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 March 31, 2013

 

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

 

For the transition period from ________ to ________

 

Commission file number 000-54172

 

SUREPURE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware	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 ¨    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 x    No ¨

 

The number of shares outstanding of the issuer’s common stock, as of May 15, 2013 was 24,247,684.

 

 

 

 

SUREPURE, INC.

 

INDEX

 

PART I FINANCIAL INFORMATION		1
Item 1.	Financial Statements.	1
	Consolidated Balance Sheets March 31, 2013 (Unaudited) and December 31, 2012	1
	Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2013 and 2012 and Cumulative From August 24, 2005 (Inception) to March 31, 2013	2
	Consolidated Statements of Other Comprehensive Income (Loss) (Unaudited) for the Three Months Ended March 31, 2013 and 2012 and Cumulative From August 24, 2005 (Inception) to March 31, 2013	3
	Consolidated Statement of Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2013	4
	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2013 and 2012 and Cumulative From August 24, 2005 (Inception) to March 31, 2013	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	26
Item 4.	Controls and Procedures.	26
PART II OTHER INFORMATION		28
Item 1.	Legal Proceedings.	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	28
Item 3.	Defaults Upon Senior Securities.	29
Item 4.	Mine Safety Disclosures.	29
Item 5.	Other Information.	29
Item 6.	Exhibits.	29
SIGNATURES		30

 

 

PART I

 

FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

     

SUREPURE, INC. AND SUBSIDIARIES

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2013 (UNAUDITED) AND DECEMBER 31, 2012

 

		March 31, 2013				December 31, 2012
		(Unaudited)				(Audited)
Assets
Current assets:
Cash		$	19,468			$	142,373
Accounts receivable, net			21,859				19,948
Prepaid expenses and other current assets			86,380				128,646
Total current assets			127,707				290,967
Property and equipment, net			3,255				4,616
Other assets:
Intangible assets, net			124,791				128,958
Total assets		$	255,753			$	424,541
Liabilities and Equity (Deficit)
Current liabilities:
Accounts payable		$	974,916			$	790,930
Due to officers/stockholders			576,789				247,259
Income taxes payable			394				409
Total current liabilities			1,552,099				1,038,598
Long-term liabilities:
Loans from stockholders			2,965,138				3,241,768
Other loans payable			222,312				219,549
Total long-term liabilities			3,187,450				3,461,317
Total liabilities			4,739,549				4,499,915
Commitments and contingencies
Equity (deficit):
Stockholders’ equity (deficit):
Common stock			23,890				23,542
Preferred stock			226,654				226,654
Additional paid-in capital			21,345,211				20,920,817
Equity of variable interest entities			920,980				920,980
Other comprehensive income			580,722				360,464
Deficit accumulated during the development stage			(26,260,129	)			(25,192,142	)
Total stockholders’ equity (deficit)			(3,162,672	)			(2,739,685	)
Noncontrolling interest			(1,321,124	)			(1,335,689	)
Total Equity (Deficit)			(4,483,796	)			(4,075,374	)
Total Liabilities and Equity Deficit		$	255,753			$	424,541

 

 

 

See notes to consolidated financial statements.

 

SUREPURE, INC. AND SUBSIDIARIES

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

AND CUMULATIVE FROM AUGUST 24, 2005 (INCEPTION) TO MARCH 31, 2013

 

										Cumulative From
		Three Months Ended								August 24, 2005
		March 31,								(inception) to
		2013				2012				March 31, 2013
		(Unaudited)				(Unaudited)				(Unaudited)
Sales		$	36,355			$	28,706			$	2,300,765
Cost of sales			7,565				5,293				1,545,061
Gross profit			28,790				23,413				755,704
Expenses:
General and administrative expenses			1,013,648				786,270				21,406,155
Promotion and marketing			28,731				37,537				620,117
Research and development			33,566				16,537				3,662,866
Depreciation and amortization			5,528				5,744				181,627
Impairment of patent			-				-				537,631
Total expenses			1,081,473				846,088				26,408,396
Loss from operations			(1,052,683	)			(822,675	)			(25,652,692	)
Other income (expense):
Interest income			3				14				371,861
Interest expense			(79,173	)			(115,121	)			(2,536,399	)
Exchange rate gains and losses			(776	)			-				(26,163	)
Loss on disposition of fixed assets			-				-				(64,172	)
Total other (expense) income			(79,946	)			(115,107	)			(2,254,873	)
Loss before provision for taxes			(1,132,629	)			(937,782	)			(27,907,565	)
Provision for income taxes			-				-				32,673
Net loss			(1,132,629	)			(937,782	)			(27,940,238	)
Net loss attributable to non-controlling interest			(64,642	)			(34,917	)			(1,680,109	)
Net loss attributable to SurePure		$	(1,067,987	)		$	(902,865	)		$	(26,260,129	)
Loss per share – basic and diluted attributable
to SurePure common stockholders		$	(0.05	)		$	(0.03	)			(0.99	)
Weighted average shares outstanding -
basic and diluted			23,669,784				36,094,215				26,537,506

  

 

See notes to consolidated financial statements.

  

SUREPURE, INC. AND SUBSIDIARIES

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

AND CUMULATIVE FROM AUGUST 24, 2005 (INCEPTION) TO MARCH 31, 2013

 

										Cumulative From
		Three Months Ended								August 24, 2005
		March 31,								(inception) to
		2013				2012				March 31, 2013
		(Unaudited)				(Unaudited)				(Unaudited)
Net loss		$	(1,132,629	)		$	(937,782	)		$	(27,940,238	)
Other comprehensive loss, net of tax
Unrealized gain (loss) on foreign
currency translation			299,465				(230,095	)			746,148
Comprehensive loss			(833,164	)			(1,167,877	)			(27,194,090	)
Less: Comprehensive income (loss) attributable
to noncontrolling interest			14,565				(91,119	)			(1,514,684	)
Comprehensive loss attributable
to SurePure, net of tax		$	(847,729	)		$	(1,076,758	)		$	(25,679,406	)

 

 

 

See notes to consolidated financial statements.

 

 

  

SUREPURE, INC. AND SUBSIDIARIES

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2013

 

																			Equity in												Accumulated
(Unaudited)		Common												Additional					Variable				Retained								Other
		Shares				Common				Preferred				Paid-in					Interest				Earnings				Noncontrolling				Comprehensive
		Issued				Stock				Stock				Capital					Entities				(Deficit)				Interest				Income				Total
Balances-January 1, 2013			23,542,184			$	23,542			$	226,654			$	20,920,817				$	920,980			$	(25,192,142	)		$	(1,335,689	)		$	360,464			$	(4,075,374	)
Issuance of common stock			348,000				348								347,652																					348,000
Imputed interest on stockholder loans															76,742																					76,742
Net (loss) for the three months ended March 31, 2013																								(1,067,987	)			(64,642	)							(1,132,629	)
Unrealized gain on foreign currency translation adjustment			-				-				-				-					-				-				79,207				220,258				299,465
Balances- March 31, 2013			23,890,184			$	23,890			$	226,654			$	21,345,211				$	920,980			$	(26,260,129	)		$	(1,321,124	)		$	580,722			$	(4,483,796	)

 

 

 

See notes to consolidated financial statements.

 

 

  

SUREPURE, INC. AND SUBSIDIARIES

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

AND CUMULATIVE FROM AUGUST 24, 2005 (INCEPTION) TO MARCH 31, 2013

  

										Cumulative From
		Three Months Ended								August 24, 2005
		March, 31								(inception) to
		2013				2012				March 31, 2013
		(Unaudited)				(Unaudited)				(Unaudited)
Cash from operating activities:
Net loss		$	(1,132,629	)		$	(937,782	)		$	(27,940,238	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization			5,528				5,744				181,627
Impairment of patent			-				-				537,631
Loss on sale of property and equipment			-				-				64,172
Imputed interest on stockholders loans			76,742				110,489				2,440,679
Changes in assets and liabilities:
Accounts receivable			(1,911	)			66,118				(21,859	)
Prepaid expenses and other current assets			42,266				(11,836	)			(86,380	)
Accounts payable			183,986				69,618				974,916
Due to officers/stockholders			329,530				(36,322	)			576,789
Income taxes payable			(15	)			(307	)			394
Total cash used in operating activities			(496,503	)			(734,278	)			(23,272,269	)
Cash from investing activities:
Purchase of property and equipment			-				-				(181,760	)
Proceeds from sales of property and equipment			-				-				16,860
Acquisition of patents			-				-				(746,576	)
Total cash provided by (used in) investing activities			-				-				(911,476	)
Cash from financing activities:
Proceeds from sale of equity			348,000				-				14,006,469
Proceeds from equity of variable interest entities			-				-				83,309
(Decreases)/Increases in loans from stockholders			(276,630	)			1,090,138				9,144,975
Increases in other loans payable			2,763				-				222,312
Total cash provided by financing activities			74,133				1,090,138				23,457,065
Effect of exchange rate changes on cash and cash equivalents			299,465				(230,095	)			746,148
Net (decrease) increase in cash			(122,905	)			125,765				19,468
Cash, beginning of period			142,373				35,475				-
Cash, end of period		$	19,468			$	161,240			$	19,468
Supplemental disclosures:
Interest paid		$	2,431			$	4,932			$	95,720
Income taxes paid		$	-			$	-			$	32,673
Conversion of stockholders’ loans to equity		$	-			$	-			$	5,065,437
Conversion of other loans payable to stockholders’ loans										$	300,000
Conversion of stockholders’ loans to equity of variable interest entities		$	-			$	-			$	1,114,400
Imputed interest on stockholder's loans reported as an
increase to additional paid-in capital		$	76,742			$	110,189			$	2,440,679

 

 

See notes to consolidated financial statements.

  

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements

  

Three Months Ended March 31, 2013 and 2012

 

 

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 the 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 bovine blood plasma, water, brines and sugar syrup solutions. The Group holds international patents for this technology. The Group has been engaged in raising capital, continuing research and development of its technologies and processes 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”), with the instructions to Form 10-Q and with the requirements of Regulation S-X of the U. S. Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual consolidated financial statements. The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2012. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013.

 

The accompanying unaudited consolidated financial statements include the accounts and results of operations of the Company, its subsidiaries and its variable interest entities (“VIE’s”). All inter-group balances and transactions have been eliminated in the consolidation. As a development stage entity, the Company is devoting most of its efforts to establishing its business; therefore, the accompanying consolidated statements of operations, comprehensive income (loss), and cash flows present cumulative amounts since inception.

  

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

 

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

 

  

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements (Continued)

  

Three Months Ended March 31, 2013 and 2012

 

 

· SurePure Latin America Maqinas de Purificasao UVC Ltda. (“SPLAM”), which conducts no operations currently; and

 

· 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 and all of its expenses have been and will continue to be paid by SPI. Formerly a VIE, SPP became a subsidiary as a result of the Share Exchange on December 12, 2012.

 

VIE’s are entities whose activities primarily benefit the Company and are primarily supported by the Company. The Company continues to have a variable interest in the following entities: SurePure Holdings South Africa (Pty) Ltd. (“SPHSA”) and its wholly-owned subsidiary, SurePure Marketing South Africa (Pty) Ltd. (“SPMSA”), which hold the South African patent, make the products of the Group and earn revenue from selling equipment utilizing the SurePure technology.

  

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

 

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.

 

 

 

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements (Continued)

  

Three Months Ended March 31, 2013 and 2012

 

 

Accounts Receivable

 

The Group performs regular credit evaluations of customers to which it provides sales on credit terms, and adjusts credit limits based on the customer’s payment history and reassessments of their creditworthiness. The Group continuously monitors its collections and establishes a provision for estimated doubtful accounts, if necessary. No allowance for doubtful accounts was deemed to be necessary at March 31, 2013 or at December 31, 2012.

 

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 remaining estimated useful lives of twelve years.

 

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 months ended March 31, 2013 or for the year ended December 31, 2012. During the period from inception to March 31, 2013, impairment losses on intangible assets of $537,631 were recognized.

  

 

 

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements (Continued)

  

Three Months Ended March 31, 2013 and 2012

 

 

Fair Value of Financial Instruments

 

Financial instruments include accounts receivable and accounts payable. As of March 31, 2013 and December 31, 2012, the carrying values of the financial instruments approximated their fair values due to the short-term nature of these instruments.

  

Revenue

 

Revenue is earned from sales and licensing of equipment that uses the Company’s patented technology and is recognized, net of returns and discounts, when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. These criteria are usually met upon delivery of the product to the customer, which is also when the risk of ownership and title passes to the customer.

 

Research and Development

 

Research and development costs are charged to expense as incurred.

 

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 assets and liability accounts on the consolidated balance sheets have been translated using the 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

 

SPMSA and SPHSA South African Rand – ZAR

 

 

 

 

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements (Continued)

  

Three Months Ended March 31, 2013 and 2012

 

 

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

 

 

		Three Months Ended March 31,								December 31,
		2013				2012				2012
CHF:
Reporting date			1.0525				1.1071				1.0942
Average for period			1.0752				1.0847				N/A
BRL:
Reporting date			0.4938				0.5478				0.488
Average for period			0.4998				0.5650				N/A
ZAR:
Reporting date			0.1082				0.1300				0.1178
Average for period			0.1118				0.1286				N/A

 

Fair Value of Financial Instruments

 

GAAP has established a framework for measuring fair value that is based on a hierarchy which prioritizes the inputs to valuation techniques according to the degree of objectivity necessary. The fair value hierarchy of the inputs to valuation techniques used to measure fair value is divided into three broad levels of objectivity:

 

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. They are based on best information available in the absence of level 1 and 2 inputs.

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value as required by GAAP:

 

Cash: The carrying amount is the fair value because it is the basic financial instrument used to express fair value.

 

Accounts receivable and accounts payable: The carrying amounts approximate fair value because of the short-term duration of those instruments.

 

Loans payable: The carrying amount approximates fair value based on current market conditions and interest rates available to the Group for similar financial instruments.

 

Earnings (Loss) per Share

 

Basic and diluted earnings (loss) per share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as options, convertible notes and convertible preferred stock, were exercised or converted into common stock or could otherwise cause the issuance of common stock that then would share in earnings (losses). Such potential additional common shares are included in the computation of diluted earnings per share. The Company has no securities or other contracts to issue 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 would reduce the reported loss per share and therefore have an anti-dilutive effect.

 

 

 

 

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements (Continued)

  

Three Months Ended March 31, 2013 and 2012

 

 

2.

Property and Equipment

 

Property and equipment consists of the following:

 

		March 31,				December 31,
		2013				2012
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			41,555				40,194
Property and equipment, net		$	3,255			$	4,616

 

Depreciation expense was $1,361, $1,727, and $94,014 for the three months ended March 31, 2013 and 2012 and for the period from inception to March 31, 2013, respectively.

  

 

3.

Intangible Assets

 

Intangible assets consist of the following:

 

		March 31,				December 31,
		2011				2012
Patents		$	208,943			$	208,943
Less: Accumulated amortization			84,152				79,985
Intangible asset, net		$	124,791			$	128,958

 

Amortization expense was $4,167, $4,017, and $87,613 for the three months ended March 31, 2013 and 2012 and for the period from inception to March 31, 2013, respectively.

  

 

4.

Due to Officers/Stockholders

 

Due to officers/stockholders consists of unpaid salaries, accrued leave and advances from the three executives of the Group entities totaling $576,789 and $247,259 at March 31, 2013 and December 31, 2012, respectively.

  

 

5.

Stockholders and Other Loans Payable

 

Stockholder and other loans payable consist of advances by individuals and companies to the Group. Certain of the lenders are either stockholders or are related to stockholders. None of these loans are supported by notes and none have a provision for interest or repayment. The Company has imputed interest on these loans. The rates of interest used to impute interest on these loans range from 4% per annum to 15% per annum during the periods in which these loans were outstanding and represent management’s best estimate of the interest rates that would be applicable to Company in a third-party marketplace. For the three months ended March 31, 2013 and 2012 and for the period from inception to March 31, 2013, the imputed interest on these loans was $76,742, $110,489 and $2,440,679, respectively. These amounts are included in interest expense in the accompanying consolidated statements of operations and are reflected as an increase in additional paid-in capital in the accompanying consolidated statements of stockholders’ deficit.

  

 

 

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements (Continued)

 

  

Three Months Ended March 31, 2013 and 2012

 

 

The Group has obtained subordination agreements from all of the lenders with respect to these loans, the terms of which provide that the loans will not be classified as current or be payable within one year if doing so would cause a Group member to be considered insolvent in accordance with the applicable local laws. Therefore, these loans are presented as long-term liabilities in the accompanying consolidated balance sheets.

 

 

 

 

 

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements (Continued)

 

  

Three Months Ended March 31, 2013 and 2012

 

 

In October 2012, the Company and the three lenders whose balances are reflected in Other Loans Payable revised their agreements orally and these agreements were later formalized in writing effective January 2013. The Company agreed to pay interest at 5% per annum on the outstanding balances retroactive to the time that the loans were made in 2011 and repaid these lenders $105,000 in October 2012. Interest on these loans for the three months ended March 31, 2013 was $2,763 and for the period from inception to March 31, 2013 was $24,593 respectively. In addition, the Company agreed to make monthly payments of $10,000 to each of the three lenders commencing February 2013. On April 4, 2013, these lenders and the Company agreed that the lenders will receive the right to convert each $1 that is unpaid under the agreement into one share of the Company’s common stock for upon the effective date of the Company’s registration statement for certain shares of the Company’s common stock. The agreements further provided that if the entire loan balance was not paid by October 31, 2013, then a 10% per annum interest rate would be applied to the entire loan balance from the inception of the loan. As of April 1, 2013, the Company has not made the monthly payments pursuant to these agreements.

  

 

6.

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. For all of 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 and 7,378,416 shares in connection with the conversion of SPI stockholder loans to common shares, resulting in 36,700,631 common shares outstanding immediately prior to the Share Exchange.

 

On June 14, 2011, a majority of the shareholders and directors of SurePure US approved a special resolution to undertake a forward split of the Company’s common stock resulting in an increase in the number of outstanding shares on that date from 2,135,000 to 32,452,000. Of these shares, 23,180,000 shares that were held by the former directors and officers were redeemed and cancelled as a condition to the Share Exchange, leaving 9,272,000 shares of SurePure US outstanding immediately prior to the Share Exchange. No preferred shares were issued prior to the date of the Share Exchange.

  

In determining the annual number of outstanding common shares on a weighted-average basis, the 9,272,000 common shares held by former SurePure US stockholders are considered to be outstanding from July 25, 2011, the date that the Company and SPI entered into an Agreement and Plan of Merger.

 

 

 

 

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements (Continued)

  

Three Months Ended March 31, 2013 and 2012

 

 

On December 12, 2012, the Company designated 31,155,282 of the authorized shares of preferred stock as Nonvoting Convertible Preferred Stock. 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 us and will receive shares of our Common Stock in return.

 

At March 31, 2013 and December 31, 2012, 23,890,184 and 23,542,184, respectively, common shares were issued and outstanding. There were 22,665,447 issued and outstanding preferred shares at March 31, 2013 and December 31, 2012..

  

All references in these consolidated financial statements to the number of common shares, price per share and weighted average number of common shares outstanding prior to the June 2011 forward split have been adjusted to reflect the stock split on a retroactive basis unless otherwise noted. As of March 31, 2013, the Company has not granted any stock options and has not recorded any stock-based compensation.

 

 

7.

Stock Subscription Agreement

 

On November 26, 2012, the Company entered into a Subscription Agreement with RD Active Capital Limited, a United Kingdom-based investment manager (“RD Active”), in which RD Active agreed to purchase up to 300,000 new common shares over the period ending January 31, 2013 and acquired the right to purchase up to 2,700,000 new common shares through March 31, 2013 as long as RD Active purchased the 300,000 new common shares. The right to purchase shares was extended on March 28, 2013 to April 12, 2013 and on April 12, 2013, the right to purchase shares was further extended to May 31, 2013. All common shares were purchased and sold, and are to be purchased and sold, at an issue price of $1.00 per share. Under the terms of the Subscription Agreement, RD Active may exercise the additional purchase right on its own behalf and resell to other purchasers or may place the additional shares directly with other purchasers. At such time as RD Active and any other purchasers have completed and paid for 3,000,000 shares under the Subscription Agreement, RD Active and the other purchasers under the Subscription Agreement have the right to appoint an additional director to the board of directors of the Company. Pursuant to the terms and conditions of the Share Exchange, the Company has assumed the obligations of SPI under the Subscription Agreement.

  

 

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements (Continued)

  

Three Months Ended March 31, 2013 and 2012

 

 

As of March 31, 2013, RD Active had purchased 583,000 common shares under the Subscription Agreement, including 348,000 common shares during the three months ended March 31, 2013. Subsequent to March 31, 2013, the Company received $357,500 pursuant to the Subscription Agreement, and the Company issued 357,500 additional common shares.

  

 

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements (Continued)

  

Three Months Ended March 31, 2013 and 2012

    

 

8.

Stockholders’ Deficit

 

The consolidated stockholders’ equity of the Group consists of the consolidated equity of the Group attributable to the parent which includes the common stock, additional paid-in capital, the retained deficit, and the accumulated other comprehensive income plus the equity of the noncontrolling interest of the VIE’s.

The South African VIE’s (SPHSA and SPMSA) that are part of the Group are managed by the same executive management as that of SPI, and the major shareholder of the South African VIE’s and SPI are related parties. In the accompanying consolidated financial statements, the 82.64% controlling interest in the South African VIE’s is reported in the consolidated statements of stockholders’ deficit together with the entire interest of SPP (prior to the Share Exchange) as the Equity in Variable Interest Entities. The 17.36% portion of the equity of South African entities that is not owned by this controlling stockholder is reported as the Noncontrolling Interest in the VIE’s. The investment interest of SPP in SPI was eliminated in consolidation and was reported as a Stock Subscription Receivable.

 

 

9.

Income Taxes

 

The Company and group members 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:

 

										From August 24, 2005
		Three Months Ended March 31,								(inception) to
		2013				2012				March 31, 2013
Switzerland		$	(362,053	)		$	(736,726	)		$	(16,877,939	)
South Africa			(372,212	)			(201,056	)			(9,674,331	)
United States			(398,364	)			-				(413,798	)
Brazil			-				-				(941,498	)
Total		$	(1,132,629	)		$	(937,782	)		$	(27,907,566	)

   

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements (Continued)

  

Three Months Ended March 31, 2013 and 2012

  

The provision for income taxes shown in the accompanying consolidated statements of operations consists of the following for the three months ended March 31, 2013 and 2012 and for the period from August 24, 2005 (inception) to March 31, 2013:

 

										From August 24, 2005
		Three Months Ended March 31,								(inception) to
		2013				2012				March 31, 2013
Current tax provision:
Switzerland		$	-			$	-			$	32,673
South Africa			-				-				-
United States			-				-				-
Brazil			-				-				-
Total current tax provision		$	-			$	-			$	32,673
Deferred tax provision:
Switzerland		$	(64,225	)		$	(112,996	)		$	(2,894,435	)
South Africa			(67,769	)			(33,955	)			(1,889,318	)
United States			(139,427	)			-				(144,829	)
Brazil			-				-				(235,375	)
Change in valuation allowance			271,421				146,951				5,163,957
Total deferred provision		$	-			$	-			$	-
Total		$	-			$	-			$	32,673

 

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.

 

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

 

		March 31,				December 31,
		2013				2012
Deferred tax assets:
Net operating loss carryforwards		$	5,163,957			$	4,892,536
Less: valuation allowance			(5,163,957	)			(4,892,536	)
Total		$	-			$	-

 

The following table reconciles the effective income tax rates with the statutory rates for the three months ended March 31, 2013 and 2012 and for the period from August 24, 2005 (inception) to March 31, 2013:

 

										United
		Switzerland				South Africa				States				Brazil				Total
Three months ended March 31, 2013:
Net (loss) from operations
before taxes		$	(362,053	)		$	(372,212	)		$	(398,364	)		$	-			$	(1,132,629	)
As calculated at the statutory rate			(64,225	)			(104,219	)			(139,427	)			-				(307,871	)
Permanent differences			-				36,450								-				36,450
Change in valuation reserves			64,225				67,769				139,427				-				271,421
Provision for income taxes		$	-			$	-			$	-			$	-			$	-
Three months ended March 31, 2012:
Net (loss) income from operations
before taxes		$	(736,726	)		$	(201,056	)		$	-			$	-			$	(937,782	)
As calculated at the statutory rate		$	(108,764	)		$	(56,296	)		$	-			$	-			$	(165,060	)
Permanent differences			(4,232	)			22,341				-				-				18,109
Change in valuation reserves			112,996				33,955				-				-				146,951
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 years ended December 31, 2012 and 2011 in Switzerland and South Africa, for the three years ended December 31, 2012 and in the U.S and Brazil, for the four years ended December 31, 2012.

  

10.

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivables. Cash is maintained in financial institutions in foreign countries that do not insure the balances in the accounts. The credit risk for customer accounts is concentrated because accounts receivable consists of the balance due from one customer. However, the customer’s account typically is collected within a short period of time and, based on its assessment of current conditions, management believes there is no risk of loss. Management continuously monitors these conditions. 

 

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements (Continued)

  

Three Months Ended March 31, 2013 and 2012

  

11.

Pending Acquisition of SPHSA

 

On August 16, 2012, SPI entered into an agreement (the "Acquisition Agreement") with SPHSA providing for the acquisition of 100% of the outstanding shares of SPHSA from its shareholders. The Company has assumed the executory obligations of SPI under the Acquisition Agreement.

  

SPHSA is accounted for as a subsidiary of SPI under variable interest accounting rules. The shareholdings in SPHSA have remained largely unchanged since the formation of that company in 2005. Since October 2007, SPHSA has also provided various management services for SPI and SPO. In addition, our subsidiary SPO has loaned approximately $2,000,000 to SPHSA, all of which is due on demand. There have been and continue to be various intercompany transactions relating to the sale and purchase of goods and services between SPI and SPHSA. Accordingly, the boards of directors of both SPI and SPHSA believed it to be in the best interest of their respective companies to combine such that SPHSA would become a wholly-owned subsidiary of SPI and SPO would convert its loans and advances to SPHSA into equity, thereby improving the financial condition of SPHSA.

 

Subject to the terms and conditions of the Acquisition Agreement, on August 21, 2012, SPI made its offer, which initially was irrevocable for a period of 20 business days after the date of the offer to purchase from each of the shareholders of SPHSA all of their shares of SPHSA at a closing to be held September 19, 2012, which was the 21st business day after the date of the offer. The shares of SPHSA subject to SPI’s offer to purchase included shares that reflected the value of shareholder loans outstanding at the time of the offer. On September 21, 2012, SPI extended the period during which its offer remained open until November 26, 2012 to permit the satisfaction of conditions to the closing of the offer. On November 30, 2012, SPI and SPHSA agreed to amend the Acquisition Agreement to provide that the offer would remain open until February 28, 2013, so as to permit the fulfillment of certain closing conditions. On March 8, 2013, SPI extended the date that the offer would remain open to June 28, 2013. The purchase price for the shares of SPHSA under the offer was ZAR 4,000 (approximately $500.00) per share of SPHSA. The Acquisition Agreement provides that SPI will settle the purchase price it is paying for the shares of SPHSA in shares of SPI in the ratios of (i) 1,000 common shares of SPI for each share of SPHSA and (ii) 1,000 common shares of SPI for each ZAR 4,000 in principal amount of loans owed by SPHSA to its shareholders. As of the May 15, 2013, SPHSA had not yet received a final determination from the South African Reserve Bank as to whether the transaction could proceed.

  

Acting under the terms of the Share Exchange, at the time of the Share Exchange SPI assigned its rights under the Acquisition Agreement to SurePure US, and SurePure US assumed the obligations of SPI to issue shares to the shareholders of SPHSA at such time, if any, that the pending acquisition of SPHSA is completed.

 

 

 

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements (Continued)

  

Three Months Ended March 31, 2013 and 2012

 

 

12.

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 will be administered by the Company’s board, or a committee appointed by the board (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 will terminate on December 9, 2022.

 

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.

 

There are no outstanding grants under the Plan as of March 31, 2013.

 

 

13.

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, with a monthly rent of $4,689, but has been renegotiated to extend the lease term to February 28, 2014, at a monthly rent of $2,677, for the first year and $2,946 for the second year. The lease for the Group’s workshop facility originally expired on April 30, 2012, with a monthly rent of $2,460. This lease term was then extended to November 30, 2012 and has been extended again to September 30, 2013, with a monthly rent of $2,595, through April 30, 2013 and a monthly rent of $2,855 thereafter. 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 for the three months ended March 31, 2013 and 2012 and for the period from inception to March 31, 2013 was approximately $20,500, $22,600 and $797,500, respectively. Rent expense is included in general and administrative expenses in the accompanying consolidated statement of operations.

  

 

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements (Continued)

  

Three Months Ended March 31, 2013 and 2012

  

The future rent commitments under the above leases are as follows:

 

March 31, 2014

$

47,648

  

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 March 31, 2013, the total monthly salary commitment applicable to these employees was approximately $33,000.

  

Payroll Tax Obligation

 

In February 2012, SPMSA received notification from the South African Revenue Service regarding unpaid payroll taxes of approximately $185,000. SPM requested additional time to arrange a payment plan that is suitable to both parties and has commenced making monthly payments against this balance. During the Company’s review of this matter in 2012, it was discovered that additional taxes amounting to approximately $62,000 were due. At March 31, 2013 and December 31, 2012, the unpaid balance of this liability was approximately $162,000 and $187,000, respectively and is included in accounts payable and other current liabilities in the accompanying consolidated balance sheets.

  

Employment and Consulting Agreements

 

The Group has entered into agreements to secure the services of three executives. These agreements provide for annual compensation and require a termination notice period by the Group of three months. The executives all are stockholders of the Company.

 

The total compensation paid to these executives for the three months ended March 31, 2013 and 2012 and for the period from inception to March 31, 2013 was approximately $261,000, $314,000 and $5,353,000, respectively. These amounts are included in general and administrative expenses.

 

The Group 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 two weeks 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 $134,000 per month.

   

 

 

SurePure, Inc. and Subsidiaries 

(A Development Stage Company)

  

Notes To Consolidated financial Statements (Continued)

  

Three Months Ended March 31, 2013 and 2012

 

 

14.

Subsequent Events

 

The Company has evaluated its subsequent events from the balance sheet date. Other than as disclosed in Notes 5, 7, and 15, the Company has determined that there were no material subsequent events requiring adjustment to or disclosure in these consolidated financial statements except the following:

 

On April 4, 2013, SPMSA, a VIE of the Company, borrowed ZAR 2 million (approximately $215,000) from a lender in South Africa. 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 September 30, 2013. An officer/stockholder of the Company has deposited 1,000,000 of his common shares of the Company with the lender as security for the repayment of the loan. 

  

  

15.

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 the UV-C technology and develops marketing, sales and financial plans. As reflected in the accompanying consolidated financial statements, the Group’s total liabilities exceed total assets at March 31, 2013 and December 31, 2012 by $4,483,796 and $4,075,374, respectively, and the Group has incurred cumulative operating losses since the date of inception. To date, the Group’s cash flow requirements have been met with cash investments by the stockholders, certain third parties and to a lesser extent, sales and interest income.

  

The Group will require additional capital to continue its development and to achieve sufficient revenues to support its operations. The Group’s future capital requirements will depend on many factors, including its ability to grow and maintain revenues and its ability to manage expenses and expected capital expenditures. The Group will require additional financing either through borrowings or the sale of additional equity to support its operations.

 

The Group’s access to additional financing will depend on a variety of factors many over which the Group has little or no control. These factors include market conditions, the general availability of credit, the overall availability of credit to the Group’s industry, its credit ratings and credit capacity, the actual financial and operational results of the Group as well as the lenders’ or investors’ perception of the Group’s short-term and long-term financial prospects. If future financing is not available on acceptable terms, the Group may not be able to continue as a going concern.

 

Management is currently pursuing various plans to meet the cash flow requirements of the Company for the twelve months ending March 31, 2014. As disclosed in Note 7 above, the Company is a party to the Subscription Agreement with RD Active. Subsequent to March 31, 2013, the company received $357,500 under this Subscription Agreement. An additional 2,059,500 shares of the Company’s common stock remain available for purchase under the Subscription Agreement at $1.00 per share through the current termination date of May 31, 2013. In addition, there are ongoing discussions with current and other potential investors and the Company is also considering an additional common stock offering during 2013. The Company projects that increase in the commercialization of the Company’s technology will provide additional cash flow for operations.

  

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.

 

Forward Looking Statements

 

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 our management.  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 heading “Risk Factors” included in other documents we have filed with the Securities and Exchange Commission (the “Commission”).  Furthermore, such forward-looking statements speak only as of the date of this report.  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.

 

Overview

 

The results presented in this “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” are those of the SurePure, Inc., its subsidiaries and two variable interest entities (all of which are collectively referred to in this Section as the “Group”) as reflected in our unaudited consolidated financial statements included in this report. The following discussion should be read in conjunction with such consolidated financial statements and the notes thereto. The results presented below pertain to the unaudited consolidated financial statements for the three months ended March 31, 2013 and March 31, 2012 and the audited consolidated financial statements for the year ended December 31, 2012.

 

Additional Funding

 

We experienced a shortfall in funding from investors during the end of 2012 and the beginning of 2013. As a result, we require additional funding to maintain our operations and execute our business plan. Should we be unable to secure financing from outside sources, we will be unable to meet our milestones and may scale back or even discontinue our operations until such time, if ever, that we are able to secure financing. Notwithstanding our efforts to secure financing, there is no assurance that any financing will be available on acceptable terms or at all.

 

 

Plan of Operation

 

We seek to expand the commercial acceptance of our SurePure Turbulator purification systems. To achieve this goal, we expect to execute the following principal steps:

 

·

Attend and promote our product at three or more international trade shows during late 2013 for the brewing industry and for the dairy/fruit juice industry. The purpose of our exhibitions at these venues will be to reach out to industry participants, including distributors of engineered systems and to make them aware of the our product’s advantages and the expanded applications of the product that we have developed over the past 18 months;

 

·

Continue to build our technical sales support team by hiring qualified sales engineers and scientists. Since our product is an engineered system, we believe that both our marketing and sales efforts will be enhanced by having access to qualified technical support;

 

·

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

 

a.

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

 

b.

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;

 

c.

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

 

d.

To receive approval from the Director General: Health of South Africa of our application for amendment of South African regulations relating to milk and dairy products permitting the use of our product to purify milk;

 

·

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

 

·

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;

 

·

Seek to expand our management team by hiring a relevant staff with industry expertise in those geographic territories in which we plan to sell our product; and

 

·

Obtain additional equity financing to support our growth, plus, if appropriate and if available to us, working capital financing to provide capital to support and augment our operations.

 

We intend to grow rapidly over the next five years through the use of working capital and equity financing, if financing is available to us. If we are able to secure sufficient financing, we believe that it will be feasible for us to meet our expectations based on our strategy of targeting strategic global regions with multiple potential clients. However, we will carefully monitor the risks associated with achieving our goals in each scenario to ensure that we can meet client expectations while becoming financially solvent.

  

 

Results of Operations

 

During the three months ended March 31, 2013, we focused on the following developments:

 

·

continuing with commercial trials at key customer sites;

·

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

·

evaluating new product applications for our technology;

·

preparing documentation and finalizing processes related to the conclusion of the share exchange on December 12, 2012; and

·

nurturing relationships with key investors.

 

Subsequent to March 31, 2013, we have continued to focus on the following developments:

 

·

continuing with commercial trials at key customer sites;

·

continuing the expansion of our distributor network internationally;

·

continuing to work with regulatory authorities to progress the applications for use of our technology in key areas; and

·

negotiating possible equity financing agreements.

 

Results of Operations

 

The following table summarizes our results of operations for the three months ended March 31, 2013 compared with our results of operations for the three months ended March 31, 2012:

 

		Three  Months Ended:								Variance
		March 31, 2013				March 31, 2012				$				%
Revenues		$	36,000			$	29,000				7,000				24	%
General and Admin Expenses			1,014,000				786,000				228,000				29	%
Research and Development			34,000				17,000				17,000				100	%
Interest Expense			79,000				115,000				(36,000	)			-31	%
Net Loss			1,133,000				938,000				195,000				21	%
Cash used in operating activities			497,000				734,000				(237,000	)			-32	%
Cash provided by financing activities			74,000				1,090,000				(1,016,000	)			-93	%

 

Revenues

 

We recorded revenue of approximately $36,000 during the three months ended March 31, 2013, which was relatively unchanged from our revenue for the three months ended March 31, 2012.

 

We expect that the amount of revenue realized from sales and royalty income will increase in line with its commercialization efforts, related to the introduction of its technologies to a broader range of clients and geographic areas. Our business model is largely based on usage royalties or usage fees, and we expect that royalty and fee income will increase in line with our increased level of commercialization as that increased level of commercialization occurs. We do not expect increased level of commercialization to occur before the third quarter of 2013.

 

General and Administrative Expenses

 

Our general and administrative expenses for the three months ended March 31, 2013 at approximately $1,014,000 were 29% higher than the comparable expenses for the three months ended March 31, 2012 largely as a result of the professional fees associated with the closing of the share exchange that occurred in December 2012 and our filing of reports and other documents with the Commission. General and administrative expenses are largely attributable to employment costs, professional fees, consultants and business travel expenses.

 

We expect that our general and administrative expenses will increase in future periods, as the increased level of commercialization of our technology will require increased levels of staffing and associated expenditures.

 

 

Research and Development Expenses

 

Our research and development expenses for the three months ended March 31, 2013 at approximately $34,000 were 100% higher than the comparable expenses for the three months ended March 31, 2012. A large portion of these expenditures were for work undertaken to submit our application seeking GRAS status for our technology to the FDA.

 

We expect that our research and development expenses will increase in future periods, as we pursue new applications for our technology. In addition, we anticipate that certain additional research work may be required to support our application to the FDA seeking GRAS status for our technology.

 

Net Losses

 

For the period from August 24, 2005 (inception) to March 31, 2013, we incurred net losses of approximately $27,940,000. Our net losses for the three months ended March 31, 2013 were approximately $1,133,000, compared with approximately $938,000 for the three months ended March 31, 2012, or an increase of 21%. The increase in net losses over the comparative three-month periods is primarily attributable to increases in expenditures for professional fees incurred related to completion of the December 2012 share exchange, offset by the higher revenues.

 

We have not as yet generated sufficient revenue to fund our operations, and we expect our net losses to continue until such time as our commercialization efforts related to our technologies produce an increase in revenues sufficient to meet the cost of our operations. Accordingly, we expect to continue to operate at a loss through fiscal 2013.

 

Income Tax Expense (Benefit)

 

We have realized net operating losses in Switzerland, South Africa, the United States and Brazil. We may have a prospective income tax benefit resulting from a net operating loss carry-forward that can offset future operating profits into the extent of any unexpired net operating losses.

 

Impact of Inflation

 

We believe that inflation has not had a material effect on our operations for the period from August 24, 2005 (inception) to March 31, 2013.

 

Capital Expenditures

 

We have spent approximately $182,000 dollars on property and equipment for the period from August 24, 2005 (inception) to March 31, 2013.

 

Liquidity and Capital Resources

 

The following table summarizes our financial position at March 31, 2013 compared with our financial position at December 31, 2012:

 

		As of:								Variance
		March 31, 2013				December 31, 2012				$				%
Cash		$	19,000			$	142,000				(123,000	)			-87	%
Other Current Assets			108,000				149,000				(41,000	)			-28	%
Total Assets			256,000				425,000				(169,000	)			-40	%
Current Liabilities			1,552,000				1,039,000				513,000				49	%
Long term Liabilities			3,187,000				3,461,000				(274,000	)			-8	%

 

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

 

We have been in the development stage since inception. As of March 31, 2013, we had cash of approximately $19,000 and other current assets of approximately $108,000, consisting of accounts receivable and prepaid expenses, and total assets of approximately $256,000, consisting of current assets, patents and plant and equipment. As of March 31, 2013, we had current liabilities of approximately $1,552,000, consisting of accounts payable, accounts payable to related parties and accrued liabilities. Of this amount, approximately $577,000 represented liabilities that were due to officers and shareholders who had made short term advances to us, an increase of approximately $330,000 from December 31, 2012. Long-term liabilities totaled approximately $3,187,000 and stockholders’ equity (deficit) was approximately $3,163,000 as of March 31, 2013.

 

 

For the period from August 24, 2005 (inception) to March 31, 2013, our cash used in our operating activities was approximately $23,273,000. Cash used in our operating activities for the three months ending March 31, 2013, was approximately $497,000 compared to approximately $734,000 for the three months ended March 31, 2012. Cash used in operating activities during the current period can be attributed to net losses from operations, offset by approximately $239,000 attributable to an increase in expenses funded for by officers of the Company on behalf of the Company and a lower amount of salaries paid to our officers.

 

We expect to continue to negative cash flows in operating activities until such time as we fully commercialize our technology.

 

For the period from August 24, 2005 (inception) to March 31, 2013, our cash flow used in investing activities was approximately $911,000.

 

These cash flows have largely been provided during the period since inception by our shareholders through capital investments and shareholder loans. We expect to continue to have cash flow provided by financing activities as we complete new rounds of financing and as we seek to increase the level of commercialization of our technology.

 

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 a number of prospective sources that include shareholder loans, the sale of equity, the procurement of long term debt and working capital finance as required to allow us to meet our commercialization targets. We face certain financial obstacles to attracting new financing due to our historical and current record of net losses and working capital deficits. 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.

 

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.

  

We plan to increase the number of employees to meet the anticipated demand on wider commercialization for our technology.

 

Off Balance Sheet Arrangements

 

As of March 31, 2013, 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, have concluded that our disclosure controls and procedures were effective as of March 31, 2013.

 

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 March 31, 2013, and has concluded that there was no change that occurred during the quarterly period ended March 31, 2013 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.

 

As disclosed in the Current Report on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on December 13, 2012, as amended, the Company and RD Active Limited are parties to the Subscription Agreement, dated November 26, 2012. The Company’s Current Report on Form 8-K, filed on December 13, 2012, contains a complete description of the Subscription Agreement with RD Active Limited in Item 2.01 of that Current Report under the heading “Additional Subscription Agreement for Shares,” which description is incorporated herein by reference.

 

During the first quarter of 2013, the Company sold and issued 75,000 shares of its Common Stock to RD Active Limited at a cash purchase price of $1.00 per share, subject to the terms and conditions of the Subscription Agreement. RD Active purchased 15,000 shares on January 10, 2013 and 60,000 shares on January 25, 2013.

 

During the first quarter of 2013, the Company sold and issued 273,000 shares of its Common Stock to Regency Capital Corporation at a cash purchase price of $1.00 per share, subject to the terms and conditions of the Subscription Agreement. Regency Capital Corporation is an “Other Purchaser” to whom the Company may sell its shares of Common Stock under the Subscription Agreement. Regency Capital Corporation is a Turks and Caicos Islands company. Regency Capital purchased its shares as follows:

		Number
Date		of Shares
February 8, 2013			70,000
March 1, 2013			15,000
March 11, 2013			25,000
March 13, 2013			40,000
March 19, 2013			38,000
March 27, 2013			85,000

 

Each purchase of shares under the Subscription Agreement is subject to the accuracy of certain representations and warranties made by the purchasers of the shares, including Regency Capital Corporation. Among the representations and warranties made, each purchaser represented that it has no offices or presence in the United States of America and none of the accounts that it manages are beneficially owned by citizens or residents of the United States of America.

 

The Subscription Agreement provides that for purposes of compliance with the Securities Act of 1933 (the “Securities Act”), the shares sold under the Subscription Agreement are restricted securities and may not be resold to any person who is a “U.S. Person” (as defined by the rules of the Commission) or by any means of commerce connected to the United States, other than in an offering that has been registered with the Commission.

 

 

Regency Capital Corporation delivered its joinder to the Subscription Agreement to the Company and by this document represented to the Company that:

 

·

it understood that the shares of our Common Stock that we have issued to it and to the other purchasers under the Additional Subscription Agreement are being issued in reliance on an exemption from registration contained in Regulation S;

·

it had not engaged in any “directed selling efforts” as defined in Regulation S;

·

its purchase of shares of Common Stock is not part of a plan or scheme to evade the registration requirements of the Securities Act;

·

it is not a “US Person" and is the sole beneficial owner of the stock purchased and to be purchased by it; and

·

the acquired shares cannot be sold unless in accordance with Regulation S, pursuant to registration under the Securities Act or pursuant to an available exemption from registration.

 

Consequently, we believe that Regency Capital Corporation is not a resident of the United States and is not a person who would be considered to be a “US Person” under Regulation S. Reliance on these representations may not, however, guarantee compliance with Regulation S.

 

The share certificates that we have issued to RD Active Limited and to Regency Capital Corporation bear a legend restricting their transferability until such shares have been sold as part of a registered public offering or in a transaction that otherwise is exempt from registration with the Commission.

 

Other than as set forth above, there were no unregistered sales of equity securities during the first quarter.

 

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 March 31, 2013, formatted in Extensible Business Reporting Language (XBRL): (i) Unaudited Consolidated Balance Sheets at March 31, 2013 and December 31, 2012, (ii) Unaudited Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012, and for the Cumulative Period from August 24, 2005 (inception) to March 31, 2013, (iii) Unaudited Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2013, (iv) Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012, and for the Cumulative Period from August 24, 2005 (inception) to March 31, 2013 and (v) Notes to the Unaudited Consolidated Financial Statements.**

 

_____________

*	Filed herewith.

 

**

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended and otherwise are not subject to liability under those sections.

 

 

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:  May 15, 2013	By:	/s/ Guy Kebble
		Name:	Guy Kebble
		Title:	President and Chief Executive Officer
			(Principal Executive Officer)
Date:  May 15, 2013	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 March 31, 2013, formatted in Extensible Business Reporting Language (XBRL): (i) Unaudited Consolidated Balance Sheets at March 31, 2013 and December 31, 2012, (ii) Unaudited Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012, and for the Cumulative Period from August 24, 2005 (inception) to March 31, 2013, (iii) Unaudited Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2013, (iv) Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012, and for the Cumulative Period from August 24, 2005 (inception) to March 31, 2013 and (v) Notes to the Unaudited Consolidated Financial Statements.**

 

_____________

*	Filed herewith.

 

**

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended and otherwise are not subject to liability under those sections.