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KONARED CORP - 10-Q - MANAGEMENTS' DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
[November 04, 2014]

KONARED CORP - 10-Q - MANAGEMENTS' DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD LOOKING STATEMENTS The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management's plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "will" and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products, future performance or results of current and anticipated products, sales efforts, expenses and/or cost savings, interest rates, foreign exchange rates, the outcome of contingencies, such as legal proceedings, and financial results. A list of factors that could cause our actual results of operations and financial condition to differ materially is set forth below, and these factors are discussed in greater detail under Item 1A -- "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. These Risk Factors include risks related to: (i) our liquidity and capital resources; (ii) our financing opportunities and plans; (iii) continued development of business opportunities; (iv) market and other trends affecting our future financial condition; (v) our growth and operating strategy. Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The factors that might cause such differences include, among others, the following: (i) we have incurred significant losses since our inception; (ii) any material inability to successfully develop our business plans; (iii) any adverse effect or limitations caused by government regulations; (iv) any adverse effect on our ability to obtain acceptable financing; (v) competitive factors; and (vi) other risks including those identified in our other filings with the Securities and Exchange Commission.



'Forward Looking Statements' include, but are not limited to, the following references in this Report. In our CEO Report Forward Looking Statements may include: "The momentum is headed in the right direction."; "From a strategic perspective, we feel the value of being 'authentic' in a category cannot be over-rated when creating brand loyalty."; "Along with visually presenting our name to wholesale buyers and consumers, these marketing and sponsorship initiatives also give us the opportunity to bring traffic to our website. In doing so we have the chance to share key information with consumers and believe this is also building brand loyalty."; "We created a new and sustainable use for the fruit of the coffee plant and have successfully transitioned this into healthy and enjoyable products which are now reaching consumers. This fact is a major marketing asset."; and "I can report we're extremely pleased with our progress and are enthusiastically pushing forward to accelerate expansion of our distribution and sales." In the Milestones section, the following can be considered to be 'Forward Looking Statements': "Our goals going forward remain: QIV-14 (in addition to aforementioned objectives) Launch 10 additional new DSD distribution locations; Receive authorizations to ship to one additional major retail customer through a ship direct distribution relationship; Expand into one additional major market with a broadline distributor using a natural channel distributor such as DPI, Nature's Best, UNFI or KeHe. Ship re-orders on DSD distributors signed in the QII-14"; "QI-15 (in addition to aforementioned objectives) Launch 10 additional new DSD distribution locations; Ship to one additional major retail customer through a ship direct distribution relationship; Expand into one additional major market with a broadline distributor using a natural channel distributor such as DPI, Nature's Best, UNFI or KeHe. Ship re-orders on DSD distributors signed in the QIII-14". In the Historic and Projected Product Mix section, the following can be considered to be 'Forward Looking Statements': "DSD Distributors...approximately 46%...and we project a similar percentage in the near future.; Broadline Distributors...25%...and we project a similar percentage in the near future.; Direct to Retailers...21%...and we project a similar percentage over the near term; Direct to Consumers...have historically been just under 2% of revenue and we project a similar range as we move forward." In the Results of Operations section, the following statements can be considered 'Forward Looking Statements': "We project COGS will decrease over the balance of fiscal 2014 and into fiscal 2015 and gross margin will improve."; "We project that as our order flow becomes more steady, our COGS will decrease due to the economies of scale from larger production runs."; "We do not anticipate further other income item will arise in the near term."; "We project R&D costs will remain near current levels for the balance of fiscal 2013."; "We project advertising and marketing costs will increase over the balance of fiscal 2014."; "We project general and administrative expenses will remain at current levels or increase moderately over the balance of fiscal 2014."; "At present, we estimate we will need to raise capital during the coming twelve months to fund our strategic plans." 25 -------------------------------------------------------------------------------- Table of Contents Overview KonaRed Corporation (hereinafter Konared Corporation may be referred to: "KonaRed Corporation", "KonaRed", "We", "Us", the "Registrant", or the "Company") was incorporated on October 4, 2010 in the state of Nevada. Since inception the Company has not been involved in any bankruptcy, receivership or similar proceedings. The Company was organized under the name TeamUpSports Inc.

and on September 9, 2013 entered into an agreement (the "Asset Purchase Agreement") to acquire the assets of Sandwich Isles Trading Co, Inc. ("SITC").


SITC was incorporated in the State of Hawaii on August 22, 2008 and its operations, which we have taken over, include the business of distributing, marketing and selling for retail sale beverage and other products produced from the fruit of the coffee plant.

As part of its revised business plans, the Company: amended its articles of incorporation to change its name from TeamUpSport Inc. to KonaRed Corporation; executed a 13.5 to one forward stock split of the authorized, and issued and outstanding shares of its common stock; and changed its year-end from May 31st to December 31st. The financial statements included in this Form 10-Q Report reflect the re-statement of data from prior periods so as to conform to the revised shares amounts and the new year-end cycle. These financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States.

The Company's common stock is publicly traded on the OTC Markets Group's OTCQB under the symbol: KRED.

26-------------------------------------------------------------------------------- Table of Contents KonaRed Corporation - CEO Progress Report Dear KonaRed Shareholders: We are pleased to report we've made strong year to date progress with our national product roll-out. During the last six months since engaging Splash Beverage Group we've expanded distribution of our beverage and wellness products into over 5,000 additional retail grocery and specialty stores.

When compared to the same period in 2013, our consumer product sales for the first nine months of 2014 grew 120 percent to $1,111,587 and our total revenues increased 39% percent to $1,175,829 (please see Results of Operations section below for more detail).

The momentum is headed in the right direction. For instance, during the third quarter we surpassed our internal goal of adding 10 new Direct Store Distributors ('DSDs') distribution locations by acquiring 14 new DSD distribution locations. However, we're not complacent and our entire team is pushing hard to move growth along faster.

A key to our growth is the distribution marketing agreements we have in place with Splash Beverage Group ('SBG'). They are simply the best at what they do.

One of their executives, deeply involved with KonaRed, is noted for his success as one of the chief architects marketing Red Bull in North America. And we all know how well that turned out. We couldn't have better experienced partners.

The success of our 2014 rollout has been based on a variety of factors. One of the most important is we're presenting an entirely new product category to consumers - exclusive Coffeeberry®, coffee fruit from Hawaii, USA. Other companies have created dominant product categories based on juices such as Cranberry and Pomegranate. KonaRed is doing the same with the fruit of the coffee plant. Product sales by the premier, mature stage companies in each of these other categories are in the hundreds of millions of dollars each year.

From a strategic perspective, we feel the value of being 'authentic' in a category cannot be over-rated when creating brand loyalty. We provide an efficacious dose of USA grown coffee fruit in every product that is traceable to the farms in Kona, HI.

In tandem with our authenticity is also our range of products. Three distinct KonaRed beverage products are selling off store shelves along with our line of nutritional supplement products. These multiple product offerings help capture hard to win retail shelf space and also diversify our revenue stream.

During 2014, KonaRed has conducted a wide series of in-store sampling campaigns to get our products into the hands of consumers. These have won us new customers who haven't experienced anything similar to KonaRed. We've also opened new doors in the distribution community which has proven to be a strong pillar of our growth over the last few months. Along with recruiting distributors and opening new markets such as Las Vegas, our products are being presented to many of the top national beverage wholesale buyers. An example was our presence at the Natural Products Expo East (www.expoeast.com) and the NACS (National Association of Convenience and Fuel Retailing) trade shows.

We also recently expanded into the New York City metropolitan area, the capital of consumer spending in our country. KonaRed is now being placed on store shelves in Manhattan, the Bronx, Queens, Brooklyn, Staten Island, as well as Nassau, Suffolk and Westchester counties .

KonaRed nutritional products are also available in select Vitamin Shoppe locations nationwide, as well as vitaminshoppe.com. Plus, Nature's Best has recently been added our supplement products, such as 100% Hawaiian CoffeeBerry® Powder in 16oz. tubs.

27 -------------------------------------------------------------------------------- Table of Contents Recent marketing efforts include our sponsorship initiatives of The CrossFit Ultimate Hawaiian Trail Run, The Honolua Surf Co.'s Ultimate Stand Up Paddle Showdown which was seen nationwide on the CBS Sports Network this past Sunday and the upcoming Pure Aloha Festival in Las Vegas, also known as the 9th Hawaiian Island - www.purealohafestival.com Along with visually presenting our name to wholesale buyers and consumers, these marketing and sponsorship initiatives also give us the opportunity to bring traffic to our website. In doing so we have the chance to share key information with consumers and believe this is also building brand loyalty. An element of this is spreading the word about our dedication to environmental responsibility and sustainability. Farm to bottle! We believe that consumers of wellness-based products appreciate responsible corporate stewardship and 'win-win' business practices. Our products are formulated from a highly valuable by-product of coffee production which was previously discarded by coffee growers. We created a new and sustainable use for the fruit of the coffee plant and have successfully transitioned this into healthy and enjoyable products which are now reaching consumers. This fact is a major marketing asset.

Right now you can find our main website as before at: www.konared.com, and our product locator at: www.konared.com/find-a-retailer. And we'll soon be bigger and better. Look for our new website launching in November! With respect to our raw materials supply, we can also report that the Hawaiian coffee crop has proven bountiful this summer. We have ample supply to meet this year's production of KonaRed products. Additionally, for those of you who watch the weather reports, the hurricanes which were headed toward Hawaii during the summer did not make landfall on the side of the Island in Kona where the coffee belt thrives. Our supply chain remains solid.

If you have a few minutes, Ie'd like to speak to you directly through two interviews which we have available online. Please put https://www.youtube.com/watch?v=TvsFm7if6Sk and http://ceolive.tv/konared-corp/kred-videos/2270-ceolive-tv-interview-shaun-roberts-ceo-of-konared-corp into your browser so that you can see me, my passion and, hopefully, my honest approach to marketing.

In summary, we can report we're extremely pleased with our progress and are enthusiastically pushing forward to accelerate expansion of our distribution and sales.

Sincerely, Shaun Roberts Founder, President, CEO 28-------------------------------------------------------------------------------- Table of Contents Description of Business Principal Products Our principal product is our premium coffee fruit wellness drink, KonaRed Antioxidant Juice, offered to retail consumers. Previously discarded as a byproduct of coffee production, the fruit surrounding the coffee seed (coffee bean) has been recognized as containing powerful anti-oxidants.

Our company's consumer products line consists of the following proprietary formulations: ? 16 oz. KonaRed Original Antioxidant Juice (2 servings) Our company's flagship beverage, the 16 oz. superfruit drink enjoys widespread placement in cold juice coolers in a myriad of retail major establishments including 2100+ Walmart locations.

? 10.5 oz. KonaRed Original Antioxidant Juice (1 serving) Our 10.5 oz. is also now also being featured at numerous retailers including Kroger locations.

? 10.5 oz. KonaRed Antioxidant (1 serving) Additional Flavor Combinations Including Organic Green Tea and Coconut Water In total we offer 3 different beverages in the 10.5oz size: Original Hawaiian Coffeeberry®, Hawaiian Coffeeberry® with Organic Green Tea, and Hawaiian Coffeeberry® with Coconut Water.

[[Image Removed]] 29-------------------------------------------------------------------------------- Table of Contents Other Products The following products extensions were also added during early 2014 and are now available in several major chains in Hawaii, and at select locations of Vitamin Shoppe nationwide: ? KonaRed On-the-Go Packs (15 per box) ? KonaRed Hawaiian Superfruit Powder (100% soluble coffee fruit powder) [[Image Removed]] [[Image Removed]] [[Image Removed]] 30-------------------------------------------------------------------------------- Table of Contents Use of Patents A key element of our business is the License we have been provided by VDF FutureCeuticals Inc. which provides us with the use of VDF's coffee fruit patents and Coffeeberry® trademark license. The License Agreement has effectively formed a strategic alliance between KonaRed and VDF and eliminated competition and patent defense costs between the parties for rights to valuable proprietary R&D.

The License Agreement provides us with access to use of VDF's patents, as existing and/or modified in the future, along with the processes, products, methods, compositions and know-how developed by VDF related to the patented Coffee Cherry-related inventions, trade secrets and know-how.

Operations, Facilities and Distribution Method for Our Products Our company uses an outsourcing business model based on utilizing third parties for the bulk of our non-core business operations, such as manufacturing and coffee fruit extraction, while maintaining in-house control of critical marketing, product development and warehousing/shipping functions.

Leveraging the early research and development ("R&D") performed at our original Maui facility we developed the necessary processing and manufacturing intellectual property ("IP") for processing and manufacturing our base ingredient - the coffee fruit. As we transitioned our coffee fruit extraction to contract manufacturers, we closed our Maui facility and moved extraction to a California-based contract manufacturer with close proximity of our San Clemente warehouse , which is comprised of a shared 10,000 square foot facility.

Supply and Distribution for Our Product Our company's ability to secure exclusive Kona-based and other Hawaiian coffee fruit has elevated the stature of the home grown brand image and allows our company to operate without constraints in the supply chain far out into the future. We have been successful in securing agreements structured as 5-year arrangements containing roll-over provisions. These agreements are based on our commitment to exclusively purchase coffee fruit from the supplier, and the supplier is obligated to provide coffee fruit exclusively to our company. Our company's principal supplier of raw coffee fruit is Greenwell Farms, Inc., a Hawaii corporation. We project we will have an abundant supply of raw materials for the foreseeable future.

We determine the amount of dried coffee fruit to purchase from our suppliers based on our annual sales forecasts and have historically been accurate at estimating supply quantities based on projected sales. Since the fruit surrounding the coffee bean was previously discarded as a byproduct of coffee production, such raw material has also remained readily available from coffee farms located in Hawaii and internationally. Therefore, although we currently have a principal supplier, in the event that we lose a principal supplier, we are confident that we would be able to ascertain raw material from other suppliers.

Our production process is based on our company taking possession of the dried coffee fruit from the grower, shipping the dried coffee fruit to our San Clemente warehouse for storage, and then subsequently sending required quantities to subcontractors for value-added processing. The value-added processing consists of water based extraction whereby the dried coffee fruit is reduced to liquid extract. This processing generally takes approximately 24 hours to complete.

For our company's beverage production, the coffee fruit finished goods are sent to a 3rd party flavor house which makes the KonaRed concentrate and then ships it to our company's bottling vendors. Notably, we own the proprietary beverage formulas. Pallets of the ready-to-drink 16 oz. and 10.5 oz. product items (defined as "Stock-keeping Units", or "SKUs") are then shipped back to our company's warehouse and disseminated to either distributors or shipped directly to retailers.

31-------------------------------------------------------------------------------- Table of Contents Fiscal 2014 Expansion of Distribution via Splash Beverages To expand our distribution throughout the United States, on April 22, 2014, we entered into two agreements with the Splash Beverages Group, Inc. (`SBG`) Key terms of the first agreement, the Distribution Agreement, are as follows: - We granted to SBG the exclusive right to distribute our consumer beverage products within the United States and its territories (the `Territory); - SBG agreed to market all of our beverages, including but not limited to: ? KonaRed® Hawaiian original Coffeeberry® Superfruit Juice - 16oz ? KonaRed® Hawaiian original Coffeeberry® Superfruit Juice - 10.5oz ? KonaRed® Hawaiian Coffeeberry® Superfruit Juice with Organic Green Tea - 10.5oz ? KonaRed® Hawaiian Coffeeberry® Superfruit Juice with Coconut Water - 10.5oz.

and the parties may agree to later add additional products produced by our company by mutual written consent of the parties; - The Distribution Agreement has a term of five (5) years and SBG agreed it will not directly or indirectly distribute or sell our products outside of the Territory, including to any party SBG has reasonable basis to believe will distribute or sell our products outside of the Territory. We agreed that we will not directly or indirectly distribute or sell our products inside the Territory, including to any party we have reasonable basis to believe will distribute or sell our products inside the Territory. We also agreed to transfer all sales and distribution accounts to SBG (e.g. Walmart, Vitamin Shoppe) by the end of 2014. In addition, any sales by our company within the Territory will count towards the sales goals set forth in the Distribution Agreement as if SBG had made those sales itself; - All our products will be sold to SBG at our most preferred standard wholesale prices as currently fixed by our company for wholesale trade, and as may be adjusted by our company from time to time at our sole discretion; and - SBG shall be eligible to earn vested equity in the form of restricted common shares of our company upon successfully meeting certain sales performance goals.

Key terms of the second agreement, the Sales and Marketing Services Agreement, are as follows: - Separate and apart from any information or advice which Splash may provide to our company as contemplated within the scope of the Distribution Agreement, SBG will provide us with information and advice so as to determine strategies and methods to increase our sales within the Territory; and - The Sales and Marketing Services Agreement has a term of five (5) years; 32-------------------------------------------------------------------------------- Table of Contents Sales Strategy The sales strategy for our beverage products is now centered on distribution through SBG. With respect to our line of wellness supplement products, such as our `On-The-Go Packets`, and `100% Hawaiian CoffeeBerry® Powder in 16oz. Tubs`, we ship directly from our warehouse to customers such as Vitamin Shoppe.

Management has also retained manufacturers' sales representatives in working to calibrate its overall sales efforts. During the roll-out, management has learned the importance of supporting its distributor network with internal "on the ground" sales personnel. Particularly for an emerging product, merchandising follow-up, dialog with store managers and coordination of promotions and pricing are critical in maintaining brand momentum.

We are now heavily focusing our marketing efforts on in-store product demos, where our reps offer free samples to potential customers. Demos are often outsourced to specialists in the field and have represented a major expenditure for the business.

Although KonaRed was invented as a wellness product, we believe consumer acceptance of our beverage products now places us both within the `functional beverage` and `premium juice` retail categories. A `functional beverage` is defined as one which has certain attributes, such as Antioxidants, whereas a `premium juice` is simply a tasty product which consumers enjoy.

Our company has employed co-op advertising and special promotions in conjunction with our retail partners when deemed appropriate in its brand building efforts.

To date, minimal slotting fees have been paid. (A slotting fee is an amount paid by the manufacturer to the retailer for making room on its retail shelf for the product).

We monitor industry pricing levels carefully and our beverage pricing levels have already been adjusted to reflect the current pricing dynamics fostered by recent industry consolidation.

Specifically, the entrance of leading beverage monoliths into the functional beverage category has tightened pricing but also created a vibrant mergers and acquisitions environment for emerging brands like KonaRed.

Recent beverage industry deals have included: ? Coca Cola acquired Zico Coconut Water in January 2014; ? Pepsi acquired a majority stake in O.N.E. Coconut Water in April 2012; ? InBev has made a series of investments in Sambazon (in August 2012, December 2011, and December 2008); and ? InBev has also made a series of investments in Vita Coco in May 2012 and December 2010.

? Coca Cola acquired a 16.7% stake in Monster Beverages in August 2014 for $2.15 Billion as a method to diversify its product lines into new generation products.

33-------------------------------------------------------------------------------- Table of Contents Market Development and Metrics Our long-term objective is to develop KonaRed into a nutritional company which supplies consumers with a variety of high quality food and beverage products. We plan to achieve this based on a strategy of expanding our retail footprint through a series of revenue generating distribution channels. Presently, our predominant focus is our beverage business and we are generating revenues through the following five distribution channels: ? Direct Store Distributors: The direct store distributors ("DSDs") channel comprises wholesale distributors who maintain in-house inventories of multiple brands of beverage products, such as juices, beer, and water, which they sell to retail stores and other wholesalers. Examples of our DSD customers presently include: Paradise Beverages in Hawaii, and John Lenore in San Diego.

? Broadline Distributors: The broadline distributors channel includes wholesalers who specialize in distribution of natural food products to retail stores. Examples of our broadline distributor customers presently include: United Natural Foods Inc. ("UNFI"), DPI Specialty Foods ("DPI"), and Nature's Best.

? Direct to Retail: During our growth phase we have developed a direct to retail sales channel to grocery stores such as Walmart and specialty retail stores such as The Vitamin Shoppe. We intend to continue to service and develop this channel further.

Direct to Consumer: The KonaRed brand has gained a dedicated following of Internet based customers who purchase our products directly through our website. We plan to expand this channel though on-line marketing initiatives in parallel with our brand recognition marketing campaigns.

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

In summary, our sales expansion priorities comprise: (1) expansion of wholesale distribution; (2) retail chain success; (3) growth of direct to retail sales; and (4) growth of direct to consumer sales.

To fulfill our sales expansion objectives in our four targeted distributions channels, we intend to raise capital by pursuing a range of financing strategies. We cannot predict precisely at this time what will be the composition of these financings, but will seek capital arrangements which achieve a balance of minimizing our financing costs and maintaining maximum shareholder value.

34-------------------------------------------------------------------------------- Table of Contents Milestones At the end of our first quarter of 2014, we presented the following roadmap and highlight below the elements which we have achieved during our second and third quarters: QII-14: ? Execute distribution contract for nationwide United States distribution in three of our five distribution channels.

RESULT: Achieved ? Launch 10 new additional DSD distribution locations. RESULT: Achieved and surpassed. 11 new DSDs distribution locations added.

? Ship to one additional major retail customer through a ship direct distribution relationship.

RESULT: Achieved ? Expand into one additional major market using a broadline distributor using a natural channel distributor such as DPI, Nature's Best, UNFI or KeHe Distributors ("KeHe").

RESULT: Achieved ? Launch two new consumer beverages including KonaRed Coconut Water and KonaRed Green Tea.

RESULT: Achieved ? Additionally the following QIII-14 goal was also achieved this quarter: Launch two new consumer KonaRed products including 'on the go packs' and 100 percent water soluble coffee fruit powder.

RESULT: Achieved QIII-14 ? Launch 10 additional new DSD distribution locations.

RESULT: Achieved and surpassed. 14 new DSD distribution locations added.

? Ship to one additional major retail customer through a ship direct distribution relationship.

RESULT: Achieved ? Expand into one additional major market using a broadline distributor using a natural channel distributor such as DPI, Nature's Best, UNFI or KeHe.

RESULT: Achieved ? Additionally the following QIV-14 goal was also achieved this quarter: Harvest 2014 coffee fruit crop.

RESULT: Achieved 35-------------------------------------------------------------------------------- Table of Contents Our goals going forward remain: QIV-14 (in addition to aforementioned objectives) ? Launch 10 additional new DSD distribution locations.

? Receive authorizations to ship to one additional major retail customer through a ship direct distribution relationship.

? Expand into one additional major market using a broadline distributor using a natural channel distributor such as DPI, Nature's Best, UNFI or KeHe.

? Ship re-orders to DSD distribution locations acquired in QII-14 QI-15 (in addition to aforementioned objectives) ? Launch 10 additional new DSD distribution locations.

? Ship to one additional major retail customer through a ship direct distribution relationship.

? Expand into one additional major market using a broadline distributor using a natural channel distributor such as DPI, Nature's Best, UNFI or KeHe.

? Ship re-orders to DSD distribution locations acquired in QIII-14 If sufficient capital is not raised to support distribution for this business model, no new KonaRed consumer products will be launched and we will continue to service our existing markets without expansion into new DSDs. If we had experience a lack of capital, we anticipate that would limit our sales growth over the coming year.

Historic and Projected Product Mix KonaRed uses four main channels of distribution to bring KonaRed consumer products to market.

1. DSD Distributors: DSD is a business process that manufacturers use to both sell and distribute goods directly to point of sales or point of consumption including additional product and market related services such as merchandising. In order to fulfill growing demand from retailers, DSDs specializing in the beverage channels are expanding their functional beverage categories to include the type of products in which KonaRed specializes. During the last nine months, DSDs have represented approximately 46% of KonaRed's revenue and we project a similar percentage over the near future 2. Broadline Distributors: A broadline distributor services a wide variety of accounts with a wide variety of products ranging from food, beverages and supplies in the natural channel selling to retailers like Whole Foods and Sprouts. During the last nine months, broadline distributors have represented approximately 25% of revenue and we project a similar percentage over the near future.

3. Direct to Retailers: Direct to retailer includes major retail chains with 500 locations or more where the KonaRed product ships direct to the retailers distribution centers and the retailers are responsible for the distribution to each retail store.

During the last nine months, direct to retailer distribution has represented approximately 21% of our revenue and we project a similar percentage over the near term.

4. Direct to Consumers: Direct to consumer are internet revenues and have historically been just under 2% of revenue and we project a similar range as we move forward.

36-------------------------------------------------------------------------------- Table of Contents Advertising Our advertising is now focused on Point of Purchase initiatives such as in-store product demos, and we are participating in key trade shows nationwide.

Organic Promotion - Athlete Sponsorships Historically we've been involved in many athletic sponsorship initiatives through our continuing presence in the both the Hawaiian and Southern California communities, participating in and promoting ocean and extreme-athlete related contests, races and charity events. We've now expanded this marketing program and also sponsor an "Ambassador Team," which includes both a group of Hawaiian super-athletes and high profile athletes in sports such as Golf. Our Ambassadors participate in promotional events, sign autographs at store openings, and are generally available to spread the goodwill of our brand.

Competition The beverage industry is extremely competitive. The principal areas of competition include pricing, packaging, development of new products and flavors, and marketing campaigns. Our product is competing directly with a wide range of drinks produced by a relatively large number of manufacturers. Most of these brands have enjoyed broad, well-established national recognition for years, through well-funded ad and other marketing campaigns. In addition, companies manufacturing these products generally have far greater financial, marketing, and distribution resources than we do.

Important factors that will affect our ability to compete successfully include taste and flavor of our product, trade and consumer promotions, the development of new, unique and cutting edge products, attractive and unique packaging, branded product advertising, pricing, and the success of our distribution network.

We will also be competing to secure distributors who will agree to market our product over those of our competitors, provide stable and reliable distribution, and secure adequate shelf space in retail outlets.

Our product will compete generally with all liquid refreshments, including numerous specialty beverages, such as: SoBe; Snapple; Arizona; Vitamin Water; Gatorade; and Powerade. We will compete directly with other consumer products participants in the nascent coffee fruit sector including Bai5 and SoZo. As we are still a relatively new business and we have modest revenues, we believe that we are a small company in the general liquid refreshments market and health liquid refreshment market.

Intellectual Property KonaRed® is a registered trademark in the United States and in Japan and we intend to seek a number of trademarks for slogans and product designs. We also hold trademark rights to the "Paradise in a Bottle®" tag line. We believe we have the rights to use the necessary processing and manufacturing intellectual property relating to processing and manufacturing our base ingredient (the coffee fruit) and our proprietary beverage formulas. However, we do not own the manufacturing process for making the finished beverages. We intend to aggressively assert our rights under trade secret, unfair competition, trademark and copyright laws to protect our intellectual property, including product design, product research and concepts and recognized trademarks. These rights are protected through the acquisition of patents and trademark registrations, the maintenance of trade secrets, the development of trade dress, and, where appropriate, litigation against those who are, in our opinion, infringing these rights.

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

37 -------------------------------------------------------------------------------- Table of Contents Partnership Initiative with VDF FutureCeuticals Inc.

To the mutual satisfaction of the parties, on January 28, 2014 we settled a patent dispute which had been pending since 2011 with VDF FutureCeuticals Inc.

("VDF") by forming a partnership with VDF.

VDF is a major biotech and ingredient supplier and owner of the patent-protected CoffeeBerry® coffee fruit technology, a proprietary set of agricultural and industrial processes and a line of unique ingredients. VDF's patents and processes capture the same potent nutrition inherent in coffee fruit which had formed the basis of two provisional patent applications made by KonaRed based on the proprietary research and development which had been fully developed by KonaRed.

The partnership brings together the flavor profile of KonaRed's beverages and the ingenuity, innovation, and ongoing chemistry and clinical research of VDF's globally integrated CoffeeBerry® coffee fruit ingredient platform.

Commenting on formation of the partnership, Mr. Shaun Roberts, CEO of KonaRed and Mr. John Hunter, Executive Vice President of VDF provided the following: "Finding ways to work together, bridge differences, and create something stronger than the sum of its parts is what the spirit of Aloha is all about, and this dispute with FutureCeuticals is a perfect example," said KonaRed CEO Shaun Roberts. "This new relationship was forged within the crucible of the lawsuit.

During productive discussions with FutureCeuticals, it became apparent that there were obvious synergies available to KonaRed if we worked together. The CoffeeBerry® coffee fruit IP opens up limitless opportunities for us, and I have no doubt that we're now a far stronger company than we were before." "KonaRed has built a very strong brand concept and shows real promise in the marketplace," said FutureCeuticals Executive VP John Hunter. "During our negotiations, Shaun and Dana Roberts impressed us [and] it became immediately apparent that they are genuine people and terrific marketers. KonaRed is a natural match for our IP and for the extensive science and manufacturing expertise that underlies our CoffeeBerry® coffee fruit ingredient-line.

FutureCeuticals welcomes KonaRed into our license fold, and we see a new, even stronger KonaRed emerging from this lawsuit with our partnership." VDF (www.futureceuticals.com) is a leader in the bio-research, development, and manufacture of high-quality fruit, vegetable, and grain-based nutraceutical and functional food ingredients. VDF is committed to discovery-based research that leads to the expansion of human health, and is the trusted partner-of-choice for companies in search of creative, ethical solutions for the health and wellness needs of today's consumer. Its sister company, Van Drunen Farms, was founded over one hundred years ago, and has grown into one of the largest dried food ingredient manufacturers and suppliers in the world.

Seasonality of Business The sales of our products are influenced to some extent by weather conditions in the markets in which we operate. Unusually cold or rainy weather during the summer months may have a temporary effect on the demand for our product and contribute to lower sales, which could have an adverse effect on our results of operations for such periods.

38-------------------------------------------------------------------------------- Table of Contents Research and Development Costs During the Last Two Years KonaRed has maintained a modest R&D effort over fiscal years 2013 and 2012, having spent approximately $18,710 and $34,850, respectively.

R&D has been focused on quinic acid, an antioxidant that is in greater abundance in the KonaRed beverage than any other molecule. With a molar mass of 192.17 g/mol, quinic acid is small by comparison to other organic chemicals known as polyphenols. Much of our research has been directed towards attempts to confirm whether there is a correlation between small molecular mass and high bioavailability (the body's ability to readily absorb a substance introduced).

In addition, our research has been focused on whether antioxidants with a high oxygen radical absorbance capacity, a method of measuring antioxidant capacities in biological samples, and a high bioavailability may provide a way to increase one's cellular metabolic efficiency ("CME"). We believe that it is possible that increased CME may result in increased energy, reduction of metabolic oxygen related stress at the cellular level and reduction of inflammation. We intend to continue our research to the extent of our limited funds and to examine whether the consumption of KonaRed products, if established as substances that increase CME, might provide positive effects on human health by decelerating the death of cells without negative side effects. Such research is in a very preliminary stage, there is no proof that KonaRed can produce health benefits for humans, and we do not have the funds required to conduct an extensive research program on the matter.

In 2012, a series of tests were conducted at Cayetano University in Lima, Peru by a team of research physicians to determine the antiviral and anti-inflammatory properties of KonaRed in a clinical environment. The Cayetano University studies were commissioned by KonaRed. They were in-vitro (test tube) based studies and not human trials. The KonaRed extract was found to improve cell viability, increase T cell proliferation and improve antiviral defense. The foregoing conclusions were based on the results of antiviral activity and cell proliferate effect of KonaRed on mice.

In these limited tests, KonaRed's coffee fruit demonstrated an antiviral effect, improving cell viability, increasing T cell proliferation and improving antiviral defense. The body's first line of defense against viruses is the immune system. This comprises cells and other mechanisms that defend the host from infection in a non-specific manner. Because viruses use vital metabolic pathways within host cells to replicate, they are difficult to eliminate without using drugs that cause toxic effects to host cells in general. The foregoing limited studies suggested that KonaRed beverage's coffee fruit could have antiviral effects upon consumption by humans.

As in any research and development program, further investigation and study is required. Whether KonaRed's beverage ultimately proves to be a useful CME supplement, and does so without negative effectives, and whether the promotion of CME proves to have therapeutic effects on humans, is unknown. To the extent our Company has funds available for research and development, management intends to pursue this line of research and investigation on a limited basis.

39 -------------------------------------------------------------------------------- Table of Contents Government Regulation Our products are considered to be synonymous with coffee for regulatory purposes and are thus sold under the U.S. Food and Drug Administration's ("FDA") "Generally Regarded as Safe" ("GRAS") regulatory umbrella. Accordingly, we are not required to petition for FDA approval of its coffee fruit offerings, which would be typical under standard dietary supplement guidelines. However, our company has registered all of its supply chain subcontractors with the FDA as required and has met and answered all inquiries by the FDA. We believe we are in full compliance with all FDA regulations.

The advertising, distribution, labeling, production, safety, sale, and transportation in the United States of our product are subject to: the Federal Food, Drug, and Cosmetic Act; the Federal Trade Commission Act; the Lanham Act; state consumer protection laws; competition laws; federal, state and local workplace health and safety laws; various federal, state and local environmental protection laws; and various other federal, state and local statutes and regulations. It will be our policy to comply with any and all legal requirements.

Employees In addition to Shaun Roberts, who is our President, Chief Executive Officer and a Director and John Dawe, CFA, who is our Chief Financial Officer, Secretary & Treasurer, we currently employ 7 full time employees whom all work in the United States. Our operations are overseen directly by management that engages our employees to carry on our business. Our management oversees all responsibilities in the areas of corporate administration, business development, and research. We intend to expand our current management to retain other skilled directors, officers, and employees with experience relevant to our business focus. Our management's relationships will provide the foundation through which we expect to grow our business in the future. We believe that the skill-set of our management team will be a primary asset in the development of our brands and trademarks.

Description of Property Our property assets consist of warehouse equipment and office furniture. Our corporate office is located at 2829 Ala Kalanikaumaka St., Suite F-133 Koloa, HI 96756. This property consists of approximately 1,000 square feet of office space for which we pay $1,300 per month, on a month to month basis. Our warehouse and distribution center is located at 1101 Via Callejon - #200, San Clemente, California 92673 comprised of 2,558 square feet of office area and 8,344 square feet of warehouse area. Base rent is $9,811.80 per month with the term ending May 31, 2016. We pay a total of $7,537.25 per month with the remainder paid by Malie, Inc. We believe that the condition of our principal offices is satisfactory, suitable and adequate for our current needs.

DISTRIBUTION EXPANSION KonaRed Increases Sales and Retail Placements via Splash Beverage Group At September 30, 2014 our beverage distributor Splash Beverage Group, Inc.

('SBG') provided us with a progress report showing increases in sales and placements in key retail stores nationwide through the work SBG performed for KonaRed during the second and third quarters. A key highlights of the SBG report was the signing of 25 new DSD distribution locations over the last six months.

Overall, it's our assessment that SBG is providing an effective method for the expansion of our distribution in the near term and that distribution expansion is on track.

40-------------------------------------------------------------------------------- Table of Contents RECENT NEWS: QI-14 ? January 27, 2014 - Two Private Placements Raise $1,000,000 In January 2014 we raised an additional $1,000,000 through two unit private placements.

? January 28, 2014 - VDF Patent Settlement & Formation of Co-operative Relationship On January 28, 2014 we came to a mutually beneficial resolution with VDF FutureCeuticals Inc. ('VDF') regarding a patent dispute. This resolution has formed a new co-operative relationship between KonaRed and VDF which we expect will provide substantial value over the coming years.

? March 19, 2014 - Bill Van Dyke Appointed as New Director Bill Van Dyke has been the chairman and CEO of B&D Nutritional Ingredients since 2003. As the founder, Bill has been the pivotal force behind B&D's development into a full-service, North American sales and marketing company. His sales and marketing career in the dietary supplement industry spans more than 20 years. As the Council for Responsible Nutrition's 2000-2002 Chairman, Bill has served on numerous committees throughout his 20-year involvement with CRN. Bill has also served on the board of directors for other industry organizations.

? March 19, 2014 - John Dawe Hired as CFO, Secretary & Treasurer John Dawe brings more than 31 years of financial, business and executive level experience. He has served as CEO, vice president of finance and treasurer for finance related entities and created and maintained accounting and reporting systems for U.S. publicly traded companies. In 1983 Mr. Dawe received his B.Comm degree from the University of British Columbia; and in 1988 earned the designation of Chartered Financial Analyst. He has profitably managed a financial asset portfolio of over $1 billion and his management experience with U.S. start-up corporations spans the last 15 years.

QII-14 ? April 22, 2014 - Distribution and Marketing Agreements with Splash Beverages Group On April 22, 2014 we engaged industry leader Splash Beverages Group to expand our distribution networks and provide us with sales and marketing services. (Full details regarding SBG appear above).

? April 22, 2014 - Nutritional Industry Giant The Vitamin Shoppe begins carrying KonaRed products in select Vitamin Shoppe locations in 37 states across the U.S.

This product rollout includes KonaRed On-the-Go Packets and 100% Hawaiian Coffeeberry in 150 Gram Tubs. The Vitamin Shoppe conducts business through more than 640 company-operated retail stores under The Vitamin Shoppe, Super Supplements and Vitapath retail banners, and through its website.

? May 9, 2014 - New Capital Begins Flowing from Equity Line On May 9, 2014 our Equity Line with Lincoln Park Capital LLC ('LPC) formally came online and has provided us with $1.7million in new capital to current date.

? May 27, 2014 - CEO Shaun Roberts Interviewed on CEOLIVE.TV CEO Shaun Roberts was interviewed by CEOLIVE.TV as part of its Executive Interview Series and described KonaRed's history, products and major initiatives to expand KonaRed's retail presence. https://www.youtube.com/watch?v=TvsFm7if6Sk.

41-------------------------------------------------------------------------------- Table of Contents ? May 28, 2014 - Nature's Best is added as New Customer of Wellness Products On May 28, 2014, we added Nature's Best - The Natural Products Distributor®, as a new customer for our non-beverage wellness products. Nature's Best will now distribute KonaRedÒ Supplement Products: On-The-Go Packets, and 100% Hawaiian CoffeeBerry® Powder in 16oz. Tubs.

? June 12, 2014 - 50 Fred Meyers added as consumer interest in KonaRed continues to grow On June 12, 2014 the momentum of our distribution growth continued with more than 50 Fred Meyer Stores, in the states of Washington and Oregon coming on-stream to sell KonaRed products.

? June 17, 2014 - Key Beverage Industry Publication Runs Feature Article on KonaRed In its June 2014 edition, Beverage Industry Magazine featured the following article on KonaRed: http://www.bevindustry.com/articles/87521-konared-capitalizes-on-benefits-of-coffee-fruit, which we re-printed in a press release with permission from the magazine. Beverage Industry Magazine (www.bevindustry.com) is the best read and most widely distributed magazine covering the entire $400 billion North American beverage marketplace. The magazine covers a wide range of marketing and manufacturing subjects with emphasis on new products, research and development, packaging, production, distribution, and marketing innovations.

? June 19, 2014 - Strategic Alliance Formed with Sparkling Drink Systems International In June 2014 KonaRed signed a letter of intent with Sparkling Drink Systems International (SDS) to co-develop KonaRed flavor pods exclusively for use with SDS' unique CO2 cylinder free technology. Sparkling Drink Systems International (SDS), the Drinking Experience Company, specializes in beverages and at-home carbonation products. SDS and KonaRed will together launch worldwide a line of powdered beverage pods co-developed exclusively for use with Viberation, SDS' new generation of At-Home Carbonation appliances and portable beverage products which use a patented powered technology to deliver fizz, flavor and functional benefits all in one pod, in just two easy steps (insert pod and push to pierce) and with no CO2 cylinder.

QIII-14 ? July 15, 2014 - Marketing Initiatives Through Key Sponsorships During 2014, we have continued our support of a variety of sponsorships including: - "The Greatest Show on Surf," in San Clemente, California, Ocean Festival July 19 - 20 - an event which attracts families and participants from as far away as Hawaii and Australia and thousands of Californians from San Diego to the south and the Los Angeles area to the north http://www.oceanfestival.org/; - The July 27th 18th Annual Molokai-2-Oahu Paddleboard World Championships, which brings an international group of the top paddleboarders in the world to compete in a gruelling 32-mile ocean channel crossing.

http://www.molokai2oahu.com/sponsors/; - Athletic sponsorships including being Official Supplier for the USA Volleyball Cup 2014, a series of events this year featuring the U.S. Men's and Women's National Volleyball Teams.

http://www.konared.com/konared-becomes-official-supplier-usa-volleyball-cup-2014/ ? July 24, 2014 - KonaRed Expands into New York City Metro Area Our expansion continued during the summer with introduction into the New York metropolitan area via Preferred Beverage Distributors. Preferred Beverage has proven experience and reach in the five New York City boroughs - Manhattan, the Bronx, Queens, Brooklyn, Staten Island, as well as Nassau, Suffolk and Westchester counties, and this launch is another significant step in our national roll-out.

42-------------------------------------------------------------------------------- Table of Contents ? August 1, 2014 - KonaRed Store Locator Launched To guide consumers to retailers offering our products, we created the KonaRed online store locator: www.konared.com/find-a-retailer.

? August 6, 2014 - CEO Shaun Roberts Follow-up Interview on CEOLIVE.TV CEO Shaun Roberts appears for a second CEOLIVE.TV interview featured on its Executive Interview Series wherein he provided answers to investor and consumer questions about KonaRed progress and products.

http://ceolive.tv/konared-corp/kred-videos/2270-ceolive-tv-interview-shaun-roberts-ceo-of-konared-corp.

? August 13, 2014 - Shareholder Letter from KonaRed Founder and CEO Shaun Roberts Mr. Roberts addressed a range of issues in a letter to shareholders with the message that "Our Business Has Never Been in Better Shape".

? August 26, 2014 - KonaRed Corporation Products Now Featured in The Fresh Market Stores in 26 States Founded in North Carolina in 1982, The Fresh Market is a specialty grocery retailer focused on providing high-quality products in a unique and inviting atmosphere with a high level of customer service. (www.thefreshmarket.com). In August, 2014, The Fresh Market began offering 10.5oz. KonaRed Original beverage and KonaRed Coconut Water both in coolers and on their shelves.

? September 11, 2014 - 176 Ralphs Grocery Stores Begin Selling KonaRed Ralphs stores are a key division of the Kroger family of stores, which operate more than 2,600 grocery retail stores, under nearly two dozen banners, throughout the U.S. The addition of Ralphs added to the existing placement of KonaRed's wellness beverages in other stores in the Kroger family, one of the nation's largest retail grocery chains. The KonaRed products available on Ralphs shelves are the 16oz KonaRed Original and the 10.5 oz KonaRed Original, KonaRed Organic Green Tea, and KonaRed Coconut Water.

? September 26, 2014 KonaRed Corporation - CEO Progress Report CEO Shaun Roberts advises shareholders: "I'm pleased to report we've made strong progress this summer with our national product roll-out. Since my last update in August we've added an additional 558 high profile retail stores to our distribution network for KonaRed beverages and wellness products. This translates into expanded distribution of our beverage and wellness products into approximately 2,800 additional retail grocery and specialty stores during the last six months." Progress of KonaRed Operations We are now redesigning our website www.konared.com to improve our Subscription Service to better serve our loyal customers.

We introduced our new 10.5oz single serving size in our original flavor and have begun shipping to our distributors. In addition, we have begun shipping our new formulas, KonaRed Original Coffeeberry with Organic Green Tea, and Hawaiian Coffeeberry with Coconut Water.

We recently launched our On-the-Go Packs and our 100% Hawaiian Coffeeberry Powder. In addition to the formulas, we have designed new packaging for the On-the-Go Packs and Powder in a Tub. Packaging was accompanied by new art design. Both products were launched in the 2nd Quarter of 2014. The launch of these new products accompany new distribution agreements to service this nutritional market segment.

43 -------------------------------------------------------------------------------- Table of Contents KonaRed's Original Hawaiian Superfruit Antioxidant Juice was selected to be featured in Kroger's "Taste of Tomorrow" program, a platform for emerging beverage brands. KonaRed was introduced to the Kroger network during the month of October 2013 in King Soopers, a supermarket brand in the Rocky Mountains owned by The Kroger Company, whose other food chains include Ralphs, Dillons Food Stores, and Harris Teeter, among others.

In the retail market for two years, KonaRed continues to be showcased as an innovative product, high in antioxidants and sourced from the red ripe coffee fruit grown in Kona, Hawaii. The Kroger Company has recognized KonaRed Hawaiian Superfruit Antioxidant Juice as a leader in innovation.

Mr. Mathis Martines, Sr. Category Manager of Innovation at The Kroger Company, stated, "Coffee fruit is an untapped and powerful source of antioxidants. It's one of the most potent sources that exist. We are pleased to be able to offer to our King Soopers' shoppers the opportunity to try KonaRed, one of the pioneers in health and wellness beverages." KonaRed announced that is has officially launched its Hawaiian Superfruit Original Beverages in 16oz. size with retailers across Canada. KonaRed is now listed in over 180 stores and can be found in major natural retail outlets including Whole Foods Market, Choices Markets, Planet Organic and numerous other major independent grocery stores and chains, such as PriceSmart.

Science Update KonaRed continues to push forward on the science behind the Coffee Fruit.

Resulting from our study on the effects of coffee fruit on inflammation and boosting immunity, we announced positive results for the effect of coffee fruit on anti-inflammation, immunostimulatory and antiviral effects of coffee fruit at the 15th International Congress of Immunology held in Milan, Italy on August 22 to 27, 2013.

Researchers from the Universidad Peruana Cayetano Heredia, Department of Cellular and Molecular Sciences, Lima, Peru, led by Dr. Jose L. Aguilar presented the research paper "Anti-inflammatory, Immunostimulatory and Antiviral effects of Coffee fruit (Coffea arabica)" and concluded "CFE showed anti-inflammatory properties on cellular and humoral levels supported by histological techniques. CFE decreased the secretion of pro-inflammatory cytokines such us IL6, TNF? and also MCP-1, thus diminishing cellular infiltration. Conversely, under viral simulation, CFE stimulated T cell proliferation and increased the percentage and activated cytotoxic T cells.

Therefore, these results could attribute coffee fruit immunomodulatory and antiviral properties." These results were presented at the annual conference of the International Congress of Immunology held in Milan Italy and demonstrate the efficaciousness of the active ingredients in KonaRed the Hawaiian Superfruit Antioxidant Wellness Beverage sold throughout Hawaii and select US markets.

44-------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies Basis of presentation The financial statements of the company have been prepared in accordance with the accounting principles generally accepted in the United States of America.

Inventories Inventories are primarily raw materials and finished goods. Inventories are valued at the lower of, cost as determined on an average basis, or market. Market value is determined by reference to selling prices at, or around, balance sheet date or by management's estimates based on prevailing market conditions. Management writes down the inventories to market value if it is below cost. Management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if valuation allowance is required. Costs of raw material and finish goods inventories include purchase and related costs incurred in bringing the products to their present location and condition.

Revenue recognition Sales revenue consists of amounts earned from customers through the sale of its primary products, the KonaRed, premium coffee fruit wellness drink, offered to retail consumers. The company also operates a branded ingredients division that sells fruit powder and extracts to parallel markets to allow the company to piggyback on resources of established players with widespread footprints in other health-oriented consumer venues.

Sales revenue is recognized when persuasive evidence of an arrangement exists, price is fixed or determinable, title to and risk of loss for the product has passed, which is generally when the products are received by the customers, and collectability is reasonably assured. Customers accept good FOB shipping point.

Goods are sold on a final sale basis and in the normal course of business the Company does not accept sales returns.

Cost of goods sold Cost of goods sold consists primarily of selling of raw materials and finished goods purchased from vendors as well as warehousing and distribution costs such as inbound freight charges, shipping and handling costs, purchasing and receiving costs.

Stock Based Payments We account for share-based awards to employees in accordance with ASC 718 "Stock Compensation". Under this guidance, stock compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the estimated service period (generally the vesting period) on the straight-line attribute method. Share-based awards to non-employees are accounted for in accordance with ASC 505-50 "Equity", wherein such awards are expensed over the period in which the related services are rendered.

45 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The following discussion and analysis covers material changes in the financial condition of our Company during the three and nine month periods ended September 30, 2014 and September 30, 2013.

A summary is as follows: Three Months Three Months Nine Months Nine Months ended ended ended ended September 30, September 30, September 30, September 30, 2014 2013 2014 2013 Product sales $ 332,867 $ 169,262 $ 1,175,829 $ 847,178 Shipping and delivery fees 8,397 5,319 85,027 17,055 Net sales 341,264 174,581 1,260,856 864,233 Cost of goods sold (278,851 ) (115,045 ) (1,022,761 ) (541,408 ) GROSS MARGIN 62,413 59,536 238,095 322,825 Operating expenses (814,898 ) (317,016 ) (3,190,622 ) (947,839 ) Loss from operations (752,485 ) (257,480 ) (2,952,527 ) (625,014 ) Other income - - - 49,000 NET LOSS $ (752,485 ) $ (257,480 ) $ (2,952,527 ) $ (576,014 ) Net loss per share $ (0.01 ) $ (0.00 ) $ (0.04 ) $ (0.01 ) Product Sales During the three and nine month periods ended September 30, 2014 we recorded product sales of $332,867 and $1,175,829 respectively, compared with product sales of $169,262 and $847,178 for the three and nine month periods ended September 30, 2013. Prior to adjustment, this represents an increase of 97% in three month comparative product sales, and an increase of 39% in comparative nine months product sales.

We note a change of product mix occurred in early fiscal 2014 which makes the period over period product sales data not entirely comparable.

Previously, in addition to our mainline beverage and wellness product sales, we also operated a division which sold wholesale ingredients to other beverage manufacturers. A phase-out of wholesale ingredients sales was a component of our patent settlement agreement with VDF and this phase-out began in early fiscal 2014. Sales of wholesale ingredients comprised $4,200 and $64,242 for the three and nine month periods ended September 30, 2014, versus $108,318 and $342,774 for the three and nine month periods ended September 30, 2013.

When sales of wholesale ingredients are excluded, adjusted product sales for the three and nine month periods ended September 30, 2014 are $328,667 and $1,111,587, respectively, compared with adjusted product sales of $60,944 and $504,404, respectively, for the three and nine month periods ended September 30, 2013.

The exclusion of phased-out wholesale ingredient sales translates to respective comparable consumer product sales increases of 439% and 120% for third quarter comparative three and nine month periods.

We attribute our increases in sales to key initiatives undertaken in fiscal 2014, including our strategic alliance with Splash Beverage Group Inc. which has expanded our distribution network; and our introduction into national chain stores including Walmart, Kroger and Vitamin Shoppe.

46 -------------------------------------------------------------------------------- Table of Contents Shipping and delivery fees During the three and nine month periods ended September 30, 2014 we recorded shipping and delivery fees of $8,397 and $85,027 respectively, compared with shipping and delivery fees of $5,319 and $17,055 for the three and nine month periods ended September 30, 2013. This represents increases of 58% and 399% respectively for the three and nine month comparative periods.

Cost of Goods Sold As referenced in our Description of Business above, our production is based on an outsourcing business model which utilizes third parties for the bulk of our non-core business operations, such as manufacturing and coffee fruit extraction.

The main component of our cost of goods sold ('COGS') relates to costing the finished goods which are drawn from our inventory when sold. These finished goods primarily include bottles of our coffee beverages in various container and lot sizes which have been manufactured in a staged process for us by third parties and delivered to our warehouse, or to SBG, for distribution. Costing is done on applying specific unit sales to unit product costs based on the costs per unit recorded in our inventory system. Costs per unit in the inventory system include per unit manufacturing charges from outsource manufacturers.

Along with the current period cost of inventory which has been used for product sales, COGS also includes expensing of inventory which has: (i) been disposed of because it has expired and/or become obsolete; and (ii) been subject to a write-down reserve because the inventory has been deemed to be potentially useful, but has been slow moving for a significant period of time. During the period ended September 30, 2014, we completed an extensive assessment of inventory stocks and disposed of $48,854 of obsolete current inventory, and $18,732 of inventory which previously had previously been reserved. Obsolete inventory was comprised both of raw materials which had expired, old labels which included outdated information, and remaining inventory of a discontinued product.

During the three and nine month periods ended September 30, 2014 COGS were $278,851 and $1,022,761, or 82% and 81% of sales, compared with $115,045 and $541,408, or 66% and 63% of sales for the three and nine month periods ended September 30, 2013. This corresponds to gross margin percentages of 18% and 19% versus 44% and 47% for the comparative three and nine month periods ended September 30, 2014 versus September 30, 2013. We project COGS will decrease over the balance of fiscal 2014 and into fiscal 2015 and gross margin will improve.

We attribute part of the relatively higher COGS for the current period to rush processing fees which were required to meet high demand from new major clients such as Walmart. We project that as our order flow becomes more steady, our COGS will decrease due to the economies of scale from larger production runs.

Additionally, a significant contributing factor in the relative period over period decrease in gross margin is that during fiscal 2014 we have been phasing out our wholesale ingredients business. This phase-out of wholesale ingredients sales was a component of our patent settlement agreement with VDF and this began in early fiscal 2014. Sales of wholesale ingredients earned higher gross margin than our mainline consumer products and the elimination of these sales has impacted our comparative period over period gross margins.

The primary cost of goods sold components for the three and nine month periods ended September 30, 2014 versus the three and nine month periods ended March 31,2013 were as follows: (i) manufacturing costs, which include both in-house and outsourced manufacturing costs, totaled $229,148 and $751,776 versus $72,563 and $430,365, respectively; (ii) packaging which totaled $1,840 and $22,459 versus $588 and $2,408, respectively; (iii) customer shipping which totaled $35,325 and $143,652 versus $22,851 and $70,191, respectively; and (iv) inventory delivery which totaled $8,488 and $39,290 versus $5,867 and $23,340, respectively.

47-------------------------------------------------------------------------------- Table of Contents Other Income During the three and nine month periods ended September 30, 2014 we recorded other income of $nil and $nil compared with other income of $nil and $49,000 for the three and nine month periods ended September 30, 2013. Other income was comprised of a one-time license fees charged for the use of our trademark during the first quarter of fiscal 2013. We do not anticipate further other income item will arise in the near term.

Expenses Our operating expenses are classified into three categories: - Research and development - Advertising and marketing - General and administrative expenses Research and Development Research and development costs were $nil and $3,300, respectively for the three and nine month periods ended September 30, 2014, compared with $nil and $16,326 for the comparative periods ended September 30, 2013; or nil% and negative 80%, respectively. Decreases in research and development costs are attributable to implementation of cooperative R&D efforts with VDF per the terms of the agreements we executed in January 2014. We project R&D costs will remain near current levels for the balance of fiscal 2014.

Advertising and Marketing Advertising and marketing costs increased by 678% and 865% to $252,404 and $714,309 for the three and nine month periods ended September 30, 2014, compared with $32,452 and $73,988 for the comparative periods ended September 30, 2013.

These substantial planned increases are primarily attributable to: (i) increased use of free samples in grocery stores; (ii) fees paid to Splash Beverage Group Inc. ('SBG') under our Sales and Marketing Agreement with SBG, which we implemented to effect a rapid expansion of our beverage products distribution with the U.S.; (iii) a major upgrade of our enterprise website to better facilitate direct sales to consumers; and (iv) expenses for a variety of advertising, graphic design and sponsorship/public relations initiatives.

During the three and nine month comparative periods ended September 30, 2014 versus September 30, 2013: the cost of free samples was $68,047 and $215,638 versus $15,541 and $36,011, respectively, representing increases of 338% and 499%, respectively; sales and marketing fees were $72,046 and $177,242 versus $nil and $nil, respectively, representing increases of 100% and 100% respectively; website expenses were $13,713 and $46,971 versus $16,343 and $18,953, respectively, representing a decrease of 16% and an increase of 148%, respectively; and advertising, graphic design and sponsorship/public relations initiatives comprised $98,598 and $274,458 versus $568 and $19,024, respectively, representing increases of 17,259% and 1,343%, respectively. We project advertising and marketing costs will increase over the balance of fiscal 2014.

48-------------------------------------------------------------------------------- Table of Contents General and Administrative General and administrative costs were $562,494 and $2,473,013, respectively, for the three and nine month periods ended September 30, 2014, compared with $284,564 and $857,525 for the three and nine month period ended September 30, 2013. This includes cash and non-cash components and represents increases of 98% and 188%, respectively, for the comparative three and nine month periods. We project general and administrative expenses will remain at current levels or increase moderately over the balance of fiscal 2014.

Non-cash expenses include option grants amortization expense, stock based compensation expenses, and fixed assets depreciation expense. When non-cash expenses of and $131,252 and $1,176,588 for the three and nine month periods ended September 30, 2014; and $nil and $39,550 for the three and nine month periods ended September 30, 2013 are excluded, general and administrative expenses for the comparative periods show comparative increases of 52% and 58% to $431,242 and $1,296,425 respectively for the three and nine month periods ended September 30, 2014, and $284,564 and $817,975, respectively for the three and nine month periods ended September 30, 2013.

Within expenses paid in cash, major items for the three and nine month comparative periods ended September 30, 2014 versus September 30, 2013 included: (i) wages and contract salaries of $233,487 and $681,227 versus $141,688 and $429,457, respectively, representing respective increases of 65% and 59%; (ii) legal and audit fees of $22,920 and $180,083, respectively, versus $24,762 and $62,260, respectively, representing a decrease of 7% and an increase of 189%, respectively; (iii) VDF license fees expenses of $75,000 and $150,000 versus $nil and $nil, representing increases of 100% and 100%, respectively; and (iv) rent of $35,376 and $79,599 versus $16,506 and $67,541, representing increases of 114% and 18%, respectively.

In the current periods, wage and salary expense increases are due to the addition of executive, warehouse and office support staff; and legal and audit expenses are primarily related to: (a) filing of a series of Form 8-Ks ('Super 8-Ks') to report Form 10 information to shareholders regarding our transition from being a Shell Company to regular SEC reporting status; (b) settlement of our patent dispute with VDF; (c) negotiation of our Equity Line and the filing with the SEC of a Form S-1, and amendments thereto, to bring the Equity Line into being; and (d) filing of our Form S-1 filing to apply for registration of shares issued to the former shareholders of Sandwich Isles Trading Co, Inc. Rent increases primarily due to the tiered increases within our warehouse lease.

Net Loss Our net losses for the three and nine month periods ended September 30, 2014 were $752,485, or $0.01 per share, and $2,952,527, or $0.04 per share, respectively, compared to $257,480, or $0.00 per share, and $576,014, or $0.01 per share, respectively, for the three and nine month periods ended September 30, 2013.

When respective non-cash expenses of $131,252 and $1,176,588 for the three and nine month periods ended September 30, 2014; and $nil and $39,550 for the three and nine month periods ended September 30, 2013 are excluded, our net losses for the comparative periods respectively improve to $621,233, or $0.01 per share and $1,775,939, or $0.02 per share for the three and nine month periods ended September 30, 2014, compared with $257,480, or $0.00 per share, and $536,464, or $0.01 per share, for the three and nine month periods ended September 30, 2013.

49-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Our financial position as at September 30, 2014 and December 31, 2013 was as follows: Net Working Capital As of As of September 30, December 31, 2014 2013 Current Assets $ 1,368,433 $ 640,705 Current Liabilities 95,298 276,957 Net Working Capital (Deficit) $ 1,273,135 $ 363,748 As of September 30, 2014 we had cash on hand of $600,450, accounts receivable of $249,639, net inventory of $514,192, prepaid expenses of $nil, and other current assets of $4,152. This compares with cash of $213,156, accounts receivable of $26,422, net inventory of $309,127, prepaid expenses of $7,500, and other current assets of $3,500 for the comparable period ended December 31, 2013.

Our net working capital increased from a balance of $363,748 at December 31, 2013 to a balance of $1,273,135 at September 30, 2014. This significant increase in working capital was supported by our January 2014 $1,000,000 unit private placement, and $1,700,000 raised from our Equity Line. At present, we estimate we will need to raise capital during the coming twelve months to fund our strategic plans.

Cash Flows Nine Months Nine Months ended ended September 30, September 30, 2014 2013 Net cash (used) by Operating Activities $ (2,298,032 ) $ (534,165 ) Net cash provided/(used) in Investing Activities (14,674 ) - Net cash provided by Financing Activities 2,700,000 542,803 Increase (decrease) in Cash during the Period 387,294 8,638 Cash, beginning of period 213,156 7,383 Cash, end of period $ 600,450 $ 16,021 Comparative figures for Net cash (used) by Operating Activities is comprised of the net loss of $2,952,527 for the nine month period ended September 30, 2014 versus a net loss $576,014 for the prior period in 2013, and also includes non-cash add-backs of: (i) options grant expense of $797,258 versus $nil, respectively; and (ii) stock based compensation of $378,325 versus $39,550, respectively for the nine month period ended September 30, 2014 versus the nine month period ended September 30, 2013.

Total non-cash items comprise $1,176,588 or 40% of our total net loss for six month period ended September 30, 2014, versus total non-cash items of $39,550, or 7% for the nine month period ended September 30, 2013.

Additionally, Net cash (used) by Operating Activities for the comparative nine month periods of 2014 versus 2013 include key elements comprised of: (i) an increase in accounts receivable of $223,217 versus $48,327, respectively; (ii) a recorded increase in inventory of $124,065 versus a decrease of $87,481, respectively; and (iii) a decrease in accounts payable and accrued liabilities of $183,647 versus an increase of $106,267, respectively.

50 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements We had no significant off-balance sheet arrangements at September 30, 2014 or December 31, 2013 that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Material Events and Uncertainties Our operating results are difficult to forecast. Our prospects should be evaluated in light of the risks, expenses and difficulties commonly encountered by comparable early stage companies in rapidly evolving markets. There can be no assurance that we will successfully address such risks, expenses and difficulties.

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