UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

   

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

   

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

For the transition period from ________ to ________

 

Commission File No. 000-54172

  

SUREPURE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada		26-3550286
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
405 Lexington Avenue, 25th Floor, New York, NY		10174
(Address of Principal Executive Offices)		(Zip Code)

 

(917) 368-8480

(Registrant’s Telephone Number, Including Area Code)

_____________________________________________

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

   

	Large accelerated filer ¨	Accelerated filer ¨
	Non-accelerated filer ¨	Smaller reporting company  x
	(Do not check if a smaller reporting company)

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No x

 

The number of shares outstanding of the issuer’s common stock, as of July 28, 2015 was 47,345,816.

 

 

SUREPURE, INC.

 

INDEX

 

PART I FINANCIAL INFORMATION		3
Item 1.	Financial Statements.	3
	Consolidated Balance Sheets June 30, 2015 (Unaudited) and December 31, 2014	3
	Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2015 and 2014	4
	Consolidated Statements of Other Comprehensive Income (Loss) (Unaudited) for the Three and Six Months Ended June 30, 2015 and 2014	5
	Consolidated Statement of Changes in Stockholders’ Deficit (Unaudited) for the Six Months Ended June 30, 2015	6
	Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2015 and 2014	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	30
Item 4.	Controls and Procedures.	30
PART II OTHER INFORMATION		31
Item 1.	Legal Proceedings.	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	31
Item 3.	Defaults Upon Senior Securities.	31
Item 4.	Mine Safety Disclosures.	31
Item 5.	Other Information.	31
Item 6.	Exhibits.	31
SIGNATURES		33

 

  

PART I

 

FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

  

SUREPURE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2015 (UNAUDITED) AND DECEMBER 31, 2014

 

		June 30, 2015				December 31, 2014
		(Unaudited)				(Audited)
Assets
Current assets:
Cash		$	59,585			$	526
Accounts receivable			667				16,800
Prepaid expenses and other current assets			333,147				406,280
Total current assets			393,399				423,606
Property and equipment, net			-				-
Intangible assets, net			87,287				95,622
Total assets		$	480,686			$	519,228
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and other current liabilities		$	1,097,126			$	1,252,203
Customer deposits			706,782				412,703
Due to officers			1,362,214				1,148,085
Income taxes payable			508				480
Loan payable			282,350				265,522
Total current liabilities			3,448,980				3,078,993
Total liabilities			3,448,980				3,078,993
Stockholders' deficit:
Common stock, $.001 par value, 200,000,000 shares authorized, 47,345,816 shares issued and outstanding (47,345,816 shares issued and outstanding at December 31, 2014)			47,346				47,346
Preferred stock, $.01 par values, 31,155,282 shares authorized, 14,800,000 shares issued and outstanding (14,800,000 shares issued and outstanding at December 31, 2014)			148,000				148,000
Additional paid-in capital			30,595,591				30,570,760
Other comprehensive income			975,070				999,456
Deficit			(34,734,301	)			(34,325,327	)
Total stockholders' deficit			(2,968,294	)			(2,559,765	)
Total liabilities and stockholders' equity (deficit)		$	480,686			$	519,228

 

See Notes to Consolidated Financial Statements.

 

  

SUREPURE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Revenue		$	1,451,803			$	49,525			$	1,550,143			$	75,423
Cost of revenue			786,623				4,457				832,958				6,110
Gross profit			665,180				45,068				717,185				69,313
Expenses:
General and administrative expenses (includes equity-based compensation of $12,415, $34,142, $24,831 and $68,284 respectively)			495,312				850,520				1,032,302				1,728,191
Promotion and marketing			464				4,512				9,291				32,868
Research and development			19,384				11,466				36,722				68,116
Amortization			4,167				4,167				8,334				8,334
Total expenses			519,327				870,665				1,086,649				1,837,509
Income (loss) from operations			145,853				(825,597	)			(369,464	)			(1,768,196	)
Other income (expense):
Interest expense (net)			(22,954	)			(132,237	)			(39,510	)			(146,664	)
Exchange rate gains and losses			-				(1,354	)			-				(164	)
Total other (expense) income			(22,954	)			(133,591	)			(39,510	)			(146,828	)
Income (loss) before provision for taxes			122,899				(959,188	)			(408,974	)			(1,915,024	)
Provision for income taxes			-				-				-				-
Net income (loss)		$	122,899			$	(959,188	)		$	(408,974	)		$	(1,915,024	)
Income (loss) per share – basic and diluted		$	0.00			$	(0.02	)		$	(0.01	)		$	(0.04	)
Weighted average shares outstanding – basic and diluted			47,345,816				44,602,697				47,345,816				42,790,467

 

See Notes to Consolidated Financial Statements.

 

  

SUREPURE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

 

		Three Months ended								Six Months ended
		June 30,								June 30,
		2015				2014				2015				2014
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Net income (loss)		$	122,899			$	(959,188	)		$	(408,974	)		$	(1,915,024	)
Other comprehensive income, net of tax
Unrealized gain (loss) on foreign currency translation			7,103				2,092				(24,386	)			(7,542	)
Comprehensive income (loss) net of tax		$	130,002			$	(957,096	)		$	(433,360	)		$	(1,922,566	)

 

See Notes to Consolidated Financial Statements.

 

  

SUREPURE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2015

 

																						Accumulated
		Common												Additional								Other
		Shares				Common				Preferred				Paid-in								Comprehensive
		Issued				Stock				Stock				Capital				Deficit				Income				Total
December 31, 2014 (audited)			47,345,816			$	47,346			$	148,000			$	30,570,760			$	(34,325,327	)		$	999,456			$	(2,559,765	)
Equity-based compensation															24,831												24,831
Net (loss) for the year																			(408,974	)							(408,974	)
Unrealized loss on foreign currency translation adjustment			-				-				-				-				-				(24,386	)			(24,386	)
June 30, 2015 (unaudited)			47,345,816			$	47,346			$	148,000			$	30,595,591			$	(34,734,301	)		$	975,070			$	(2,968,294	)

 

See Notes to Consolidated Financial Statements.

 

 

SUREPURE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2015 AND 2014

 

		Six Months Ended
		June 30,
		2015				2014
			(Unaudited)				(Unaudited)
Cash from operating activities:
Net loss		$	(408,974	)		$	(1,915,024	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization			8,334				8,334
Non-cash interest expense and loan costs			37,725				126,558
Issuance of common stock for consulting services			-				51,300
Equity-based compensation			24,831				68,284
Changes in assets and liabilities:
Accounts receivable			16,133				23,087
Prepaid expenses and other current assets			73,133				(2,497	)
Accounts payable and other current liabilities			(155,077	)			136,611
Customer deposits payable			294,079				56,700
Due to officers			209,120				290,869
Income taxes payable			-				(1	)
Total cash provided by (used in) operating activities			99,304				(1,155,779	)
Cash from financing activities:
Proceeds from issuance of equity			-				1,049,825
Proceeds from issuance of convertible debt			-				102,500
Total cash provided by financing activities			-				1,152,325
Effect of exchange rate changes on cash			(40,245	)			(9,223	)
Net increase (decrease) in cash			59,059				(12,677	)
Cash, beginning of period			526				20,870
Cash, end of period		$	59,585			$	8,193
Supplemental disclosures:
Interest paid		$	1,788			$	1,588

 

See Notes to Consolidated Financial Statements.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and six months ended June 30, 2015 and 2014

 

 

1. Organization and Significant Accounting Policies

 

Description of Business

 

SurePure Investment Holding AG (“SPI”) was incorporated in Switzerland in 2007. From 2007 to December 12, 2012 SPI was the holding company of the SurePure Group (the “Group”), which included subsidiaries and other entities whose activities primarily benefit the Group. On December 12, 2012, SPI entered into an Amended and Restated Share Exchange Agreement with SurePure, Inc. (“SurePure US” or the “Company”) pursuant to which SurePure US acquired SPI in a share exchange (the “Share Exchange”) and became the holding company for the Group, including SPI. Although SurePure US is the legal acquirer of SPI, SPI is treated as the acquirer for accounting and financial reporting purposes and under this method, SurePure US retains SPI’s financial reporting history.

 

Under the Share Exchange, each share of the capital stock of SPI was exchanged for one share of SurePure US common stock, par value $.001 per share (“Common Stock”), and, in the case of one shareholder of SPI, one share of Nonvoting Convertible Preferred Stock, par value $.01 per share (the “Nonvoting Convertible Preferred Stock”).

 

The Group has developed technology for using shortwave ultraviolet light (“UV-C”) to purify turbid liquids such as wine, fruit juice and milk. Although initially designed to treat food-grade applications, it has successfully been applied to liquids such as dairy products for animal consumption, protein products, bovine blood plasma, water, brines and sugar syrup solutions. The Group holds patents in 66 countries for this technology. The Group has been engaged in raising capital, continuing research and development of its technologies and developing markets for its products.

 

Basis of Presentation and Consolidation

 

The accompanying unaudited consolidated financial statements of the Company and subsidiaries have been prepared in accordance accounting principles generally accepted in the United States of America (“GAAP”).

 

The Company’s wholly-owned subsidiaries are as follows:

 

· SurePure Investment Holding AG (“SPI”), which holds the investment in SPO;

 

· SurePure Operations AG (“SPO”), which markets the products of the Group and earns its revenue by selling or otherwise distributing equipment utilizing the Group’s technology globally. SPO owns a patent for the Group’s technology in various countries;

 

· SurePure Participations AG (“SPP”), which was a minority stockholder of SPI and is part of the common holding structure of the Group. SPP has no operations. SPP became a subsidiary as a result of the Share Exchange on December 12, 2012;

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and six months ended June 30, 2015 and 2014

 

 

· SurePure Holdings South Africa (Pty) Ltd., which holds the South African patent, and its wholly-owned subsidiary, SurePure Marketing South Africa (Pty) Ltd. (“SPMSA”) which earn revenue from selling or otherwise distributing equipment utilizing the Group’s technology in South Africa. These entities became subsidiaries as a result of their acquisition on June 12, 2013; and

 

· SurePure Latin America Maqinas de Purificasao UVC Ltda. (“SPLAM”), which conducts no operations currently and is in the final stages of deregistration.

 

The Group’s reporting currency is the United States Dollar (“USD”) and these consolidated financial statements are presented in USD or “$.”

 

Adoption of New Accounting Standards

 

The Company has early adopted ASU 2014-10 Development Stage Entities which eliminates the requirement to provided Development Stage Entity reporting. As such, the financial statements as presented no longer contain information that aggregates all activities from the date of inception through the reporting date. The adoption of this new standard did not have a material impact on our financial position or results or operations.

 

Use of Estimates

 

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

 

Income Taxes

 

The Group accounts for income taxes using the liability method. Under this method, deferred income taxes are recognized based on the tax effects of temporary differences between the financial statement and tax bases of assets and liabilities, as measured by current enacted tax rates. Valuation allowances are recorded to reduce the deferred tax assets to an amount that will more likely than not provide a future tax benefit.

 

GAAP requires that, in applying the liability method, the consolidated financial statement effects of an uncertain tax position be recognized based on the outcome that is more likely than not to occur. Under this criterion, the most likely resolution of an uncertain tax position should be analyzed based on technical merits and one that will likely be sustained under examination. There are no uncertain tax positions requiring adjustment to or disclosure in these consolidated financial statements.

 

Accounts Receivable

 

Accounts receivable represent amounts due from customers and are carried at original invoice amount less an estimate made for doubtful receivables. The Group establishes a provision for estimated doubtful accounts, if necessary. No allowance for doubtful accounts was deemed to be necessary at June 30, 2015 or at December 31, 2014.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and six months ended June 30, 2015 and 2014

 

 

Property, Equipment and Related Depreciation

 

Property and equipment are recorded at cost, less accumulated depreciation. Cost includes the price paid to acquire the asset and any expenditures that substantially increase the asset’s value or extend the useful life of an existing asset. Depreciation is computed using the straight-line method over the estimated useful lives of the property and equipment. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Expenditures for routine repairs and maintenance are expensed as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is recognized in operations.

 

Depreciation is provided over the following estimated useful lives:

 

Plant machinery	3 to 5 years
Furniture and fixtures	3 to 5 years
Motor vehicles	5 years
Office and computer equipment	3 to 5 years

 

Intangible Assets

 

Intangible assets consist of patents in various countries around the world for the Company’s UV-C purification technology. The patents were initially recognized at their cost and are being amortized on a straight-line basis over their estimated useful lives of twelve years beginning with the acquisition of the patents in 2008. The patents expire in October 2020.

 

The Group evaluates the carrying value of its intangible assets for impairment at least annually or when events or changes in circumstances are identified by management that indicate that such carrying values may not be fully recoverable. The evaluation involves estimating the future undiscounted cash flows expected to be derived from the assets to assess whether or not a potential impairment exists. As a result of its evaluations, management determined that it was not necessary to recognize a loss on impairment of its intangible assets for the three and six months ended June 30, 2015 and 2014.

 

Revenue

 

Revenue is earned from sales or use of equipment that uses the Company’s patented technology and is recognized, when persuasive evidence of an arrangement exists, the sales price is fixed or determinable and collectability is reasonably assured. These criteria are usually met upon completion of delivery, installation and customer acceptance testing of the product by the customer.

 

Research and Development

 

Research and development costs are charged to expense as incurred.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and six months ended June 30, 2015 and 2014

 

 

Equity-Based Compensation

 

The Company measures compensation cost for all stock options granted based on fair value on the measurement date, which is typically the grant date. The fair value of each stock option granted is estimated on the grant date using the Black-Scholes-Merton option valuation model. The fair value of each share is based on the fair market value of the Company’s common stock on the date of the grant. Equity-based compensation expense is recognized on a straight-line basis over the requisite service period for each stock option or stock grant expected to vest with forfeitures estimated at the date of grant based on the Company’s historical experience and future expectations.

 

Foreign Currency Translations

 

These consolidated financial statements are presented in USD, which is the Group’s reporting currency. The consolidated financial statements of the Group members have been translated into USD in accordance with GAAP. All asset and liability accounts on the consolidated balance sheets have been translated using the spot exchange rate in effect at the consolidated balance sheet date. Equity accounts have been translated at their historical rates when the capital transaction occurred. Income and expenses have been translated at the average exchange rates for the periods presented. Adjustments resulting from the translation of the Group’s consolidated financial statements are included in the consolidated statement of other comprehensive income (loss). Actual transaction gains and losses are included in the consolidated statements of operations as incurred.

 

The functional currencies of the companies included in the Group are their respective local currencies. Accordingly, the Group is exposed to transaction gains and losses that result from changes in various foreign currency exchange rates.

 

Applicable functional currencies are:

 

SPI, SPO, and SPP	Swiss Francs – CHF
SPLAM	Brazilian Real – BRL
SPHSA and SPMSA	South African Rand – ZAR

 

Exchange rates used for conversion of foreign items to USD at the end of each period and the average for each period were:

 

		Three Months Ended								Six Months Ended
		June 30								June 30								December 31,
		2015				2014				2015				2014				2014
CHF:
Reporting date			1.0703				1.1216				1.0703				1.1216				1.0105
Average for period			1.0617				1.1247				1.0562				1.1223				1.0938
BRL:
Reporting date			0.3166				0.4536				0.3166				0.4536				0.3722
Average for period			0.3250				0.4477				0.3380				0.4352				0.4257
ZAR:
Reporting date			0.0813				0.0944				0.0813				0.0944				0.0861
Average for period			0.0827				0.0948				0.0839				0.0935				0.0922

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and six months ended June 30, 2015 and 2014

 

 

Earnings (Loss) per Share

 

Basic and diluted earnings (loss) per share are computed by dividing net income or loss by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue shares of Common Stock, such as options, convertible notes and convertible preferred stock, were exercised or converted into shares of Common Stock or could otherwise cause the issuance of shares of Common Stock that then would share in earnings (losses). Such potential issuances of additional shares of Common Stock are included in the computation of diluted earnings per share. Except as disclosed in Note 7 and 11 of these Notes to Consolidated Financial Statements, the Company has no securities or other contracts to issue shares of Common Stock that could cause any dilution of earnings. In addition, when there is a loss, diluted loss per share is not computed because any potential additional common shares of Common Stock would reduce the reported loss per share and therefore have an anti-dilutive effect.

 

2. Property and Equipment

 

Property and equipment consists of the following:

  

		June 30,				December 31,
		2015				2014
		(Unaudited)				(Audited)
Machinery and equipment		$	5,010			$	5,010
Furniture and fixtures			12,753				12,753
Motor vehicles			14,400				14,400
Office and computer equipment			12,647				12,647
			44,810				44,810
Less: Accumulated depreciation			44,810				44,810
Property and equipment, net		$	-			$	-

 

Property and equipment is fully depreciated, and there was no depreciation expense for the three and six months ended June 30, 2015 and 2014.

 

3. Intangible Assets

 

Intangible assets consist of the following:

 

		June 30,				December 31,
		2015				2014
		(Unaudited)				(Audited)
Patents		$	208,943			$	208,943
Less: Accumulated amortization			121,656				113,321
Intangible assets, net		$	87,287			$	95,622

 

Amortization expense was $4,167 for the three months ended June 30, 2015 and 2014 and $8,334 for the six months ended June 30, 2015 and 2014.

 

4. Due to Officers

 

Due to officers consists of unpaid salaries, accrued leave and advances from executives totaling $1,362,214 and $1,148,085 at June 30, 2015 and December 31, 2014, respectively. During 2014, the Company’s chief executive officer advanced $58,720 to SPMSA, of which $52,393 was outstanding at June 30, 2015. The chief executive officer has not been paid a portion of his salary and unreimbursed expenses and was due $108,613 as of June 30, 2015. During 2015 the chief executive officer advanced ZAR 2 million (approximately $162,000) to the Company under a loan agreement; the loan bears interest at the rate of 2% per month. The amount outstanding at June 30, 2015, including accrued interest of $5,009, is $170,861. The Company’s chief financial officer has not been paid his salary since October 2012. The amount owed to the chief financial officer as of June 30, 2015 includes unpaid salary of $783,792 and an amount due to the chief executive officer which has been ceded to the chief financial officer of $246,555.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and six months ended June 30, 2015 and 2014

 

 

5. Other Loans Payable

 

On April 4, 2013, SPMSA borrowed ZAR 2 million (approximately $201,000) from a lender pursuant to a note. The terms of the loan provide for interest of 2% per month on the outstanding balance which is payable together with the principal balance no later than December 31, 2013. An officer and stockholder of the Company deposited 1,000,000 shares of Common Stock with the lender as collateral for the repayment of the loan to SPMSA. On June 10, 2015, the repayment date was further extended to September 30, 2015. Interest on this loan was approximately $16,000 and $15,000 for the three months ended June 30, 2015 and 2014 and $32,600 and $28,700 for the six months ended June 30, 2015 and 2014. As of June 30, 2015, the unpaid balance on this loan was $282,350 and is included in loans payable in the accompanying Consolidated Balance Sheet.

 

6. Convertible debentures payable

 

On June 23, 2014, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Peak One Opportunity Fund, L.P., a Delaware limited partnership (“Peak One”), under which the Company has the right, subject to the terms and conditions of the Securities Purchase Agreement, to issue up to three convertible debentures each in the face amount of $125,000. . Each debenture is payable in full on the third anniversary of the date of issue (the “maturity date”). Each debenture provides for a discount of $12,500 upon issuance and sale and a zero percent stated interest rate. The Company issued the first debenture (the “Debenture”) to Peak One on June 23, 2014. The Company paid Peak One $10,000 for legal and other costs, that were deducted from the proceeds of issuance. The Securities Purchase Agreement also provided for the issuance of 75,000 shares of the Company’s Common Stock to an affiliate of Peak One upon the issuance of the Debenture. These shares were issued and valued at $.49 per share, which was the closing price of the Company’s Common Stock on the date of issuance. The Debenture provides Peak One with the option to convert any outstanding balance under the Debenture into shares of Common Stock of the Company at 65% of the lowest closing price of the Company’s Common Stock during the twenty trading days prior to conversion. This conversion price constitutes a beneficial conversion feature (“BCF”) that was valued at $67,308 on the date of issuance. The Company accounted for the BCF as a reduction of the balance of the related debt at the date of issuance and as an additional cost that is to be treated as noncash interest. The total costs of issuance were $126,558, including the value of 75,000 shares of the Company’s Common Stock issued, the discount and the BCF, which are treated as interest, and the legal and other costs that are treated as loan costs. The Company has expensed these costs currently due to the fact that the option to convert into shares rests solely with Peak One. Of the total costs associated with the Securities Purchase Agreement, $116,558 was charged to interest expense and $10,000 of loan costs was included in general and administrative expenses. Following the issuance of the Debenture, the Company registered 1,227,416 shares of its Common Stock in connection with Peak One’s conversion rights.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and six months ended June 30, 2015 and 2014

 

 

At June 30, 2014, the unpaid balance of the Debenture was $125,000 and was included in long-term debt. On July 18, 2014, Peak One converted $30,000 of the Debenture into 177,514 shares of the Company’s Common Stock. On August 5, 2014, Peak One converted an additional $30,000 of the Debenture into 209,795 shares of the Company’s Common Stock. On September 2, 2014, the Company repaid the outstanding amount of the debenture that it had issued to Peak One Opportunity Fund, L.P. on June 23, 2014. On September 3, 2014 the Company and Peak One Opportunity Fund, L.P. terminated the Securities Purchase Agreement, dated June 23, 2014.

 

7. Equity

 

Common Stock through the date of the Share Exchange consisted of the common stock of SPI. The amounts presented for periods prior to the Share Exchange were denominated in CHF and have been translated from CHF to USD using the exchange rates in effect on the date of each issuance. As of December 31, 2011, SPI had 26,822,215 common shares issued and outstanding. During 2012 prior to the Share Exchange, SPI issued 2,500,000 shares in connection with the subscription agreement referenced in Note 7 of these Notes to Consolidated Financial Statements and 7,378,416 shares in connection with the conversion of SPI stockholder loans to common shares, resulting in 36,700,631 common shares of SPI being outstanding immediately prior to the Share Exchange.

 

On December 12, 2012, SurePure US designated 31,155,282 of its authorized shares of preferred stock as Nonvoting Convertible Preferred Stock, par value $0.01 per share.  Under the terms of the Certificate of Designation (the “Certificate”), each share of Nonvoting Convertible Preferred Stock is convertible into one share of Common Stock, subject to certain limitations and restrictions as defined in the Certificate.

 

The issued shares of Nonvoting Convertible Preferred Stock automatically convert, at the applicable conversion ratio as defined in the Certificate, into shares of the Company’s Common Stock upon the assignment, sale or other transfer of shares to any person other than an affiliate of the holder of the seller.  Any assignee, purchaser or other transferee may surrender certificates representing the assigned shares to the Company and will receive shares of the Company’s Common Stock in return. 

 

During the year ended December 31, 2014, the preferred stockholder converted 5,000,000 shares of the Company’s preferred stock into 5,000,000 shares of the Company’s Common Stock.  At both June 30, 2015 and December 31, 2014, there were 14,800,000 issued and outstanding shares of the Company’s preferred stock.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and six months ended June 30, 2015 and 2014

 

 

Effective with the acquisition of SPHSA on June 12, 2013, 3,000 common shares of SPHSA were then exchanged for 3,000,000 shares of the Company’s Common Stock, which shares are treated as being outstanding as of June 12, 2013. The shareholder loans of SPHSA were converted to 6,865 common shares of SPHSA which were then exchanged for 6,864,811 shares of the Company’s Common Stock, which shares are treated as being outstanding as of June 12, 2013.

 

On September 1, 2013, the Company issued 60,000 common shares to a consultant in exchange for services.  The shares issued and the related consulting services were valued at $60,000 based upon a value of $1.00 per share, which was the closing price of the shares of the Company’s Common Stock on the last trading day prior to September 1, 2013.  On December 19, 2013, the Company issued 145,000 common shares to two consultants in exchange for services.  The shares issued and the related consulting services were valued at $130,500 based upon a value of $.90 per share, which was the closing price of the shares of the Company’s Common Stock on the last trading day prior to December 19, 2013.

 

On April 1, 2014, the Company entered into an agreement with a consultant to issue 30,000 common shares on the first business day of each month through September, 2014 in exchange for services. A total of 90,000 common shares were issued during the year ended December 31, 2014. The shares issued and the related consulting services were valued at $51,300 based upon the closing price on each date of issuance.

 

On June 23, 2014, the Company issued 75,000 common shares to Peak One as part of the cost of the financing in connection with the sale of the convertible debentures. The shares issued were valued at $.49, the closing share price on that day. On July 18, 2014, Peak One converted $30,000 of the Debenture into 177,514 shares of the Company’s Common Stock. On August 5, 2014, Peak One converted an additional $30,000 of the Debenture into 209,795 shares of the Company’s Common Stock.

 

At June 30, 2015 and December 31, 2014, there were 47,345,816 shares of the Company’s Common Stock issued and outstanding.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and six months ended June 30, 2015 and 2014

 

 

8. Stock Subscriptions

 

On September 20, 2013, the Company and Trinity Asset Management International Limited (“TAMIL”), a company formed under the laws of Mauritius, entered into the Share Purchase Agreement (the “TAMIL Share Purchase Agreement”), dated as of September 19, 2013, under which TAMIL agreed to purchase 900,000 shares of the Company’s Common Stock in monthly installments during the period ending March 25, 2014. The agreement required that TAMIL purchase the first 360,000 shares on September 30, 2013 or on such later date, not later than October 25, 2013 as the Company and TAMIL may agree. TAMIL agreed to purchase the remaining 540,000 shares in six installments of 90,000 shares each during the months beginning October 2013 and ending March 2014. TAMIL did not purchase any shares during the third quarter or fourth quarter of 2013. On November 7, 2013, the Company and TAMIL amended the Share Purchase Agreement to permit TAMIL to purchase the 900,000 shares of Common Stock at any time until March 25, 2014 and to modify the purchase price to be paid for the shares to be the greater of $1.00 per share or 92% of the volume weighted average price per share for the 20 trading days prior to the third business day before the purchase and sale of the shares. On March 5, 2014, TAMIL purchased 184,825 shares of the Company’s Common Stock under the agreement for a purchase price of $184,825.  The agreement included a liquidated damages provision in the event that TAMIL failed to purchase the agreed upon number of shares. The liquidated damages provision required TAMIL to pay an amount equal to the difference between $900,000 and the amount paid for the shares under the agreement. TAMIL did not purchase any of the remaining 715,175 shares of the Company’s Common Stock under this agreement as amended. The Company did not enforce its rights under the liquidated damages provision.

 

On November 22, 2013, the Company entered into an additional Share Purchase Agreement with Regency Capital Corporation, an existing stockholder, under which Regency agreed to purchase a total of 170,000 shares of Common Stock during the period ended November 30, 2013. In addition, Regency was given an option to purchase an additional 430,000 shares of Common Stock before January 31, 2014. Regency purchased the 170,000 shares of Common Stock as agreed and purchased an additional 380,000 shares of Common Stock through December 31, 2013. The remaining 50,000 shares of the Company’s Common Stock were purchased on January 24, 2014. All shares of Common Stock under this additional share purchase agreement with Regency were purchased at an issue price of $1.00 per share.

 

On February 13, 2014, effective as of January 31, 2014, this agreement was amended to grant Regency an option to purchase an additional 500,000 common shares not later than March 31, 2014 at the greater of $1.00 and 92% of the volume-weighted average price of for the 20 trading days ending on the third trading day before each additional share closing (the “Amendment Option Price”). Under this agreement as amended and through June 30, 2014, Regency has purchased 500,000 shares of the Company’s Common Stock at an issue price of $1.00 per share for an aggregate purchase price of $500,000.

 

On March 19, 2014, the Company and Regency entered into a second amendment of the Share Purchase Agreement that granted Regency the right to purchase 1,000,000 additional shares of Common Stock during the period ending June 30, 2014 at a cash purchase price equal to the Amendment Option Price. Under the second amendment and through June 30, 2014, Regency has purchased 315,000 shares of the Company’s Common Stock for an aggregate purchase price of $315,000.

 

On May 20, 2014, the Company and Trinity Asset Management (Proprietary) Limited (“Trinity”) entered into an Agreement for the Subscription of Shares that permitted Trinity arrange for the purchase of 850,000 shares of the Company’s Common Stock by offers to purchase by other subscribers at the price of $1.00 per share before July 30, 2014. In addition, Trinity agreed to assume the obligations of TAMIL with respect to the liquidated damages in connection with the unpurchased shares under the TAMIL agreement dated as of September 19, 2013 as amended. As of July 24, Trinity had not provided any offers to purchase to the Company and requested an extension of time to September 30, 2014 to complete it obligations under the agreement. Subsequent to June 30, 2014, no such offers to purchase have been made to the Company and no sales of Common Stock have taken place under the agreement.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and six months ended June 30, 2015 and 2014

 

 

On June 24, 2014, the Company and Regency entered into a third amendment of the Share Purchase Agreement that extended to September 30, 2014 Regency’s right to purchase the remaining 685,000 shares of the Company’s Common Stock under the second amendment. Through September 30, 2014, 141,250 shares were purchased under the third amendment.

 

During the year ended December 31, 2014, the Company issued an aggregate of 1,191,075 shares of its Common Stock for aggregate gross proceeds of $1,190,075, 575,000 shares of its Common Stock in settlement of liabilities to executives and consultants, 180,000 shares of its Common Stock in connection with a consulting agreement, 75,000 shares of its Common Stock in connection with the issuance of the Peak One convertible debentures and 387,309 shares issued in connection with the conversion rights under the Peak One convertible debentures.

 

During the year ended December 31, 2014, the holder of the Company’s convertible preferred shares converted 5,000,000 shares of Preferred Stock into 5,000,000 shares of Common Stock. The holder did not convert any shares of Preferred Stock during the first or second quarters of 2015.

 

9. Stockholders’ Deficit

 

The consolidated stockholders’ deficit of the Company consists of common stock, additional paid-in capital, deficit and accumulated other comprehensive income. The amounts for equity in variable interest entities and noncontrolling interest have been reclassified to additional paid-in capital, deficit and accumulated other comprehensive income effective with the acquisition of SPHSA on June 12, 2013.

 

10. Income Taxes

 

The Company and its subsidiaries file income tax returns in Switzerland, South Africa, the United States and Brazil. The components of income (loss) from operations before income taxes, by jurisdiction, are as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
Switzerland		$	312,843			$	(397,962	)		$	83,321			$	(883,745	)
South Africa		$	(122,324	)			(157,520	)			(258,310	)			(384,174	)
United States		$	(67,620	)			(403,706	)			(233,985	)			(647,105	)
Brazil			-				-				-				-
Total Net Income (Loss)		$	122,899			$	(959,188	)		$	(408,974	)		$	(1,915,024	)

 

The provision for income taxes shown in the accompanying consolidated statements of operations consists of the following for the three and six months ended June 30, 2015 and 2014:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
Current tax provision:
Switzerland		$	-			$	-			$	-			$	-
South Africa			-				-				-				-
United States			-				-				-				-
Brazil			-				-				-				-
Total current tax provision			-			$	-				-			$	-
Deferred tax provision:
Switzerland			56,767			$	(71,303	)			15,759			$	(158,070	)
South Africa			(34,215	)			(44,066	)			(72,256	)			(107,490	)
United States			(23,667	)			(141,297	)			(81,894	)			(226,487	)
Brazil			235,375				-				235,375				-
Change in valuation allowance			(234,260	)			256,666				(96,984	)			492,047
Total deferred provision			-				-				-				-
Total		$	-			$	-			$	-			$	-

 

The Company has determined that the future tax benefits from net operating losses are not likely to be realized in future periods and a full valuation allowance has been provided for all periods.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and six months ended June 30, 2015 and 2014

 

 

The income tax effect of each type of temporary difference giving rise to the net deferred tax asset as follows:

 

		June 30,				December 31,
		2015				2014
Deferred tax assets:
Net operating loss carryforwards		$	6,555,878			$	6,652,861
Less: valuation allowance			(6,555,878	)			(6,652,861	)
Total		$	-			$	-

 

The following reconciles the effective income tax rates with the statutory rates for the three and six months ended June 30, 2015 and 2014:

 

										United
		Switzerland				South Africa				States				Brazil				Total
Statutory rate of tax			8.5%/18%				28.0%				35.0%				25.0%
Three months ended June 30, 2015:
Net income (loss) from operations before taxes		$	312,843			$	(122,324	)		$	(67,620	)		$	-			$	122,899
As calculated at the statutory rate			56,767				(34,286	)			(23,667	)			-				(1,186	)
Permanent differences			-				71				-				235,375				235,446
Change in valuation reserves			(56,767	)			34,215				23,667				(235,375	)			(234,260	)
Provision for income taxes		$	-			$	-			$	-			$	-			$	-
Three months ended June 30, 2014:
Net (loss) from operations before taxes		$	(397,962	)		$	(157,520	)		$	(403,706	)		$	-			$	(959,188	)
As calculated at the statutory rate			(71,303	)			(44,106	)			(141,297	)			-				(256,706	)
Permanent differences			-				40				-				-				40
Change in valuation reserves			71,303				44,066				141,297				-				256,666
Provision for income taxes		$	-			$	-			$	-			$	-			$	-
Six months ended June 30, 2015:
Net income (loss) from operations before taxes		$	83,321			$	(258,310	)		$	(233,985	)		$	-			$	(408,974	)
As calculated at the statutory rate			15,759				(72,327	)			(81,894	)			-				(138,462	)
Permanent differences			-				71				-				235,375				235,446
Change in valuation reserves			(15,759	)			72,256				81,894				(235,375	)			(96,984	)
Provision for income taxes		$	-			$	-			$	-			$	-			$	-
Six months ended June 30, 2014:
Net (loss) from operations before taxes		$	(883,745	)		$	(384,174	)		$	(647,105	)		$	-			$	(1,915,024	)
As calculated at the statutory rate			(158,070	)			(107,569	)			(226,487	)			-				(492,126	)
Permanent differences			-				79				-				-				79
Change in valuation reserves			158,070				107,490				226,487				-				492,047
Provision for income taxes		$	-			$	-			$	-			$	-			$	-

 

Permanent differences are principally related to loss on disposal of property and equipment, interest and penalties and unallowable expenses.

 

The Company and Group members remain subject to tax examinations for the year ended December 31, 2014 in Switzerland and South Africa, for the six years ended December 31, 2014 in the U.S and for the four years ended December 31, 2014 in Brazil.

 

During December 2013 the Internal Revenue Service (the “IRS”) notified the Company of assessments totaling $40,000 based on the failure by the Company’s management prior to the December 12, 2012 share exchange to file certain information returns for the years 2008-2011. The Company requested, but did not receive, administrative relief from the IRS from the assessments. The Company entered into an agreement with the IRS to pay the outstanding balance over four months in installments of $10,000 each commencing August 15, 2014. The Company made the payment of the first installment of $10,000 on August 7, 2014. The Company obtained an updated settlement amount from the IRS during February 2015 and paid the amount in full to the IRS during March 2015.

 

11. 2012 Stock Option Plan

 

On December 11, 2012, the Company adopted the 2012 Stock Plan (the “Plan”). Under the terms of the Plan, 3,000,000 shares of our Common Stock have been reserved for future issuance. The Plan authorizes the granting of non-qualified stock options to our directors and to any independent consultants. The Plan is administered by the Company’s board of directors, and may also be administered by a committee appointed by the board of directors (the “Committee”). The Committee may determine persons eligible for grants and the timing, type, amount, fair market value and other provisions of such grants. The Committee will have authority, subject to the express provisions of the Plan, to construe the Plan and the option agreements granted pursuant to the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, and to make all other determinations in the judgment of the Committee necessary or desirable for the administration of the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option agreement in the manner and to the extent it shall deem expedient to promote the best interests of the Company. The Plan terminates on December 9, 2022.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and six months ended June 30, 2015 and 2014

 

 

The Plan provides that the determination of the option price per share for any option rests in discretion of the Committee. Options granted under the Plan must be granted within ten years from the date on which the Plan has been adopted. No options granted under the Plan may be exercisable after ten years from the date of grant. The Company’s board of directors may suspend or terminate the Plan in whole or in part or amend the Plan in such respects as the board may deem appropriate and in the best interest of the company. No amendment, suspension or termination of the Plan shall, however, without the optionee's consent, alter or impair any of the rights or obligations granted under the Plan.

 

On November 12, 2013, the Company granted non-qualified stock options to purchase an aggregate of 475,000 shares of the Company’s Common Stock under the plan, each at an exercise price of $0.89 per share. The options vest over three years as follows:

 

Options vested on November 12, 2013			190,000
Options vesting on November 12, 2014			142,500
Options vesting on November 12, 2015			142,500
			475,000

 

The Company uses the Black-Scholes-Merton option pricing model to estimate the fair value of stock options. The principal assumptions utilized in valuing stock options include the expected stock price volatility (based on the most recent historical period beginning December 12, 2012); the expected option life; the expected dividend yield; and the risk-free rate (an estimate based upon the yields of Treasury constant maturities) equal to the expected life of the option. The fair values for the options, all of which were granted in 2013, were determined using the Black-Scholes-Merton option pricing model with the following assumptions:

 

Dividend yield			0.00	%
Risk-free interest rates			2.80	%
Expected volatility			72.68	%
Expected term (in years)			10

 

There was no reduction for estimated forfeitures. Under this model and the foregoing assumptions, the options granted in 2013 were valued at $151,053. Of this amount, $87,452, $15,900 and $47,701 is attributable to executives, employees and consultants, respectively. Equity-based compensation for the three months ended June 30, 2015 and 2014 was $12,415 and $34,142 respectively and $24,831 and $68,284 for the six months ended June 30, 2015 and 2014 respectively. These amounts are included in general and administrative expenses in the accompanying Consolidated Statements of Operations.

 

12. Commitments, Contingencies and Tax Obligation

 

Lease Commitments

 

The Group leases two premises in South Africa under operating leases.  One location is an office facility and the other is a workshop.  The office facility lease was originally scheduled to expire on April 30, 2012 and has been extended in a short-term basis several times. The lease term terminated on February 28, 2014, and the Company leased this office for an additional month in March 2014.  The Company executed a one-year lease for a new office facility effective April 1, 2014 and was able to terminate this lease in May 2014. The lease for the Group’s workshop facility originally expired on April 30, 2012 and was also extended on a short-term basis. The workshop is being leased on a month-to-month basis. On June 1, 2014, the Company lease new office and workshop facilities for a one-year term. The lease for the office terminated on May 31, 2015 and was not renewed. The monthly rent for the workshop lease is approximately $900. In addition to the payments required under the preceding leases, payments are made for space rentals on an as-needed basis. The total rent expense was approximately $9,000 and $18,000 for the three months ended June 30, 2015 and 2014, respectively and $15,000 and $35,000 for the six months ended June 30, 2015 and 2014 respectively. Rent expense is included in general and administrative expenses in the accompanying Consolidated Statements of Operations.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and six months ended June 30, 2015 and 2014

 

 

The future rent commitments under the above lease for the twelve months ending December 31, 2015 is approximately $11,000.

 

Payroll Commitments

 

The Group’s employees in South Africa have employment contracts that provide for one month of notice before the employee can be terminated.  As of June 30, 2015, the total monthly salary commitment applicable to these employees was approximately $11,500.

 

Payroll Tax Obligations

 

During 2013, SPMSA received notification from the South African Revenue Service (“SARS”) regarding unpaid payroll taxes of approximately $185,000.  SPMSA requested additional time to arrange a payment plan that is suitable to both parties and commenced making monthly payments to SARS. Due to insufficient funds the SPMSA has been unable to continue making additional payments in this regard and has requested additional time to arrange a payment plan that is suitable to both parties. As at June 30, 2015 and December 31, 2014, the unpaid balance of this liability was approximately $103,000 and $80,000, respectively and is included in accounts payable and other current liabilities in the accompanying Consolidated Balance Sheets. Effective October 31, 2014, SARS placed a collection order on the bank account of SPMSA for the outstanding amounts due.

 

Additionally, the Company has payroll tax obligations in Switzerland relating to the employment of the chief financial officer by SPOAG. As at June 30, 2015 and December 31, 2014, the unpaid balance of this liability was approximately $77,000 and $53,000, respectively and is included in accounts payable and other current liabilities in the accompanying Consolidated Balance Sheets.

 

Employment and Consulting Agreements

 

The Company has entered into agreements to secure the services of two executives.  These agreements provide for annual compensation and require a minimum termination notice period by the employer of three months.  Both executives are stockholders of the Company. The minimum amount due under these agreements is approximately $144,000 over the year ending December 31, 2015.

 

The total compensation to these executives and one former executive was approximately $155,000 and $192,000 for the three months ended June 30, 2015 and 2014, respectively and $299,000 and $386,000 for the six months ended June 30, 2015 and 2014 respectively.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and six months ended June 30, 2015 and 2014

 

 

The Company entered into agreements with unrelated third party consultants and institutions for consulting, research and professional services.  These agreements can be terminated by either party with between one and three months written notice or immediately if for cause.  The amounts due vary according to the nature of the service arrangement and the length of notice required for termination. The minimum amount due under these agreements is approximately $58,000 over the year ending December 31, 2015.

 

Other Commitments

 

The Company is obligated to make payments of approximately $63,500 subsequent to June 30, 2015 in connection with purchase orders open as of June 30, 2015 for the purchase of machines to be delivered in 2015. Payments to vendors relating to these purchases are scheduled to be made prior to August 31, 2015 from the proceeds of the sales to which they relate.

 

13. Subsequent Events

 

The Company has evaluated its subsequent events since June 30, 2015 and has disclosed in Note 12 with respect to open purchase orders and payroll tax obligations.

 

14. Going Concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the continuation of the Group as a going concern. Due to the start-up nature of its business, the Group has generated recurring losses and expects to incur additional losses as it expands its photopurification technology and develops marketing, sales and financial plans. As reflected in the accompanying Consolidated Financial Statements, the Company’s total consolidated liabilities exceed total consolidated assets at June 30, 2015 and December 31, 2014 by $2,968,294 and $2,559,765, respectively.

 

To date, the Company’s cash flow has been funded with cash investments by its shareholders, certain third parties and to a considerably lesser extent, revenue. These inflows have been insufficient to enable the Company to cover its costs. For the six months ended June 30, 2015 there has been a substantial increase in current liabilities. Additionally as disclosed in Note 12 with respect to payroll tax obligations, the Company has been unable to meet its obligations in terms of these taxes.

 

The Company requires additional capital to continue its development and to achieve sufficient revenues to support its operations. The extent of the Company’s future working capital requirements depend on many factors, including its ability to maintain revenues and to manage expenses. The Company requires additional financing either through borrowings or the sale of equity to support its operations.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and six months ended June 30, 2015 and 2014

 

 

The Company’s access to additional financing, if any, will depend on a variety of factors over which the Company has little or no control. These factors include market conditions, the general unavailability of equity financing to the Company in light of its limited revenues, the actual financial and operational results of the Company on a consolidated basis, as well as investors’ perception of the Company’s short-term and long-term financial prospects. If future financing is not available on acceptable terms, or on any other terms, the Company will not be able to continue as a going concern.

 

Management is currently pursuing plans to address the cash flow requirements of the Company for the twelve months ending June 30, 2016 and beyond. The Company is engaged in discussions with current and other potential investors, and the Company is also considering additional offerings of Common Stock. The Company was not, however, able to secure any additional equity financing during the first half of 2015 from existing shareholders or otherwise, despite its efforts to do so. In addition, the Company projects that increase in the commercialization of its technology may provide additional cash flow for operations. The Company entered into sales contracts of approximately $940,000 during the six-month period ended June 30, 2015.

 

The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

  

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward Looking Statements

 

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other parts of this Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements.  The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements.  These statements are based on the beliefs and assumptions of our management based on information currently available to them.  Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those identified under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “Commission”), as well as in other documents that we have filed with the Commission.  Furthermore, such forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q.  Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

Rounding

 

Certain figures included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other parts of this Quarterly Report on Form 10-Q have been rounded for ease of presentation. Percentage figures included in this Quarterly Report on Form 10-Q have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, certain percentage amounts in this Quarterly Report on Form 10-Q may vary from those obtained by performing the same calculations using the figures in our financial statements. Certain other amounts that appear in this Quarterly Report on Form 10-Q may not sum due to rounding.

 

Overview

 

The results presented in this “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” are those of SurePure, Inc. and its subsidiaries (all of which are collectively referred to in this Management’s Discussion and Analysis of Financial Condition and Results of Operations as “we”) as reflected in our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. The following discussion should be read in conjunction with such consolidated financial statements and the notes thereto. The commentary presented below pertains to our unaudited consolidated financial statements for the quarters ended June 30, 2015 and 2014 and for the six month periods ended June 30, 2015 and 2014.

 

 

Insufficient Funding

 

For the period from our inception on August 24, 2005 to June 30, 2015, we had net losses of approximately $31,185,000. During the six months ended June 30, 2015, although we had an increase in operating revenues, we nevertheless continue to experience a significant shortfall in funding from investors. As a result, we require significant additional funding to maintain our operations and execute our business plan. If we are unable to obtain financing from our current shareholders or other sources, we will be unable to meet our business objectives and may scale back or even discontinue our operations until such time, if ever, that we are able to obtain financing. Notwithstanding our efforts to obtain financing, there is no assurance that any financing will be available on acceptable terms or at all. See “—Liquidity and Capital Resources.”

 

Business Overview

 

SurePure Inc. (SURP) is quoted on the OTCQB market and owns the international patent for a novel liquid purification technology that uses UV, rather than heat, to sterilize liquids. Using ultraviolet C light, the photopurification process can deliver the same or superior microbiological efficacy to pasteurization on both clear and turbid liquids without the concomitant energy consumption or degradation of the liquid, either biochemically or organoleptically.

 

Although UV light has long been used as a surface sterilizer and has been applied to clear water successfully, this is the first technology of its kind that can process opaque or turbid liquids. Its scope of application is therefore virtually unlimited. Food-grade liquid application in beverages abound; technical application to process water and liquid raw materials, as well as liquids such as diesel are possible; even the medical application of this technology from blood to breast milk is being explored. We continue to do research work either by ourselves or in conjuction with clients to establish the efficacy on other liquids including various consumer beverages and home care products.

 

The heart of the SurePure photopurification technology is the Turbulator technology for which SurePure holds 1 United States and 16 foreign patents. The unique and self-cleaning design of the Turbulator enables the purification of turbid liquids on an industrial processing scale.

 

We have experienced negative cash flows from operations with respect to our business since our inception. As of June 30, 2015, we did not have adequate working capital resources to satisfy our current liabilities, and, as a result, we have substantial doubt about our ability to continue as a going concern. Based on our current projections, we are not assured that we will have the cash resources to enable us to continue to fund normal operations.

 

Plan of Operation

 

We seek to expand the commercial acceptance of our SurePure Turbulator purification systems. To pursue this goal, contingent on our obtaining sufficient capital to maintain our operations, we plan to execute the following steps:

 

·

Attend and promote our product at international trade shows in 2015 and 2016 for the brewing, dairy industries, liquid egg and industrial applications. At these venues we will seek to establish contact with industry participants, including distributors of engineered systems, and to make them aware of our product’s advantages and the expanded applications of the product that we have developed;

 

·

Continue to pursue regulatory clearances and approvals for applications, such as dairy, that are required for our technology to be sold in those industries. In particular, we expect to take the following actions with regulatory agencies:

 

·

To request review of the SurePure technology by the US Food and Drug Administration (“FDA”) for a number of applications so that the technology may be categorized as “generally recognized as safe,” or “GRAS”;

 

·

To receive approval of the material that we and a UK customer submitted to the UK Food Standard Authority in June 2011 to obtain EU Novel Food approval; and

 

 

·

To receive approval from the International Organization of Wine and Vine (“OIV”) for the use of the SurePure technology for wine industry applications.

 

·

Seek to market and sell our product and our technology for industrial applications;

 

·

Seek to expand the level of commercialization of our technology in the liquid egg, wine, dairy, fruit juice, carbonated soft drink and other beverage industries;

 

·

Expand our distribution networks for our products by identifying additional distributors according to geographic market, expertise with specific liquids and existing client relationships and negotiating agreements with the identified distributors on terms acceptable to both the distributors and to us; and

 

·

Obtain additional equity financing to support our growth from current shareholders, institutional investors or other investors to provide capital to support and augment our operations.

 

Our goal is to grow significantly over the next five years through the use of working capital and equity financing, if capital and financing are available to us. If we are able to obtain sufficient financing, we believe that it will be feasible for us to grow our operations based on our strategy of targeting strategic global regions with multiple potential clients for the commercialization of our technology. However, we will also seek to carefully monitor the risks associated with achieving our goal to increase commercialization and meet client expectations while also becoming financially solvent.

 

During the period ended June 30, 2015, we focused on the following activities:

 

·

continuing with commercial trials with key customers;

 

·

concluding agreements with customers;

 

·

working with regulatory authorities such that our technology can be employed in key areas;

 

·

manufacturing, delivering and commissioning equipment ordered by customers; and

 

·

negotiating financing arrangements.

 

Subsequent to June 30, 2015, we have focused on the following activities:

 

·

continuing with commercial trials with key customers;

 

·

concluding agreements and accepting orders from new customers;

 

·

pursuing the expansion of our customer base and distributor network internationally;

 

·

working with regulatory authorities such that our technology can be employed in key areas;

 

·

manufacturing, delivering and commissioning equipment ordered by customers; and

 

·

negotiating possible equity financing agreements.

 

Results of Operations

 

The following table summarizes our results of operations for the three and six months ended June 30, 2015 compared with our results of operations for the three and six months ended June 30, 2014:

 

  

		Three Months Ended:								Variance
		June 30, 2015				June 30, 2014				$				%
Revenues		$	1,452,000			$	50,000				1,402,000				2804	%
General and Administrative Expenses			495,000				851,000				(356,000	)			-42	%
Research and Development			19,000				11,000				8,000				73	%
Interest Expense			23,000				132,000				(109,000	)			-83	%
Net Profit / (Loss)			123,000				(959,000	)			1,082,000				-113	%

 

		Six Months Ended:								Variance
		June 30, 2015				June 30, 2014				$				%
Revenues		$	1,550,000			$	75,000				1,475,000				1967	%
General and Administrative Expenses			1,032,000				1,728,000				(696,000	)			-40	%
Research and Development			37,000				68,000				(31,000	)			-46	%
Interest Expense			40,000				147,000				(107,000	)			-73	%
Net Loss			409,000				1,915,000				(1,506,000	)			-79	%

 

  

Revenues

 

We had revenues of approximately $1,452,000 during the three months ended June 30, 2015, representing a 2804% increase as compared to approximately $50,000 for the three months ended June 30, 2014. This increase as compared to the 2014 year was primarily due to the increase in new customer installations during the period. Revenue for the six months ended June 30, 2015 was approximately $1,550,000, an increase of 1967%, compared to the six months ended June 30, 2014.

 

Although we are negotiating certain agreements for the commercialization of our SurePure technology and although there are ongoing tests of our technology with potential customers, it is unlikely that more than one or two of those agreements as currently structured will generate significant amounts of revenue during the next six months. As a general matter, however, we expect that revenues will increase to the extent that our commercialization efforts are successful. These commercialization efforts seek to introduce our technology to a broader range of clients and geographic areas. Our business model is largely based on sales of equipment.

 

General and Administrative Expenses

 

We had general and administrative expenses of approximately $495,000 during the three months ended June 30, 2015, representing a 42% decrease as compared with approximately $851,000 during the three months ended June 30, 2014. This decrease as compared to 2014 was primarily due to lower professional fees resulting from the reorganization of our South African entities during 2014, lower employment costs due to reduction in staff numbers and remuneration levels as well as reduced travel expenditures due to timing of customer visits. For the six months ended June 30, 2015, general and administrative expenses of approximately $1,032,000 were 40% lower than the comparable expenses of $1,728,000 for the six months ended June 30, 2014. This decrease as compared to 2014 was also primarily due to lower professional fees resulting from the reorganization of our South African entities as direct subsidiaries during 2014, lower employment costs due to reduction in staff numbers and remuneration levels as well as reduced travel expenditures due to timing of customer visits.

 

General and administrative expenses are largely attributable to employment costs, professional and consulting fees and business travel expenses.

 

We expect that our general and administrative expenses will increase in future periods if we are able to obtain funding for our operations, as the increased level of commercialization of our technology will require increased levels of staffing and associated expenditures.

 

Research and Development Expenses

 

We had research and development expenses of approximately $19,000 for the three months ended June 30, 2015, representing a 73% increase as compared with approximately $11,000 for the three months ended June 30, 2014. Research and development expenses for the six months ended June 30, 2015 were approximately $37,000, or 46% lower than the approximately $68,000 of research and development expenses for the six months ended June 30, 2014. This decrease as compared to the first half of 2014 was primarily due to timing of research work related to regulatory submissions.

 

  

We expect that our research and development expenses will increase in future periods as we pursue new applications and clients for our technology.

 

Interest Expense

 

We had interest expense of approximately $23,000 for the three months ended June 30, 2015, representing a 83% decrease, as compared to approximately $132,000 of interest expense for the three months ended June 30, 2014. Interest expense was approximately $40,000 for the six months ended June 30, 2015, representing a 73% decrease as compared to approximately $147,000 of interest expense for the six months ended June 30, 2014. This decrease was primarily due to the fact that during August 2014 we repaid the debenture that was outstanding during the second quarter of 2014.

 

Net Income (Loss)

 

For the reasons discussed above, we had a net income of approximately $123,000 for the three months ended June 30, 2015, compared with a net loss of approximately $959,000 for the three months ended June 30, 2014. Net losses for the six months ended June 30, 2015 were approximately $409,000 as compared to approximately $1,915,000 for the six months ended June 30, 2014, or a decrease of 79%.

 

Although we generated a profit in the second quarter, we have not as yet generated sufficient revenue to fund our operations for the six months to date in 2015, and we expect our net losses to continue until such time as our commercialization efforts for our technology produce an increase in revenues sufficient to meet the cost of our operations. Accordingly, we expect to continue to operate at a loss at least through calendar 2015.

 

Income Tax Expense (Benefit)

 

We have realized net operating losses in Switzerland, South Africa and the United States. In addition to net operating losses in prior periods, our net operating losses during the quarter may result in a potential future income tax benefit, to the extent that any unexpired net operating loss carry-forwards can offset future operating profits.

 

Impact of Inflation

 

We believe that inflation has not had a material effect on our operations for the period from August 24, 2005 (when our operations began) to June 30, 2015.

 

Capital Expenditures

 

We did not invest in property and equipment during the quarter ended June 30, 2015.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity have historically been through sales of our Common Stock to our investors. During the quarter ended June 30, 2015, however we were unable to obtain additional equity funding.

 

We continue to discuss potential financing transactions with various third parties, but we cannot provide any assurance that we will be able to conclude financing transactions with these or any other investors.

 

 

Our current assets are insufficient to meet our current obligations or to satisfy our cash needs over the next twelve months and, as such, we will require debt or equity financing. We are pursuing prospective sources for equity financing in an amount that would allow us to meet our commercialization targets. We face significant obstacles to attracting new financing due to our historical and current record of net losses and working capital deficits and the low level of the commercialization of our technology. Therefore, despite our efforts, we can provide no assurances that we will be able to obtain the financing required to meet our stated objectives or even to continue our business as a going concern.

 

The following table summarizes our financial position at June 30, 2015 compared with our financial position at December 31, 2014:

 

		As of:								Variance
		June 30, 2015				December 31, 2014				$				%
Cash		$	60,000			$	1,000				59,000				5900	%
Other Current Assets			334,000				423,000				(89,000	)			-21	%
Total Assets			481,000				519,000				(38,000	)			-7	%
Current Liabilities			3,449,000				3,079,000				370,000				12	%

 

As noted above under “Insufficient Funding” and as also noted below under this heading, our current cash resources are extremely limited.

 

As of June 30, 2015, we had cash of approximately $60,000 and other current assets of approximately $334,000, consisting of accounts receivable and prepaid expenses, and total assets of approximately $481,000. As of June 30, 2015, we had current liabilities of approximately $3,449,000, consisting of accounts payable, accounts payable to related parties and accrued liabilities. Of this amount, approximately $1,362,000 represented liabilities that were due to officers and stockholders, an increase in liabilities to officers and stockholders of approximately $214,000 as compared to such amount as of December 31, 2014. Our shareholders’ deficit was approximately $2,968,000 as of June 30, 2015, compared with deficit of approximately $2,560,000 as of December 31, 2014.

 

Cash Flow Analysis

 

For the six months ended June 30, 2015 our cash generated by operating activities was approximately $59,000, which amount corresponded mainly to net losses from our operations offset by an increase in customer deposits and amounts due to officers and stockholders. However we expect to continue to have periods of negative cash flows from operating activities until such time as we fully commercialize our technology.

 

We do not expect to pay cash dividends in the foreseeable future.

 

  

We have a defined stock option plan and contractual commitments with all of our officers and directors. See “Market for Registrants Common Equity, Related Equity Stockholder Matters and Issuer Purchases of Equity Securities—Equity Compensation Plan Information” below in this Quarterly Report on Form 10-Q.

 

We plan to increase the number of employees to meet the anticipated demand if we are able to achieve wider acceptance of our technology.

 

Off Balance Sheet Arrangements

 

As of June 30, 2015, we had no off-balance sheet arrangements.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4.

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosures.

 

As of the end of the period covered by this report, our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures.  Based on their evaluation of our disclosure controls and procedures and as a result of the material weaknesses discussed below, management, including our principal executive officer and principal financial officer, has concluded that our disclosure controls and procedures were effective as of June 30, 2015.

 

Changes in Internal Control Over Financial Reporting

 

Our management, including our principal executive and principal financial officers, has evaluated any changes in our internal control over financial reporting that occurred during the quarterly period ended June 30, 2015, and has concluded that there was no change that occurred during the quarterly period ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

  

PART II

 

OTHER INFORMATION

 

Item 1.

Legal Proceedings.

 

None.

 

Item 1A.

Risk Factors.

 

As a smaller reporting company, we are not required to provide the information required by this Item.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

There were no unregistered sales of equity securities during the second quarter of 2015.

 

Item 3.

Defaults Upon Senior Securities.

 

None

 

Item 4.

Mine Safety Disclosures.

 

None

 

Item 5.

Other Information.

 

None

 

Item 6.

Exhibits.

 

The following is a list of exhibits filed as part of this Form 10-Q:

 

  

Exhibit Number		Description
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101		The following materials from SurePure, Inc. Form 10-Q for the quarter ended June 30, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) Unaudited Consolidated Balance Sheets at June 30, 2015 and December 31, 2014, (ii) Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2015 and June 30, 2014, (iii) Unaudited Consolidated Statement of Comprehensive Income (Loss) for the three and six months ended June  30, 2015 and June 30, 2014, (iv) Unaudited Consolidated Statements of  Stockholders' Deficit for the six months ended June 30, 2015, (vi) Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and March 31, 2014 and (vi) Notes to the Unaudited Consolidated Financial Statements.*

  

*	Filed herewith.

  

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	SurePure, Inc.
Date:  July 28, 2015	By:	/s/ Guy R Kebble
		Name:	Guy R Kebble
		Title:	President and Chief Executive Officer
			(Principal Executive Officer)
Date:  July 28, 2015	By:	/s/ Stephen M. Robinson
		Name:	Stephen M. Robinson
		Title:	Chief Financial Officer
			(Principal Financial and Accounting Officer)

  

 

EXHIBIT INDEX

 

Exhibit Number		Description
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101		The following materials from SurePure, Inc. Form 10-Q for the quarter ended June 30, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) Unaudited Consolidated Balance Sheets at June 30, 2015 and December 31, 2014, (ii) Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2015 and June 30, 2014, (iii) Unaudited Consolidated Statement of Comprehensive Income (Loss) for the three and six months ended June  30, 2015 and June 30, 2014, (iv) Unaudited Consolidated Statements of  Stockholders' Deficit for the six months ended June 30, 2015, (vi) Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and March 31, 2014 and (vi) Notes to the Unaudited Consolidated Financial Statements.*

  

*	Filed herewith.