News Column

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

August 1, 2014

Certain information included herein contains forward-looking statements that involve risks and uncertainties within the meaning of Sections 27A of the Securities Act, as amended; Section 21E of the Securities Exchange Act of 1934. These sections provide that the safe harbor for forward looking statements does not apply to statements made in initial public offerings. The words, such as "may," "would," "could," "anticipate," "estimate," "plans," "potential," "projects," "continuing," "ongoing," "expects," "believe," "intend" and similar expressions and variations thereof are intended to identify forward-looking statements. These statements appear in a number of places in this Form 10-Q and include all statements that are not statements of historical fact regarding intent, belief or current expectations of the Company, our directors or our officers, with respect to, among other things: (i) our liquidity and capital resources; (ii) our financing opportunities and plans; (iii) continued development of business opportunities; (iv) market and other trends affecting our future financial condition; (v) our growth and operating strategy. Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The factors that might cause such differences include, among others, the following: (i) we have incurred significant losses since our inception; (ii) any material inability to successfully develop our business plans; (iii) any adverse effect or limitations caused by government regulations; (iv) any adverse effect on our ability to obtain acceptable financing; (v) competitive factors; and (vi) other risks including those identified in our other filings with the Securities and Exchange Commission. 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 Over-the-Counter Bulletin Board stock market ('OTCBB') under the symbol: KRED.

24



--------------------------------------------------------------------------------

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]] 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) 25



--------------------------------------------------------------------------------

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 facilitywe 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 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. 26



--------------------------------------------------------------------------------

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 September 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;

Market and Sales and Marketing

We believe our company has established a frontrunner position in the coffee fruit category, boasting a numerous retail entrees within 21 months of product launch. Setting out to first establish the upstart coffee fruit sector on our home turf in Hawaii, visible placement has in turn spawned similar opportunities across the United States, representing an expanding presence with iconic industry players. Our company's eastward expansion is now underway in addition to a strategy of targeting additional sales avenues, including the restaurant and hospitality space and the pursuit of international prospects in Japan, Korea and China. 27



--------------------------------------------------------------------------------

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, no 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. 28



--------------------------------------------------------------------------------

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 Albertson's and specialty retail stores such as

Jamba Juice. We intend to continue to service and develop this channel

further.

? Direct to Consumer:

The KonaRed brand has gained an increasing following of Internet based

customers who purchase our products directly through our website. We plan

to expand this channel though on-line marketing initiatives in parallel

with our brand recognition marketing campaigns.

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 five targeted distributions channels, we intend to raise capital by pursuing a diversified range of financing strategies which are expected to include a mixture of conventional and convertible debt and equity instruments. 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. 29



--------------------------------------------------------------------------------

Table of Contents Milestones



At the end of our first quarter of 2013, we presented the following roadmap and highlight below the elements which we have achieved during our second quarter:

QII-14:

? Execute distribution contract for nationwide United States distribution in

three of our five distribution channels. RESULT: Underway ? Launch 10 additional new DSD distributors. RESULT: Achieved



? Ship to one additional major retail customer (defined as 500 locations or

more) through a ship direct distribution relationship.

RESULT: Achieved (Vitamin Shoppe)

? Expand into one additional major market with 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



Our goals going forward remain:

QIII-14

? Launch 10 additional new DSD distributors.

? Ship to one additional major retail customer (defined as 500 locations or

more) 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.

By end of fiscal year 2014 (in addition to aforementioned objectives)



? Launch 10 additional new DSD distributors.

? Ship to one additional major retail customer (defined as 500 locations or

more) 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 ? Harvest 2014 coffee fruit crop. 30



--------------------------------------------------------------------------------

Table of Contents

QI-15

(in addition to aforementioned objectives)

? Launch 10 additional new DSD distributors.

? Ship to one additional major retail customer (defined as 500 locations or

more) 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

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. We anticipate that a lack of new capital will 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. Historically, DSDs have represented 33% of KonaRed's revenue and we estimate growth to 53% within the next twelve months.



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 Wholefoods and Sprouts. Historically, broadline distributors have represented 24% of revenue and we project a similar percentage in the 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. Historically, direct to retailer distribution represents 33% of our revenue and we estimate a reduction to 15%.



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.



Advertising

With a guerilla marketing and word of mouth backdrop, KonaRed has also used radio advertising, events (promotions and contests) and Surf News Network in the Hawaiian market. Social media has also been another low cost advertising tool used by our company. While confining its efforts primarily to non-mainstream advertising options, our company did effectively utilize a high profile billboard campaign on major southern California freeways in Spring 2012. In addition to placement on 11 billboards, KonaRed was also prominently displayed on 75 high-traffic bus stop shelters, a tactic that resulted in traceable sales results in the region. Management plans to selectively implement this approach in the future as well. 31



--------------------------------------------------------------------------------

Table of Contents Organic Promotion Through its continuing presence in the Hawaiian community, participating in and promoting ocean and extreme-athlete related contests, races and charity events, our company has weaved the brand into the collective consciousness of this trend-setting culture. Advancing our company's media depth and brand cache, our company also sponsors an "Ambassador Team," a group of Hawaiian super-athletes who have embraced the product and participate in promotional events, sign autographs at store openings, and are generally available to spread the goodwill of the brand.



Targeted Growth Areas

While still early in its life cycle, international distribution opportunities have been presented to our company. The food service and hospitality channel also appears ideally suited for our company and management has begun to focus on establishing a pathway into the restaurant and hotel arena.



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 Coffeeberry. 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. 32



--------------------------------------------------------------------------------

Table of Contents

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



Partnership Initiative with VDF FutureCeuticals Inc.

To the mutual satisfaction of the parties, on January 28, 2014 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. 33



--------------------------------------------------------------------------------

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.



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. 34



--------------------------------------------------------------------------------

Table of Contents Employees In addition to Shaun Roberts, who is our President, Chief Executive Officer and a Director, Michael Halsey, who is our Vice President and Chief Operating Officer, and John Dawe, who is our Chief Financial Officer, Secretary & Treasurer, , we currently employ 8 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 leased property consists of approximately 1,000 square feet of office space. 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 June 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 quarter. Highlights of the SBG quarterly report are as follows:



Distributor Contracts Increase:

? SBG added 12 new purchasing contracts to KonaRed's distribution network.

? Additional distributors are projected to come on line in July 2014.

Retail Wins: ? Walmart:



Ø 2100+ stores are reporting repeat KonaRed beverage sales.

Ø KonaRed is supporting Walmart with 100 in-store product demonstrations

scheduled for August 2014. ? Kroger:



Ø SBG has secured national authorizations for placement of KonaRed

beverages in 2000 Kroger stores including Ralphs, Fred Meyer, King Soopers and more. Ø Initial orders for Kroger Stores were shipped in early July to the chain's South-Central Kroger division in Texas through Jakes Finer Foods. Ø Kroger banner store Ralphs, in the Western states, has begun to carry KonaRed. 35



--------------------------------------------------------------------------------

Table of Contents ? Fresh Markets:



Ø Burris Distribution (Greensboro, NC) is now accepting delivery of all

10.5oz. KonaRed drink products, including original



Coffeeberry®,

Coffeeberry® with Organic Green Tea and Coffeeberry® with



Coconut

Water.



Ø SBG has received commitments from Fresh Markets to merchandise KonaRed

in its water aisle and deli sections in all stores.



? Speedee Mart and Terrible Herbst:

Ø The two dominant convenience and gas chains in the Las Vegas market are

now receiving KonaRed through Southern Wine and Spirits and have seen weekly increases in sales volumes. ? Northern California independent markets: Ø Geyser Beverage is now distributing KonaRed to more than 100 independent retailers in the Bay area and surrounding



communities

? New York Metro:

Ø Expansion 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,

all of which are significant potential markets for our products. 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. OTHER RECENT HIGHLIGHTS:



? January 27, 2014 - Two Private Placements Raise $1,000,000 in New Capital

In January 2014 we raised an additional $1,000,000 through two common shares & warrants private placements. ? January 28, 2014 - VDF Patent Settlement & Formation of Co-operative Relationship



As referenced in detail above and in the Notes to Financial Statements

included in this Form 10-Q, 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 Chief Financial Officer, Secretary &

Treasurer

John Dawe brings more than 30 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 14 years. 36



--------------------------------------------------------------------------------

Table of Contents

? April 22, 2014 - Distribution and Sales & Marketing Services Agreements put in place 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. (SBG.'s results

for the three month period ended June 30, 2014 are detailed 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 1, 2014 - Mike Halsey Hired as Vice President and Chief Operating Officer

Retail industry veteran Mike Halsey is added to our management team and assigned

responsible for overseeing, developing, and managing strategic direction for the

day-to-day operations. Over the last twenty years, Mr. Halsey has held various leadership

positions with both BestBuy and Target stores, serving as Global Retail Supply Chain/OMNI

Channel Director for Best Buy's Western Region where he was responsible for the

operational efficiency, inventory management and assortment performance for locations

throughout the Mid-West, West Coast and Hawaii.

? 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 $1.2million 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.

? 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. 37



--------------------------------------------------------------------------------

Table of Contents

? June 19, 2014 - Strategic Alliance Formed with Sparkling Drink Systems

International

As another initiative to expand our product reach, in June 2014KonaRed 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.

? July 25, 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/

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.

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. 38



--------------------------------------------------------------------------------

Table of Contents

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. Driving the growth in Canada are Zach Wilczewski, the Director of Sales, and the team of BM2 Brand Management, one of Canada's leading natural food brokers. KonaRed's distribution network is rapidly expanding to cover the growing demand. In Western Canada, stores and businesses can now purchase product at wholesale through Horizon Distributors and UNFI West. In the Toronto region, KonaRed is available through Corwin Distributors. KonaRed Corporation signed an agreement in October 2013 with Verdi Consultants, headed by Aida Aragon, a seasoned sales, marketing, and brand management executive with more than 15 years experience, including work in the sports beverage and supplement industries. She has played a pivotal role in executing successful store roll outs in specialty stores, as well as in food and drug mass retail outlets. Ms. Aragon has worked with such well-known companies as EAS, GNC, Gold's Gym, Cytopsport, Nutrition53, and Lumina Health Products, helping to increase sales and brand awareness.



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.

39



--------------------------------------------------------------------------------

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. 40



--------------------------------------------------------------------------------

Table of Contents RESULTS OF OPERATIONS The following discussion and analysis covers material changes in the financial condition of our Company during the three month periods ended June 30, 2014 and June 30, 2013. A summary is as follows: Three Months Three Months Six Months Six Months ended ended ended ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 Product sales $ 436,674$ 476,978$ 842,962$ 677,796 Shipping and delivery fees 37,976 7,484 76,630 11,736 Net sales 474,650 484,462 919,592 689,532 Cost of goods sold (407,723 ) (267,196 ) (743,910 ) (379,099 ) GROSS MARGIN 66,927 217,266 175,682 310,433 Operating expenses (1,197,836 ) (333,888 ) (2,375,724 ) (625,904 ) Loss from operations (1,130,909 ) (116,622 ) (2,200,042 ) (315,471 ) Other income - - - 49,000 NET LOSS $ (1,130,909 )$ (116,622 )$ (2,200,042 )$ (266,471 ) Net loss per share $ (0.01 ) $ (0.00 ) $ (0.03 ) $ (0.00 ) Product Sales During the three and six month periods ended June 30, 2014 we recorded product sales of $436,674 and $842,962 respectively, compared with product sales of $476,978 and $677,796 for the three and six month periods ended June 30, 2013. Prior to adjustment, this represents a decrease of 8% in three month comparative product sales, and an increase of 24% in comparative six 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 $39,667 and $60,042 for the three and six month periods ended June 30, 2014, versus $194,951 and $200,369 for the three and six month periods ended June 30, 2013. When sales of wholesale ingredients are excluded, adjusted product sales for the three and six month periods ended June 30, 2014 are $397,007 and $782,920 respectively, compared with adjusted product sales of $282,027 and $477,427 for the three and six month periods ended June 30, 2013. This represents product sales increases of 41% and 64% for comparative three and six month periods, respectively. We attribute our increases in sales to many initiatives undertaken in fiscal 2014, including our strategic alliance with Splash Beverage Group Inc. to expand our distribution network; and our introduction into national chain stores including Walmart and Vitamin Shoppe. 41



--------------------------------------------------------------------------------

Table of Contents Shipping and delivery fees During the three and six month periods ended June 30, 2014 we recorded shipping and delivery fees of $37,976 and $76,630 respectively, compared with shipping and delivery fees of $7,484 and $11,736 for the three and six month periods ended June 30, 2013. This represents increases of 407% and 553% respectively for the three and six 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 June 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 six month periods ended June 30, 2014 COGS were $407,723 and $743,910, or 86% and 81% of sales, compared with $267,196 and $379,099, or 55% and 55% of sales for the three and six month periods ended June 30, 2013. This corresponds to gross margin percentages of 14% and 19% versus 45% and 45% for the comparative three and six month periods ended June 30, 2014 versus June 30, 2013. We project COGS will decrease over the balance of fiscal 2013 and gross margin will improve.



We attribute the relative increase in COGS for the current period to rush processing fees which were required to meet high demand from new major clients such as Walmart. During July 2014 we have completed negotiations for new manufacturing and delivery arrangements at lower rates.

Additionally, a significant contributing factor in the relative period over period decrease in gross margin is that during fiscal 2013, 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 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 six month periods ended June 30, 2014 versus the three and six month periods ended March 31,2013 were as follows: (i) manufacturing costs, which include both in-house and outsourced manufacturing costs, totaled $255,492 and $522,628 versus $271,020 and $357,802, respectively; (ii) packaging which totaled $14,829 and $20,619 versus $896 and $1,820, respectively; (iii) customer shipping which totaled $106,85 and $108,327 versus $21,380 and $47,340, respectively; and (iv) inventory delivery which totaled $11,382 and $30,802 versus $8,903 and $17,473, respectively. 42



--------------------------------------------------------------------------------

Table of Contents Other Income During the three and six month periods ended June 30, 2014 we recorded other income of $nil and $nil compared with other income of $nil and $49,000 for the three and six month periods ended June 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 decreased by 100% and 80% to $nil and $3,300 respectively for the three and six month periods ended June 30, 2014, compared with $7,849 and $16,326 for the comparative periods ended June 30, 2013. These decreases in research and development costs are attributable to our reduction of expenditures in this area due 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 2013.



Advertising and Marketing

Advertising and marketing costs increased by 5078% and 1369% to $276,818 and $461,905 for the three and six month periods ended June 30, 2014, compared with $5,346 and $31,446 for the comparative periods ended June 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 six month comparative periods ended June 30, 2014 versus June 30, 2013: the cost of free samples was $79,385 and $$152,591 versus $9,133 and $20,470, respectively, representing increases of 769% and 645%, respectively; sales and marketing fees were $105,196 and $65,772 versus $nil and $nil, respectively, representing increases of 100% and 100% respectively; website expenses were $31,031 and $33,258 versus $1,002 and $2,610, respectively, representing increases of 2997% and 1174%, respectively; and advertising, graphic design and sponsorship/public relations initiatives comprised $47,187 and $100,082 versus $1,129 and $11,578, respectively, representing increases of 4080% and 764%, respectively. We project advertising and marketing costs will increase over the balance of fiscal 2013. 43



--------------------------------------------------------------------------------

Table of Contents General and Administrative General and administrative costs increased by 187% and 230% to $921,018 and $1,910,519 for the three and six month periods ended June 30, 2014, compared with $320,693 and $578,132 for the three and six month period ended June 30, 2013. We project general and administrative expenses will decrease on a relative basis over the balance of fiscal 2013. When non-cash expenses of and $442,285 and $1,045,336 for the three and six month periods ended June 30, 2014; and $43,225 and $43,225 for the three and six month periods ended June 30, 2013 are excluded, general and administrative expenses for the comparative periods show comparative increases of 49% and 50% to $478,733 and $865,183, respectively for the three and six month periods ended June 30, 2014, and $277,468 and $534,907, respectively for the three and six month periods ended June 30, 2013. Non-cash expenses included the cost of stock issued for underwriter fees for our Equity Line, and options and stock issuances to directors and officers. Within expenses paid in cash, major items for the three and six month comparative periods ended June 30, 2014 versus June 30, 2013 included: (i) payroll and salaries of $249,498 and $440,703 versus $168,791 and $355,232, respectively, representing increases of 48% and 24%, respectively; (ii) legal and audit fees of $57,928 and $157,163, respectively versus $33,889 and $37,498, respectively, representing increases of 398% and 847%, respectively; (iii) license fees to VDF of $75,000 and $75,000 versus $nil and $nil, representing increases of 100% and 100%, respectively; and (iv) rent of $27,217 and $51,035 versus $22,073 and $44,223, representing increases of 23% and 15%, respectively. In the current periods, payroll and salary expense increases are due to the addition of two executives and several 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; and (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. Net Loss



Our net losses for the three and six month periods ended June 30, 2014 were $1,130,909, or $0.01 per share, and $2,200,042, or $0.03 per share, respectively, compared to $166,622, or $0.00 per share, and $266,471, or $0.00 per share, respectively, for the three and six month periods ended June 30, 2013.

When respective non-cash expenses of $442,285 and $1,045,336 for the three and six month periods ended June 30, 2014, and $43,225 and $43,225 for the three and six month periods ended June 30, 2013 are excluded, our net losses for the comparative periods respectively improve to $688,624, or $0.01 per share and $1,154,706, or $0.02 per share for the three and six month periods ended June 30, 2014, compared with $73,397, or $0.00 per share, and $223,246, or $0.00 per share, for the three and six month periods ended June 30, 2013. 44



--------------------------------------------------------------------------------

Table of Contents

Liquidity and Capital Resources

Our financial position as at June 30, 2014 and December 31, 2013 was as follows: Net Working Capital As of As of June 30, 2014 December 31, 2013 Current Assets $ 1,435,637 $ 640,705 Current Liabilities 226,595 276,957



Net Working Capital (Deficit) $ 1,209,042 $ 363,748

As of June 30, 2014 we had cash on hand of $447,832, accounts receivable of $316,633, net inventory of $657,031, prepaid expenses of $4,665; and other current assets of $3,500. 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 $1,209,042 at June 30, 2014. This significant increase in working capital was supported by our January 2014$1,000,000 unit private placement, and $1,000,001 raised from our Equity Line. At present, we estimate our Equity Line will supply sufficient resources during the coming twelve months to fund our strategic plans. We also report that subsequent to the period ended June 30, 201, we raised an additional $200,000 from our Equity Line. Cash Flows Six Months Six Months ended ended June 30, 2014 June 30, 2013 Net cash (used) by Operating Activities $ (1,759,348 )$ (527,842 ) Net cash provided/(used) in Investing Activities (5,976 ) - Net cash provided by Financing Activities 2,000,000 640,000 Increase (decrease) in Cash during the Period 234,676 112,158 Cash, beginning of period 213,156 7,383 Cash, end of period $ 447,832$ 119,541 Comparative figures for Net cash (used) by Operating Activities is comprised of the net loss of $2,865,229 for the six month period ended June 30, 2014 versus a net loss $266,471 for the prior period in 2013, and also includes non-cash add-backs of: (i) stock issued for services of $665,186 versus $nil, respectively; (ii) options grant expense of $676,336 versus $nil, respectively; and (iii) stock based compensation expense of $369,000 versus $nil, respectively for the six month period ended June 30, 2014, compared with $43,225 of stock issued for services during the six month period ended June 30, 2013. Total non-cash items comprise $1,045,336 or 48% of our total net loss for six month period ended June 30, 2014, versus total non-cash items of $43,225 for the six month period ended June 30, 2013. Additionally, Net cash (used) by Operating Activities for the comparative six month periods of 2014 versus 2013 include key elements comprised of: (i) an increase in accounts receivable of $290,211 versus $308,908, respectively; (ii) a recorded increase in inventory of $266,904 versus 40,712, respectively; and (iii) a decrease in accounts payable and accrued liabilities of $56,642 versus $47,001, respectively. 45



--------------------------------------------------------------------------------

Table of Contents

Off-Balance Sheet Arrangements

We had no significant off-balance sheet arrangements at June 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. 46



--------------------------------------------------------------------------------

Table of Contents


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters