenture - VDF license fee rollover
|
|
1,997
|
Change in Fair Value
|
|
(570)
|
Fair Value of derivative liabilities at March 31, 2016
|
$
|
13,234
|
Increase due to issuance of convertible debenture - VDF license fee rollover
|
|
2,353
|
Change in Fair Value
|
|
(1,061)
|
Fair Value of derivative liabilities at June 30, 2016
|
$
|
14,526
|
Increase due to issuance of convertible debenture - VDF license fee rollover
|
|
1,705
|
Change in Fair Value
|
|
(4,408)
|
Fair Value of derivative liabilities at September 30, 2016
|
$
|
11,823
|
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – Derivatives (continued)
The lattice methodology was used to value the derivative liabilities related to the convertible notes, with the following assumptions.
Assumptions:
|
|
September 30, 2016
|
December 31, 2015
|
|
|
|
|
Dividend yield
|
|
0.00%
|
0.00%
|
Risk-free rate for term
|
|
0.88%
|
1.31%
|
Volatility
|
|
92%
|
133%
|
Maturity dates
|
|
2.25 years
|
3 years
|
Stock Price
|
|
$0.05615
|
$0.055
|
NOTE 10 – Related Party Transactions
During the nine month periods ended September 30, 2016 and September 30, 2015, related party transactions included:
Chief Executive Officer, Director and Board Chair.
For the nine month period ended September 30, 2016:
(i) compensation of $81,249; (ii) office rent of $11,700; (iii) issuance of 150,366 restricted common shares at a closing market price of $0.054 per share on date of issue, for deemed compensation of $8,125; (iv) issuance of 333,781 restricted common shares at a closing market price of $0.049 on date of issue for deemed compensation of $16,355; (v) issuance of 164,841 restricted common shares at a closing market price of $0.0497 per share on date of issue for deemed compensation of $8,193; (vi) issuance of 435,180 restricted common shares at a closing market price of $0.05802 per share on date of issue for deemed compensation of $25,249; (vii) issuance of 193,848 restricted common shares at a closing market price of $0.0561 per share on date of issue for deemed compensation of $10,875.
For the nine month period ended September 30, 2015:
(i) compensation of $97,500; (ii) office rent of $11,700; and (iii) Black-Scholes expense amortization of $165,266 related to 1,500,000 options granted on December 19, 2014 of which 750,000 vested on June 30, 2015 and 750,000 vested on December 31, 2015.
President and Chief Operating Officer.
For the nine month period ended September 30, 2016:
(i) compensation of $171,876; (ii) issuance of 318,081 restricted common shares at a closing market price of $0.054 per share on date of issue for deemed compensation of $17,188; (iii) issuance of 254,441 restricted common shares at a closing market price of $0.049 per share on date of issue for deemed compensation of $12,468; (iv) issuance of 348,702 restricted common shares at a closing market price of $0.0497 per share on date of issue for deemed compensation of $17,330; (v) issuance of 1,333,333 restricted common shares at a closing market price of $0.049 per share on date of issue for deemed compensation of $65,333; (vi) issuance of 906,634 restricted common shares at a closing market price of $0.05802 per share on date of issue for deemed compensation of $52,603; and (vii) issuance of 1,382,532 restricted common shares at a closing market price of $0.0561 per share on date of issue for deemed compensation of $77,560.
For the nine month period ended September 30, 2015:
(i) compensation of $39,178; and (ii) issuance of 1,333,333 restricted common shares at a closing market price of $0.107 per share on date of issue for deemed compensation of $142,667.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – Related Party Transactions (continued)
Chief Financial Officer, Secretary and Treasurer:
For the nine month period ended September 30, 2016: (i) compensation of $93,750;
(ii) office rent of $6,750; (iii) issuance of 462,663 restricted common shares at a closing market price of $0.054 per share on date of issue for deemed compensation of $25,000; (iv) issuance of 507,202 restricted common shares at a closing market price of $0.0497 per share on date of issue for deemed compensation of $25,208; and (v) issuance of 426,040 restricted common shares at a closing market price of $0.0561 per share on date of issue for deemed compensation of $23,901.
For the nine month period ended September 30, 2015: (i) compensation of $93,750;
(ii) office rent of $6,750
; (iii) issuance of
131,579 restricted common shares at a closing market price of $0.19 per share on date of issue for deemed compensation of $25,000; and (iii)
issuance of 226,860
restricted common shares at a closing market price of $0.1102 per share on date of issue for deemed compensation of $25,000.
Director and co-founder
For the nine month period ended September 30, 2016: nil transactions. For the nine month period ended September 30, 2015: consulting fees of $4,000.
Independent Director One:
For the nine month period ended September 30, 2016: (i) purchase by a holding company wholly owned by Independent Director One of 1,875,000 units priced at $0.04 per unit for aggregate proceeds of $75,000 with each unit including one restricted common share and one five year warrant exercisable at $0.055 per share in Unit Offer One; (ii) purchase by Independent Director One of 500,000 units priced at $0.04 per unit for aggregate proceeds of $20,000 with each unit including one restricted common share and one five year warrant exercisable at $0.055 per share in Unit Offer Two; (iii) provision of a loan of $100,000 to the Company in return for an inducement fee of 340,000 restricted common shares priced at a closing market of $0.0456 per share on date of issue for a deemed cost of $15,504; and (iv) accrual of $1,337 interest on the loan at September 30, 2016. For the nine month period ended September 30, 2015: (i) provision of a loan of $500,000 to the Company in return for an inducement fee of 1,700,000 restricted common shares priced at a closing market of $0.1402 per share on date of issue for a deemed cost of $238,340
; (ii) repayment by the Company of $250,000 toward the loan; and (iii) accrual of $11,556 interest on the loan at September 30, 2015.
Independent Director Two:
For the nine month period ended September 30, 2016: (i) receipt by the Company of payment by Independent Director Two to the Company of $18,000 of related party accounts receivable which was outstanding at December 31, 2015; and (ii) an arm's length purchase by a company owned by Independent Director Two for $1,800 of raw material products, such order which was recorded as a related party accounts receivable at September 30, 3016. For the nine month period ended September 30, 2015: $18,000 of revenue was derived from arm's length raw materials product sales to a company owned by Independent Director Two.
At September 30, 2016 and December 31, 2015, the Company had related party accounts payable of $nil and $3,156, respectively; related party accounts receivable of $1,800 and $18,000, respectively; and shareholder loans (excluding the loan provided by Independent Director One) of $nil and $nil, respectively.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 2016, there were 147,190,592
shares of our common stock issued and outstanding.
2016 Share Transactions
On August 11, 2016 the last shares which had been registered under the Company's 2015 Equity Line were sold. Subsequently there has not been a new registration statement on Form S-1 filed which would allow for further share sales under the 2015 Purchase Agreement.
During the nine month period ended September 30, 2016, the Company issued 6,450,000 Sale Shares and 21,529 per sale Commitment Shares under the 2015 Equity Line for aggregate proceeds of $322,936.
On January 1, 2016 we issued 600 restricted common shares at $0.0614 per share
at
market close price on date of grant to an employee for deemed compensation of $37.
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 January 8, 2016, we issued 651,269 restricted common shares at $0.05 per share at
market close price on date of grant for
deemed compensation of $32,563 to a service provider as final payment for services rendered. 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 January 11, 2016 we issued 5,000 restricted common shares at $0.064 per share to an employee
at
market close price on date of grant for deemed compensation of $320.
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 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 the 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 February 23, 2016 we issued 5,000 restricted common shares at $0.0502 per share
at
market close price on date of grant to an employee for deemed compensation of $251.
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 4, 2016, we issued 3,500 restricted common shares at $0.0559 per share
at
market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $196.
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.
For the three month period ended March 31, 2016, we issued to LPC: (a) 45,143 restricted common shares at $0.07 per share for a deemed cost of $3,160 for interest accrued on LPC Note One for the period from January 1, 2016 to March 31, 2016 ; and (b) 75,840 restricted common shares at $0.05 per share for a deemed cost of $3,792 for interest accrued on LPC Note Two for the period from January 1, 2016 to March 31, 2016.
T
hese shares were issued
at
market close price on date of grant to one US company, which is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On March 31, 2016 we issued 150,366 restricted common shares at $0.054 per share
at
market close price on date of grant to our CEO for deemed compensation totaling $8,125.
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 318,081 restricted common shares at $0.054 per share
at
market close price on date of grant to our President & COO for 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 $0.054 per share
at
market close price on date of grant 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 March 31, 2016 we issued 600 restricted common shares at $0.054 per share
at
market close price on date of grant to an employee for deemed compensation of $30.
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)
From April to 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 an employee for deemed 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 deemed 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 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.
On May 20, 2016, we issued 8,500 restricted common shares at $0.054 per share
at
market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $459.
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 May 20, 2016, we issued 7,000 restricted common shares at $0.054 per share
at
market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $378.
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 May 20, 2016, we issued 8,500 restricted common shares at $0.054 per share
at
market close price on date of grant to a professional athlete for endorsement services for deemed compensation of $459.
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 6, 2016, we issued 5,000 restricted common shares at $0.0518 per share
at
market close price on date of grant to a health care professional for endorsement services for deemed compensation of $259.
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 June 8, 2016 we issued 333,781 restricted common shares at $0.049 per share
at
market close price on date of grant as compensation to our CEO for deemed compensation totaling $16,355.
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 8, 2016 we issued 254,441 restricted common shares at $0.049 per share
at
market close price on date of grant as compensation to our President & COO for deemed compensation totaling $12,468.
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.
For the period ended June 30, 2016 we issued 164,841 restricted common shares at $0.0497 per share
at
market close price on date of grant to our CEO for 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.
For the period ended June 30, 2016 we issued 348,702 restricted common shares at $0.0497 per share
at
market close price on date of grant to our President & COO for 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.
For the period ended June 30, 2016 we issued 507,202 restricted common shares at $0.0497 per share
at
market close price on date of grant to our CFO for 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.
On June 30, 2016 we issued 1,200 restricted common shares at $0.0497 per share
at
market close price on date of grant to an employee for deemed compensation of $60.
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 17,000 restricted common shares at $0.0497 per share
at
market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $845.
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 1,500,000 restricted common shares at $0.0497 per share
at
market close price on date of grant for consultant services rendered for a deemed cost of $74,550.
T
hese shares were issued to three US persons with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – Equity (continued)
For the three months ended June 30, 2016, we issued to LPC: (a) 45,143 restricted shares at $0.0497 per share for a deemed cost of $2,244 for interest accrued on LPC Note One for the period from April 1, 2016 to June 30, 2016 ; and (b) 75,840 restricted shares at $0.0497 per share for a deemed cost of $3,769 for interest accrued on LPC Note Two for the period from April 1, 2016 to June 30, 2016.
T
hese shares were issued
at
market close price on date of grant to one US company, which is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On July 13, 2016, we issued 294,737 restricted common shares at $0.0475 per share
at
market close price on date of grant for consultant services rendered for a deemed cost of $14,000.
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.
From July to September 2016, we executed a private placement offering which raised $101,000 through the sale of 2,525,000 units. This offering terminated on September 30, 2016 and was priced at $0.04 per unit with each unit being comprised of one restricted common share price plus one five year warrant exercisable to purchase one restricted common share at $0.055 per share. The fair market value of the shares based on closing market prices on dates of sale was $147,488 and the embedded value of the warrants based on a Black-Scholes option pricing model was $116,108.
T
hese shares were issued to seven 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 August 1, 2016, the Company received a loan of $100,000 from a director of the Company and issued 340,000 restricted common shares as an inducement fee at market close price of $0.0456 on date of issue for a deemed cost of $15,504.
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 August 8, 2016, we issued 20,000 restricted common shares at $0.0475 per share market close price on date of grant to an employee for deemed compensation of $950.
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 August 8, 2016, we issued 50,000 restricted common shares at $0.0475 per share market close price on date of grant to an employee for deemed compensation of $2,375.
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 August 15, 2016, we issued 1,333,333 restricted common shares at $0.049 per share
at
market close price on date of grant to our President & COO for deemed compensation totaling $65,333.
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 August 24, 2016, we issued 42,500 restricted common shares at $0.0639 per share market close price on date of grant to an employee for deemed compensation of $2,716.
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 August 24, 2016, we issued 25,000 restricted common shares at $0.0639 per share market close price on date of grant to an employee for deemed compensation of $1,598.
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 August 30, 2016, the Company redeemed the balance due of $59,000 on the September 2015 Note One through issuance of 1,475,000 shares valued at $95,875 based on a market close price of $0.065 per share on date of issuance. This included a loss on conversion of $36,875 based on the difference between the value of the shares issued at market close price on date of issue and the agreed conversion price of $0.04 per share.
T
hese shares were issued to one US company, which is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On September 6, 2016, we issued 10,000 restricted common shares at $0.0599 per share market close price on date of grant to an employee for deemed compensation of $599.
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 September 8, 2016, we issued 25,000 restricted common shares at $0.06 per share market close price on date of grant to an employee for deemed compensation of $1,500.
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 September 9, 2016, we issued 10,000 restricted common shares at $0.0581 per share market close price on date of grant to an employee for deemed compensation of $581.
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 September 27, 2016 we issued 435,180 restricted common shares at $0.05802 per share
at
market close price on date of grant as compensation to our CEO for deemed compensation totaling $25,249.
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 September 27, 2016 we issued 906,634 restricted common shares at $0.05802 per share
at
market close price on date of grant to our President & COO for deemed compensation totaling $52,603.
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 September 29, 2016, we issued 129,244 restricted common shares at $0.058 per share market close price on date of grant to a predecessor investor for deemed cost of $7,496 to revise the shares owed to him from our reverse merger share exchange in 2014.
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. A value for capital stock of $129 was recorded and the balance of $7,367 for the cost of the shares was offset to additional paid in capital.
For the three months ended September 30, 2016, we issued to LPC: (a) 45,629 restricted shares at $0.0561 per share for a deemed cost of $2,560 for interest accrued on LPC Note One for the period from July 1, 2016 to September 30, 2016 ; and (b) 76,660 restricted shares at $0.0561 per share for a deemed cost of $4,301 for interest accrued on LPC Note Two for the period from July 1, 2016 to September 30, 2016.
T
hese shares were issued
at
market close price on date of grant to one US company, which is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended), and in issuing these shares to this person we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
On September 30, 2016, we issued 193,848 restricted common shares at $0.0561 per share
at
market close price on date of grant to our CEO for deemed compensation totaling $10,875.
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 September 30, 2016, we issued 1,382,532 restricted common shares at $0.0561 per share
at
market close price on date of grant to our President & COO for deemed compensation totaling $77,560.
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 September 30, 2016, we issued 426,040 restricted common shares at $0.0561 per share
at
market close price on date of grant to our CFO for deemed compensation totaling $23,901.
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.
From July 1 to September 30, 2016, we raised $120,000 through a private placement stock offering of 3,000,000 restricted common shares at $0.04 per share.
T
hese shares were issued to six US persons who are accredited investors (as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended) or qualified under the terms Rule 506 Regulation D, and in issuing these shares we relied on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
Additional paid in capital for the period ended September 30, 2016 also included an addition of $37,669 related to the unamortized beneficial conversion feature created by the alteration of September 2015 Note Two to allow for conversion of the note into shares.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – Equity (continued)
2015 Share Transactions
On February 6, 2015 we issued 600 restricted common shares at $0.0752 per share
at
market close price on date of grant to an employee for deemed compensation of $45.
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 February 6, 2015, we issued 11,000 restricted common shares at $0.0752 per share
at
market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $827.
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 April 30, 2015 we issued 131,579 restricted common shares at $0.19 per share
at
market close price on date of grant as compensation to our CFO for deemed compensation totaling $25,000.
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 May 1, 2015, we issued 300,000 restricted common shares for professional services rendered, such issuance which was valued at $0.20 per share at
market close price on date of grant
for a deemed cost of $60,000. T
hese 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 at $0.1402 per share
at
market close price on date of grant for an aggregate deemed cost of $238,340 to a director of the Company as a fee for a loan to the Company.
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 June 9, 2015 we issued 1,200 restricted common shares at $0.14 per share
at
market close price on date of grant to an employee for deemed compensation of $168.
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.
2015 Equity Line:
[On August 11, 2016 the last shares which had been registered under the Company's 2015 Equity Line were sold. Subsequently there has not been a new registration statement on Form S-1 filed which would allow for further share sales under the 2015 Purchase Agreement.
]
On June 16, 2015, we entered into the 2015 Purchase Agreement and 2015 Registration Rights Agreement (collectively the "2015 Equity Line") with an Illinois limited liability company ("LPC"). As part of the 2015 Equity Line, on June 15, 2015, the Company amended a warrant which had been issued to LPC on January 27, 2014, to modify the exercise price from $0.65 to $0.15. The fair value of this warrant re-pricing was calculated
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – Equity (continued)
based on the difference between Black Scholes option pricing model valuations on original grant date of January 27, 2014 and re-pricing date of June 15, 2015. This expense was recorded as a loss on equity modification of $41,753, with an offset to additional paid in capital. At execution date LPC also purchased 1,666,667 shares of our common stock at $0.15 per share for proceeds of $250,000 as an initial purchase under the agreement. These shares were issued to a U.S. person with reliance on the exemptions from the registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act of 1933, as amended. In consideration for entering into the 2015 Equity Line, we issued to LPC 2,666,667 shares of our common stock as a commitment fee and up to an additional 666,666 shares could be issued as commitment fees pro rata. The 2015 Equity Line may be terminated by us at any time at our discretion without any monetary cost to us.
During the period ended December 31, 2015 we issued 8,550,000 sale shares and 41,989 per sale commitment shares under the 2015 Equity Line for aggregate cash proceeds of $629,850
.
On June 30, 2015, 1,666,667 shares of restricted common shares were issued to investor, unrelated to LPC, under a securities purchase agreement dated June 30, 2015 at a price of $0.06 per share for aggregate proceeds of $100,000.
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. These shares were included in the 2015 Equity Line Registration Statement on Form S-1 filed on July 6, 2015,which was made Effective by the SEC on July 16, 2015.
On July 6, 2015, we issued 6,025 restricted common shares at $0.1188 per share
at
market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $716.
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 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.
On August 11, 2015, we issued
1,333,333 restricted common shares to our new President & Chief Operating Officer at $0.107 per share at
market close price on date of grant
for deemed compensation of
$142,667.
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 September 15, 2015, we issued 1,000 restricted common shares at $0.075 per share
at
market close price on date of grant to an employee for deemed compensation of $75.
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 September 18, 2015, we issued 26,000 restricted common shares at $0.0901 per share
at
market close price on date of grant to a consultant for services rendered for a deemed cost of $2,343.
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 September 24, 2015, we issued 12,500 restricted common shares at $0.0829 per share
at
market close price on date of grant to a professional athlete for endorsement services rendered for a deemed cost of $1,036.
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 September 30, 2015, we issued 9,000 restricted common shares at $0.078 per share
at
market close price on date of grant to a professional athlete for endorsement services rendered for a deemed cost of $702.
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 September 30, 2015, we issued 50,000 restricted common shares at $0.078 per share
at
market close price on date of grant to a consultant for services rendered for a deemed cost of $3,900.
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 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.
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 a service provider 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.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – Equity (continued)
On October 27, 2015, we issued 2,000,000 restricted common shares at $0.068 per share at
market close price on date of grant
for aggregate deemed compensation of $136,000 to a service provider for services rendered. 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.
On December 31, 2015 we issued 458,926 restricted common shares at $0.05448 per share
at
market close price on date of grant
as compensation to our CFO for deemed compensation of $25,000.
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 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 nine month period ended September 30, 2016, we raised $565,000 through private placement unit offerings priced at $0.04 per unit which included the issuance of 16,650,000 five year warrants each exercisable to purchase one restricted common share at $0.055 per share. The aggregate fair market value of the shares on dates of issuance was $907,091 and the aggregate embedded value of these warrants based on a Black-Scholes option pricing model was $725,748. None of these warrants have yet been exercised.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – Equity (continued)
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 One, the Company granted LPC six year warrants (the "August 18, 2015 Warrants") to purchase 3,750,000 shares of restricted common stock at an exercise price of $0.10 per share. Because these warrants are related to issuance of debt, the value of the warrant was required to be recorded as a discount to LPC Note One with an offset to additional paid in capital. The original costing of the warrants using a Black-Scholes option pricing model was $277,014, but this amount was reduced to a discount of $117,857 based on the net amount of the face value of the LPC Note One of $250,000, less the OID of $25,000, less the BCF of $107,143. These warrants include a cashless exercise right and have the same ownership limitation included in LPC Note One. None of these warrants have yet been exercised.
On September 30, 2015, as an inducement for execution of the September 2015 Notes, the Company granted the September 2015 Lenders five‑year warrants (the "September 30, 2015 Warrants") to purchase an aggregate of 3,125,000 shares of our common stock at an exercise price of $0.08 per share. These warrants include cashless exercise rights and none have yet been exercised. Because these warrants were related to issuance of debt, the value of the warrants based on a Black-Scholes option pricing model was required to be recorded as a discount of $167,788 to the September 2015 Notes with an offset to additional paid in capital. None of these warrants have yet been exercised.
On November 23, 2015, as an inducement for execution of LPC Note Two, the Company granted LPC six year warrants (the "November 23, 2015 Warrants") to purchase 5,000,000 shares of restricted common stock at an exercise price of $0.07 per share. Because these warrants are related to issuance of debt, the value of the warrants was required to be recorded as a discount to LPC Note Two with an offset to additional paid in capital. The original costing of the warrants using a Black-Scholes option pricing model was $253,098, but this amount was reduced to a discount of $167,400 based on the net amount of the face value of the LPC Note Two of $300,000, less the OID of $30,000, less the BCF of $102,600. The
se w
arrants include a cashless exercise right and has the same ownership limitation included in LPC Note Two. None of these warrants have yet been exercised.
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – Equity (continued)
The fair valuations for warrants were done on date of grant using a Black Scholes option pricing model with the following assumptions:
Warrant
|
Risk free
rate*
|
Dividend
yield
|
Volatility
period
|
Volatility
rate
|
Estimated
life
|
Exercise
Price
|
Grant Date
Stock price
|
|
|
|
|
|
|
|
|
Unit Offer Warrants
|
1.16% to 1.22%
|
0.0%
|
2.0 years
|
108% to 108%
|
5.0 years
|
$0.055
|
$0.0561 to $0.0639
|
Unit Offer Warrants
|
1.22% to 1.38%
|
0.0%
|
2.0 years
|
113% to 114%
|
5.0 years
|
$0.055
|
$0.0489 to $0.060
|
Unit Offer Warrants
|
1.11% to 1.33%
|
0.0%
|
2.0 years
|
115% to 116%
|
5.0 years
|
$0.055
|
$0.0504 to $0.0559
|
November 23, 2015 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 nine month period ended September 30, 2016 and the year ended December 31, 2015:
|
Number of Warrants
|
|
Weighted-Average Exercise Price
|
Weighted-Average Remaining Term (in years)*
|
|
Intrinsic
Value**
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
5,784,848
|
$
|
0.63
|
2.70
|
$
|
Nil
|
August 18, 2015 - Granted for loan fee
|
3,750,000
|
|
0.10
|
5.14
|
|
Nil
|
September 30, 2015 - Granted for loan fee
|
3,125,000
|
|
0.08
|
4.25
|
|
Nil
|
November 23, 2015 - Granted for loan fee
|
5,000,000
|
|
0.07
|
5.40
|
|
Nil
|
Outstanding at December 31, 2015
|
17,659,848
|
$
|
0.24
|
4.26
|
$
|
Nil
|
March 29, 2016 - Issued for Unit Offer
|
4,275,000
|
|
0.055
|
4.43
|
|
0.001
|
May 31, 2016 - Issued for Unit Offer
|
9,850,000
|
|
0.055
|
4.67
|
|
0.001
|
September 30, 2016 - Issued for Unit Offer
|
2,525,000
|
|
0.055
|
4.67
|
|
0.001
|
Outstanding at September 30, 2016
|
34,309,848
|
$
|
0.150
|
4.30
|
$
|
Nil
|
* (remaining term as of September 30, 2016)
**(intrinsic value based on the closing share price of $0.0561 on September 30, 2016)
KONARED CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – Equity (continued)
Options:
A summary of changes in outstanding stock options for the nine month period ended September 30, 2016 and the year ended December 31, 2015 is as follows:
|
Number of Options
|
|
Weighted-Average Exercise Price
|
Weighted-Average Remaining
Contractual Term (in years)*
|
|
Intrinsic Value**
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
7,000,000
|
$
|
0.19
|
3.11
|
$
|
-
|
(no option issuances were made in 2015)
|
-
|
|
-
|
-
|
|
-
|
Outstanding at December 31, 2015
|
7,000,000
|
$
|
0.19
|
3.11
|
$
|
-
|
(no option issuances have been made in 2016)
|
-
|
|
-
|
-
|
|
-
|
Outstanding at September 30, 2016
|
7,000,000
|
$
|
0.19
|
3.11
|
$
|
-
|
* (remaining term as of September 30, 2016)
**(intrinsic value based on the closing share price of $0.0561 on September 30, 2016)
The following table summarizes information about the options outstanding at September 30, 2016:
**(intrinsic value based on the closing share price of $0.0561 on September 30, 2016)
The expensing and amortization of all options grants have been credited to Additional Paid-In Capital.
Various lawsuits, claims and other contingencies arise in the ordinary course of the Company's business activities. As of the date of these financial statements, we know of no threatened or pending lawsuits, claims or other similar contingencies.
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:
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.
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.
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,