A new stock I've taken a tiny position in

Investment Analysis Clubs Saul’s Investing Discussions
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This is just in for KRED:

KonaRed Corporation Raises First $500,000 from $12 Million Equity Line

Jun 02, 2014 09:02:00 (ET)

– Funds Will be Used to Fuel Sales Expansion –

KOLOA, Hawaii, June 2, 2014 /PRNewswire/ – KonaRed Corporation (OTCBB/OTCQB: KRED), manufacturers of Antioxidant Juices from the exclusive Hawaiian CoffeeBerry(R), coffee fruit from Kona, Hawaii, announced today it has completed a drawdown of $500,000 of the $12 million Equity Line in place with Lincoln Park Capital Fund LLC.

“Our Form S-1 was declared “Effective” by the U.S. Securities & Exchange Commission, which therefore allows us to utilize the Equity Line. We’ve attempted to choose wisely on our sale of stock. With Lincoln Park, we are dealing with a firm with an excellent reputation and our Equity Line allows us to launch our strategic plans in a very orderly trajectory,” said CEO and Founder Shaun Roberts.

“It is important for our investors to realize that this money will be used to manufacture product to supply expected increased demand and other capital needs. The Equity Line provides a low cost of capital and is an efficient method of managing growth,” Mr. Roberts said.

Mr. Roberts continued, giving investors a snapshot of KonaRed today:

– We have an exciting, healthy line of unique products which are fully
tested and currently in production using proven manufacturing methods.

– Our partnership with VDF FutureCeuticals, Inc. provides us access to high
quality scientific research to ensure the quality of our wellness
products.

– We’ve expanded our senior management and Board with talented, experienced
and successful individuals.

– Our customer base continues to grow as evidenced by our products being
sold on the Mainland by major customers such as Walmart and Vitamin
Shoppe.

– Splash Beverages Group, with an historical track record of success, is
now aggressively developing new distribution channels to increase our
sales.

– We became publicly traded to provide methods to raise capital and the
Equity Line now provides us rapid access to investment capital from a
reliable source

“I’m pleased with our progress over the last eight months and our team continues to be dedicated to making KonaRed a major success; a revolution in the wellness beverage sector. We’ve only just begun and are pushing hard to fulfill our plans going forward,” Mr. Roberts concluded.

EQUITY LINE:

The Equity Line has become increasingly accepted as an attractive and viable solution that meets the financing needs of public companies. Unlike debt, an Equity Line does not charge interest and the funds received through the Equity Line do not have to be repaid. An Equity Line allows a public company to “draw” against its equity on a periodic basis by selling registered shares of common stock to an investor for cash. An Equity Line can provide a reasonably reliable, steady stream of cash that can be used to fund ongoing working capital needs. Equity Lines usually offer less dilution and a lower cost of capital to issuers than other forms of investment. And, unlike secured debt instruments such as convertible debentures, Equity Lines do not have any security interests in the assets of the issuing company so there are no lien filings. Additionally, Equity Lines often are structured in a manner that give issuers the control over the timing and amount of shares that are sold, allowing issuers to determine when capital is raised and at what price. Such is the case with KonaRed’s Equity Line which provides the Company with full control over when to sell shares to Linclon Park Capital.

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Thanks Foolchandra,

I had never heard of an equity line before but it seems analogous to a bank line of credit. Instead of a bank promising we’ll lend you x dollars when you need it at such and such a rate, this is we’ll give you x dollars for stock at such and such a price, when you need the money. It’s good for them and indicates someone has faith in their stock.

Saul

23

I spent yesterday going through the KRED financials. One concern I have is that 2013 had very low sales due to constrained working capital ($890k of sales vs $1.8 million in 2012), which means all of the 2014 comps are going to look extremely favorable. I find it a little disconcerting, honestly, that management did not include 2012 numbers in the quarterly report for comparison. I’ve emailed investor relations for those numbers, as I couldn’t find a quarterly breakdown in the 10K either (just annual results).

Q1 2014 sales were just over $400k, which annualized would be around $1.6 million – not too exciting relative to the $1.8 million in 2012. I’m sure there is seasonality to their results that will lead to better annual sales than that, but I couldn’t find a quarterly breakdown even for 2013 (maybe I missed it), so I’m not sure how much.

I guess what I’m saying is that it seems very difficult to assess how much the company is actually growing. They also are burning through massive amounts of cash: just over a $1 million last quarter, while earning only $70,000 of profits on sold goods. Assuming similar margins, it seems like they’d need to increase sales another 15 times from last quarter’s just to break even.

Saul, am I reading all this correctly? I agree that the distribution agreements look positive, and the company now has the ability to raise enough working capital to stay in business (via share dilution with Lincoln Park), but it seems like they have a long, long, way to go before becoming profitable. They also appear to have very little competitive advantage beyond being first-mover to get them there. Are you hoping for a buyout? Their 10K certainly seems to hint at that as an exit strategy.

Anyway, I know you’ve said this is very speculative, but I’m still curious to fully understand what you’re seeing in this company. Maybe I’ve misunderstood something.

Neil

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24

Saul, am I reading all this correctly? I agree that the distribution agreements look positive, and the company now has the ability to raise enough working capital to stay in business (via share dilution with Lincoln Park), but it seems like they have a long, long, way to go before becoming profitable. They also appear to have very little competitive advantage beyond being first-mover to get them there. Are you hoping for a buyout? Their 10K certainly seems to hint at that as an exit strategy.

Anyway, I know you’ve said this is very speculative, but I’m still curious to fully understand what you’re seeing in this company. Maybe I’ve misunderstood something.

Neil, With regards to KRED, it’s just a wild position which has nothing to do with my basic investing philosophy. Here’s what I wrote originally. I’m adding bolding on key phrases. I don’t think I could have been clearer:

A new stock I’ve taken a tiny position in.

Before I say anything else let me specify, SHOUT even: DON’T take a BIG position in this stock! I’ve taken only a 0.28% position, which is truly tiny. My average position is 4.0%, so this is just one-fourteenth of a average position. My large positions are 8.0%, so this is just one-twenty-ninth of a large position. I REALLY have just a tiny position here.

Okay, now that that is out of the way, I can’t remember how I learned about this company but it may have been through a short article on Seeking Alpha which was attacking it as a “pump and dump” operation, which it may have been at one time for all I know. I’ve seen ads saying “Buy this company” and they did look like crude pump and dump ads. It’s a very little company in Hawaii called KonaRed (KRED), a penny stock, which makes health drinks out of coffee berries, and has started making other products too like health bars.

They had almost no revenue in 2012 and only about $0.9 million in revenue in all of 2013, but in the first quarter they have started to collect a lot, a real lot, of distribution, including store chains like CVS pharmacies and Walmart.

Their revenue for the first quarter of 2014 was $0.4 million (or 46% of what they had in all of last year). They had so much demand that their gross margin fell from over 70% to 25%. (This is to be expected as filling huge amounts of unexpected demand can mean paying overtime, hiring temps, outsourcing production, airfreighting instead of shipping by boat etc.) They lost a penny a share. The second quarter will be bigger, and they’ll continue to lose money. Revenue for the year should at least double. Maybe triple?

They may never make any money. This investment may go to zero, in which case my totals for the year will be 0.28% lower than they would have been. But if they hit, I may make a couple of percent. Obviously, this is not my typical kind of stock. It’s a sheer speculation, which is why my position is so small. I’m buying it because the product suddenly seems to have caught on, but it could die just as fast. If anyone is from Hawaii and has tried it, please let us know. My average buying price was 62 to 64 cents. There’s plenty of volume for taking a small position.

Since then, their distribution has continued to expand, they hired an impressive guy, they have a company which was willing to give them a stock-based line of credit, so things are moving in a positive direction, but this is still JUST A SPECULATION, PURE AND SIMPLE.

Best,

Saul

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