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 The leading web portal for pharmacy resources, news, education and careers November 20, 2017
Pharmacy Choice - Pharmaceutical News - KONARED CORP - 10-Q - MANAGEMENTS' DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - November 20, 2017

Pharmacy News Article



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.

The following discussion and the information provided contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this Report. Our actual results may differ materially from the results anticipated in any forward-looking statements in this Report due to a variety of factors, including, without limitation those set forth as "Risk Factors" in the Post-Effective Amendment to our Form S-1 which became Effective on May 12, 2016. This can be found along with all our filings to the SEC at

Corporate Overview

In this Annual Report on Form 10-K the terms "KonaRed", "we", "us", "our", the "Registrant", and the "Company" mean KonaRed Corporation. Unless otherwise stated, "$" refers to United States dollars. Our fiscal year end is December 31st. We were incorporated in the State of Nevada on October 4, 2010 and our predecessor operating business was incorporated in the State of Hawaii on August 22, 2008. Our head office and distribution center is located at 1101 Via Callejon #200, San Clemente, CA 92673-4230.

The Company's common stock is publicly traded on the OTCQB over-the-counter market ('OTCQB') under the trading symbol: KRED.

Description of Business

Beverage Products

KonaRed Corporation is a Hawaiian Coffee Company and the pioneer of the USA Grown, Hawaiian Coffee Fruit. The company oversees a vertically integrated supply chain which starts with the world renowned, highest quality Coffee and Coffee Fruit from Kona, Hawaii. The Company produces five award winning Ready to Drink ('RTD') 12oz Cold Brew Coffee varieties, Bag in the Box, Key Kegs, a complete line of whole bean and ground Kona Coffee Beans, plus its well established RTD Antioxidant Juices and Hawaiian Coffee Fruit nutritional supplements. The Company also has an industrial ingredients supply division. KonaRed products are sold throughout the U.S. and can be found in select Vons, Albertsons, Publix, Pavilions, Costco, Ralphs, Fred Meyer, King Soopers, Smiths, Kroger, Safeway, Vitamin Shoppe, Target, Whole Foods, 7-Eleven and many other retail outlets. More information about KonaRed and its products can be found at


12oz. Award Winning RTD Cold Brew Coffees

In February 2016 we introduced a new line of Ready-to-Drink ('RTD') Cold Brew Coffees which included the flavors of 'Original', 'Hawaiian Vanilla' and 'Espresso'. In August 2016, consumer demand precipitated the addition of 'Kauai Caramel' and 'Maui Mocha' flavors. Sales of this product have expanded quickly and the line is now being sold in leading retailers throughout the US. Hawaiian Vanilla has won the BevergeWorld BevStar award and the Original Cold Brew won the Gourmet Retailer Editor's Choice for Best Coffee. KonaRed RTD Cold Brew Coffees have become one of the leading brands in this fast growing consumer packaged goods sector. Cold brew coffee continues to grow in popularity as it appeals to premium beverage trends, but also health and wellness ones too.

The evidence of consumer demand for Cold Brewed Coffee is in the numbers. According to SPINS data for the 52 weeks ending October 4th 2015, Cold Brewed Coffee sales reached $15.3million in Multi-Outlet and $7.3million in the Natural Channel. With dollar and unit sales in both channels exceeding 100% growth versus the prior year and the top three brands commanding over 85% share of the segment, it's evident that 2015 was just the beginning. The category is estimated to have grown to $65million during 2016.

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KonaRed's anti-oxidant beverage products consist of the following proprietary formulations:

? 16 oz. KonaRed Original Antioxidant Juice (2 servings)

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? 10.5 oz. KonaRed Original Antioxidant Juice (1 serving)

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New Product Offerings:
KonaRed Original Bag in a box - sold primarily at Costco.

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Shelf pictures

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Wellness Products

We also produce wellness nutritional products which are now available at select locations of Vitamin Shoppe nationwide and in several major chains in Hawaii. Primary among these is our antioxidant KonaRed Hawaiian Superfruit Powder Tub and our Wake-up Performance Powder Packets.

? KonaRed Hawaiian Superfruit Powder

100% soluble coffee fruit powder made from coffee fruit from Kona, Hawaii

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? KonaRed Wake Up Performance Powder Packets

1 tub with 30 packets
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Coffee Bean Products

Our line of KonaRed Coffee Beans come in varieties.

 ? 100% Kona Coffee beans

 ? 10% Kona Blends

? Both come in Whole Bean or Ground

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Industrial Ingredient Division Launch

In December of 2015, we executed a supply contract with VDF Futureceuticals Inc, ("VDF"). We now offer an American made U.S.A Hawaiian grown coffee fruit supply to the world with both coffee fruit powders and liquid extracts to other companies B2B.

Use of Patents

An important element of our business is the License we have been provided by VDF which provides us with the use of VDF's coffee fruit patents and Coffeeberry trademark license. We developed the necessary processing and manufacturing intellectual property ("IP") for processing and manufacturing our base ingredient - the coffee fruit (and have subsequently merged this with the IP provided by VDF). 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.


We have filed and received several trademarks that we use in our daily business


Nature's Best Kept Secret
Paradise in a Bottle

Operations, Facilities and Distribution Method for Our Products

Our distribution facility is a 10,000 square foot facility located in San Clemente, California. We use 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 and retail products, while maintaining in-house control of critical marketing, product development and warehousing/shipping functions.

Supply and Distribution for Our Product

We have an agreement in place which provides a reliable and trusted source of coffee fruit supply. This is structured 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 with a long established history as a major Hawaiian coffee supplier.

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 this supplier, we are confident that we would be able to secure 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, our antioxidant beverages are processed by us sending processed coffee fruit to a 3rd party flavor house which makes the KonaRed concentrate and then ships it to our company's bottling vendors. The process for Cold Brew Coffee is similar. Notably, we own the proprietary beverage formulas. Pallets of the ready-to-drink product items (defined as "Stock-keeping Units", or "SKUs") are then shipped back to our company's warehouse, or third party inventory transit service providers, and disseminated to either distributors, or shipped directly to retailers.



We believe our company has established a frontrunner position in the coffee fruit and cold brew categories, boasting numerous retail entrees and continued expansion. We first established our products in the upstart coffee fruit sector on our home turf in Hawaii and then have expanded across the USA by winning placements at Kroger, Publix, Target, Vitamin Shoppe and other major retailers. We have since moved into the large and lucrative market of coffee and have expanded beyond just coffee fruit. Over 50% of Americans over the age of 18 drink coffee daily and it is a huge marketplace. We have positioned ourselves as one of the leading RTD Cold Brew Coffee product lines on the market since our February 2016 launch.

Sales Strategy

Our sales strategy for our Cold Brew Coffee and Antioxidant beverages and nutritional supplement products is to sell and ship directly from our warehouse in San Clemente, California. We have a direct sales team of four individuals, two in Hawaii and two in Southern California whose main job is to secure new customers directly in person. We have also retained manufacturers' sales representatives who work to increase our overall sales efforts in specific regions such as New York, Los Angeles and Florida.

We've learned the importance of supporting our distributor network through "on the ground" sales personnel and will add to our sales force as markets develop. For an emerging product such as ours, merchandising follow-up, dialog with store managers, and coordination of promotions and pricing are critical in maintaining brand momentum. We anticipate adding sales staff to meet demand as we grow.

Although KonaRed was invented as a wellness product, we believe consumer acceptance of our beverage products now places us both within the coffee and 'premium juice' retail categories, as well as on dairy shelves with cold brew coffees, and the coffee aisle with our whole bean coffee line.

In summary, our sales expansion priorities are:

(1)  expansion of wholesale distribution
(2)  retail chain success
(3)  growth of direct to retail sales
(4)  growth of direct to consumer sales, and
(5)  development of raw material ingredient sales


Major Industry Participants

The expansion of leading beverage monoliths within new products in the beverage category has tightened pricing but also created a vibrant mergers and acquisitions environment for emerging brands like KonaRed.

Takeovers and mergers are a hallmark of our industry. 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
    and December 2008)

?   InBev has also made a series of investments in Vita Coco in May 2012 and
    December 2010

?   Bai Brands sold to Dr. Pepper Snapple for an acquisition of $1.7 billion in
    December 2016

?   Peets Coffee & Tea purchased 100% of Stumptown Coffee Roasters in October
    2015 for an un-disclosed amount

?   High Brew Coffee received $4 Million investment from CAVU Venture Partners
    in April 2016

Market Development and Metrics

Our objective is to develop KonaRed into a powerhouse coffee company which supplies consumers with a variety of high quality coffee, beverage and nutritional products. We plan to achieve this using a strategy of expanding our retail footprint through a series of revenue generating distribution channels as well as direct to consumer sales.

Presently, our predominant focus is our beverage and cold brew coffee businesses and we are generating revenues through the following distribution channels:

 ? Direct Store Distributors

 ? Broadline Distributors

 ? Direct to Retail

 ? Online Retail

? Raw Material Ingredient Sales

The specifics of each channel are as follows:

   ?  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. 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


   ?  Broadline Distributors:
      The broadline distributors channel includes wholesalers who specialize in
      distribution of natural food products to retail stores. 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 Markets.

   ?  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. We
      intend to continue to service and develop this channel further. 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.

   ?  Online Retail:
      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. Our website uses the
      Shopify platform which is an efficient method for processing and marketing
      online sales.

   ?  Raw Material Ingredient Sales:
      Our coffee fruit raw ingredient materials division is projected to expand
      based on growing industry demand for wholesale coffee fruit materials.

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


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. We compete 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 products compete with all liquid refreshments, including numerous specialty beverages, such as: SoBe; Snapple; Arizona; Vitamin Water; Gatorade; and Powerade.

Important factors that 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 believe our branding is strong and our position as a U.S. coffee supplier is relatively unique. We are committed to ethical production of our source ingredients and our use of a previously discarded by-product of coffee represents our environmentally positive corporate operating philosophy. We are also non-GMO. We believe these factors combine to provide us with a competitive advantage and our products are consistently well received by consumers.


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" and "Nature's Best Kept Secret" tag lines; and rights to a suite of international CoffeeBerry trademarks provided under our License with VDF. 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.

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.

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 our 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.


In addition to Shaun Roberts, who is our Chief Executive Officer, director, and Board Chair; Kyle Redfield, who is our President and Chief Operating Officer, director; and John Dawe, who is our Chief Financial Officer, Secretary & Treasurer, we currently employ 10 full-time and 4 part-time employees who 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; and as needed we engage the services of other professionals for legal, audit and other technical services. 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 principal office and warehouse is located at 1101 Via Callejon #200, San Clemente, California 92673-4230. During the period ended March 31, 2017 and the year ended December 31, 2016 we shared our warehouse premises with a sublessee whose occupancy ended on April 7, 2017, at which time we assumed all lease payments. We also utilize offices provided by our CEO and CFO. The current distribution facility lease has a term of June 1, 2016 to May 31, 2018 and presently requires lease payments of $10,466 per month. On February 25, 2016, the lease was extended for an additional 24 month term based on lease payments of $10,466 for June 1, 2016 to May 31, 2017 and $10,793 for June 1, 2017 to May 31, 2018. We believe that the condition of our principal office and warehouse are satisfactory, suitable and adequate for our current needs.

Fixed assets currently shown on our balance sheet are comprised of furniture and warehouse fixtures and at present the Company has no material property balances which are classified as assets under generally accepted accounting principles.

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 ('GAAP').


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 consumer and industrial products and from delivery fees. 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.

Customer shipping expenses

Costs for products shipped to customers are recorded as general and administrative expenses.


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.

Deferred Revenue

Revenue from customer purchase agreements is recorded as unearned revenue and amortized over the term of the agreements. At March 31, 2017 and December 31, 2016, unearned revenues were $182,986 and $193,020, respectively. Historically, unearned revenue comprised of amortization of online subscriptions wherein we ship a scheduled amount of product to online retail subscribers each month and during the year ended December 31, 2016, unearned revenue was increased based on a cash payment we received for a non-refundable signing fee of $200,000 from a strategic supplier license (the "FP Agreement"). The FP license fee will be amortized over the term of the license, which translates to addition of $10,000 per year to our Other Income.



The following discussion and analysis covers material changes in the financial condition of our Company for the periods ended March 31, 2017 and March 31, 2016. A summary is as follows:

                                               Three Months         Three Months
                                                  ended                ended
                                              March 31, 2017       March 31, 2016

   Total Sales                               $        590,065     $        149,488
   Cost of goods sold                                 397,228              117,591
   Gross Margin                                       192,837               31,897
   Research and development                               518                  755
   Advertising and marketing                           41,593              105,449
   General and administrative                         847,506              564,486
   Operating expenses                                 889,617              670,690
   Loss from operations                              (696,780 )           (638,793 )
   Amortized portion of License fee                    10,000                    -
   Amortization expenses - notes discounts           (243,517 )           (142,833 )
   Interest expense                                  (180,315 )            (36,396 )
   Net Loss                                  $     (1,110,612 )   $       (818,022 )

   Net loss per share, fully diluted         $          (0.01 )   $          (0.01 )


Total sales are comprised of product sales and shipping and delivery fees. During the period ended March 31, 2017 we recorded total sales of $590,065 compared with total sales of $149,488 for the period ended March 31, 2016, representing an increase of 295%. Comparative product sales for the periods ended March 31, 2017 and March 31, 2016 were $585,218 versus $145,791, respectively, representing an increase of 301%; and comparative shipping and delivery fees were $4,847 and $3,697, respectively.

We are now benefiting from our efforts during 2016 to build a distribution network for our new Cold Brew Coffee product line. We attribute the growth in revenue during the period ended March 31, 2017 to continuing acquisition of new customers for KonaRed Cold Brew Coffees and orders from repeat customers. Cold Brew is now KonaRed's major marketing focus and accounted for 80% of our sales during the period ended March 31, 2017.

Overall, Cold Brew Coffee is a booming new market sector and KonaRed has emerged early as a leader in this new category. The Cold Brewed Coffee industry earned total revenues of approximately $65 million in 2016. Its growth is expected to mark one of the top food and beverage trends of the last few years and this growth trend continues.

KonaRed's Cold Brew Coffees have won multiple industry and consumer awards and now appear on major retail shelves throughout the Western US, Florida and New York.


Cost of Goods Sold

For the three month periods ended March 31, 2017 and March 31, 2016, Cost of Goods Sold ('COGS') were $397,228 compared to $117,591, respectively, which represent 67% of sales compared with 79% of sales, respectively.

Gross Margin was 33% versus 21% for the periods ended March 31, 2017 and March 31, 2016.

We attribute the 57% improvement in our gross margin to the relatively higher margin produced on Cold Brew Coffee sales.

COGS components for the three month periods ended March 31, 2017 and March 31, 2016 were: manufacturing costs, which include both in-house and outsourced manufacturing costs, totaling $374,349 versus $107,234 respectively; inventory delivery costs of $17,342 versus $5,220, respectively; and packaging, inventory write-offs, term discounts, and other costs of $5,537 versus $5,137, respectively.

Operating 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 minimal for both periods ended March 31, 2017 and March 31, 2016. We project R&D costs will remain near current levels during the balance of fiscal 2016.

Advertising and Marketing

Advertising and marketing costs were $41,593 and $105,449, respectively for the three periods ended March 31, 2017 and March 31, 2016, representing a decrease of 61%. This decrease was attributable to our planned reduction of advertising and marketing expenditures to conserve capital during our sales distribution re-alignment process. Primary components of advertising and marketing expenses for the three month periods ended March 31, 2017 and March 31, 2016 were: (i) advertising and graphic art costs of $9,684 versus $10,221, respectively; (ii) cost of free samples and demos was $17,265 versus $66,103, respectively; and (iii) other marketing expenses, sponsorships and public relations initiatives totaled $14,644 and $29,125, respectively. We project advertising and marketing costs will increase during the balance of fiscal 2017.

General and Administrative

General and administrative ('G&A') costs were $847,506 for the three month period ended March 31, 2017 compared to $564,486 for the three month period ended March 31, 2016, representing an increase of 50%. Major components of G&A for the three month periods were: (i) payroll of $244,263 versus $231,616, respectively, representing an increase of 5%; (ii) non-cash stock and options issuance costs for compensation and services of $287,080 versus $63,321, respectively, representing an increase of 353%; (iii) professional and consultant fees of $5,145 versus $55,295, respectively, representing a decrease of 91%; and (iv) VDF License fees of $100,000 versus $75,000, respectively, representing an increase of 33%. We project general and administrative expenses will grow moderately during the balance of fiscal 2017.


Interest Expense

Interest expense, including amortizations of original issuance discounts related to debt issuances and amortization of derivatives created by issuance of convertible securities, totaled $180,315 for the three month period ended March 31, 2017 versus $36,396 for the three month period ended March 31, 2016. We project that interest expenses will decrease during the balance of fiscal 2017.

Other Income (Expense)

During the three month periods ended March 31, 2017 and March 31, 2016, we recorded license fee revenue amortization of $10,000 versus $nil, respectively; and non-cash charges for changes in fair market value of derivative liabilities which arose from our issuance of convertible debt instruments and non-cash amortizations of discounts on notes payable which respectively totaled $243,517 versus $142,833.

Net Loss

Our net losses for the three periods ended March 31, 2017 and March 31, 2016 were $1,110,612, or $0.01 per share, versus $818,022 or $0.01 per share.

Liquidity and Capital Resources

Our financial position at March 31, 2017 and December 31, 2016 was as follows:

Net Working Capital
                                               As of            As of
                                             March 31,       December 31,
                                               2017              2016

            Current Assets                  $   828,850     $      458,741
            Current Liabilities               1,011,815            657,607
            Net Working Capital (Deficit)   $  (182,965 )   $     (198,866 )

As of March 31, 2017 we had cash on hand of $148,072, accounts receivable totaling $309,960, inventory of $370,818, compared with cash of $68,546, accounts receivable plus accounts receivable - related party totaling $122,365, and inventory of $267,830 as of December 31, 2016. Our net working capital improved to a negative balance of $182,965 at March 31, 2017, from a negative balance of $198,866 at December 31, 2016. At present, we estimate we will need to raise capital during the coming twelve months to fund our strategic plans.

Subsequent to the period ended March 31, 2017, our liabilities and cash positions improved due the elimination of $75,000 principal owed on note which was converted to shares, and through receipt of warrant exercise which provided us with $170,455 cash.


Cash Flows
                                                             Three months         Three months
                                                                ended                ended
                                                            March 31, 2017       March 31, 2016

Net cash (used) by operating activities                    $       (362,974 )   $       (481,741 )
Net cash provided/(used) in investing activities                          -                    -
Net cash provided by financing activities                           442,500              437,011
Increase (decrease) in cash during the period                        79,526              (44,730 )
Cash, beginning of period                                            68,546              148,769
Cash, end of period                                        $        148,072     $        104,039

Key elements comprising the comparative figures for Net cash (used) by Operating Activities for the three month periods ended March 31, 2017 and March 31, 2016 include: (i) net losses of $1,110,612 and $818,022, respectively; (ii) non-cash expenses for stock issued for services and compensation of $153,209 and $83,710, respectively; (iii) net non-cash amortization option grant and notes payable discount amortizations totaling $377,387 and $164,655, respectively; (iv) an increase in inventory of $102,988 versus an decrease in inventory of $109,319; and (v) increases of $352,653 and $7,633, respectively in accounts payable and accrued liabilities.

Cash Raised from Equity Sales

During the period ended March 31, 2017 we raised at total of $242,500 through sales of equity. This was comprised of: (a) $145,000 raised from private placement sales of 2,636,363 restricted common shares at $0.055 per share; (b) $15,000 through a private placement remedial Unit Offer #3 sale of 375,000 units priced at $0.04 per unit which included one restricted common share and one five year warrant exercisable at $0.055 per share; and (c) $82,500 from issuance of 1,500,000 restricted common shares at $0.055 per share to two prior unit offering subscribers for exercises of 1,500,000 warrants they held.

Equity Line termination

On August 11, 2016 the last shares which had been registered under the 2015 Equity Line were sold and subsequently there has not been filed, and there are no plans to file, a new registration statement which would facilitate further equity line share sales and the 2015 Equity Line is extinguished.

No Variable Rate Convertible Securities

The Company has no securities outstanding which have conversion prices which vary based on the trading price of the Company's common shares.

Cash Raised from Debt

During the period ended March 31, 2017, the Company raised $100,000 from issuance of a short term non-convertible promissory note and rolled over $100,000 of a license fee to the VDF Note.


Debt Conversions

During the period ended March 31, 2017, $327,664 of debt was converted by holders into equity.

These included: (a) two transactions in which we issued at total of 1,625,000 common shares at $0.04 per share for conversion by September 2015 Note Two Purchaser of the remaining $65,000 due on September 2015 Note Two. The market values of the shares totaled $128,463 based on a market close prices on dates of issuance. The conversions resulted in a $63,463 difference between the cash redemption balance and the value of the shares redemption which was treated as a conversion loss and recorded as an additional non-cash interest expense. These conversions fully paid the note and no further payments are due; (b) issuance of 990,000 common shares at $0.04 per share for conversion by December 2015 Lender of the remaining $39,600 due on the December 2015 Note. The value of the shares was $61,578 based on a market close price on date of issuance. The conversion resulted in a $21,978 difference between the cash redemption balance and the value of the shares redemption which was treated as a conversion loss and recorded as an additional non-cash interest expense. This conversion fully paid the note and no further payments are due; and (c) four transactions in which LPC converted at total of $225,000 principal and $1,935 accrued interest due on LPC Note Two at a conversion price of $0.05 per share into 4,538,700 shares valued at $290,981 based on market close prices on dates of issuance. The conversions resulted in a $64,046 difference between the cash redemption balance and the value of the shares redemption which was treated as a conversion loss and recorded as an additional non-cash interest expense.

Additionally, subsequent to the period ended March 31, 2017, LPC converted the remaining $75,000 principal and $1,125 accrued interest due on LPC Note Two at a conversion price of $0.05 per share into 1,522,500 shares valued at $111,143 based on market close price on date of issuance. The conversion resulted in a $35,018 difference between the cash redemption balance and the value of the shares redemption which was treated as a conversion loss and recorded as an additional non-cash interest expense. Concurrent with the conversion, the $41,838 warrant discount was recorded as an amortization expense and the remaining $1,224 OID was recorded as interest expense. This conversion fully paid all amounts due on LPC Note Two and the note is extinguished.

Off-Balance Sheet Arrangements

We had no significant off-balance sheet arrangements at March 31, 2017 or December 31, 2016 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.


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