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 September 30, 2016

 

¨

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)

 

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 November 15, 2016 was 64,973,077.

 

 

SUREPURE, INC.

 

INDEX

 

PART I FINANCIAL INFORMATION		3
Item 1.	Financial Statements.	3
	Consolidated Balance Sheets as of September 30, 2016 (Unaudited) and December 31, 2015	3
	Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2016 and 2015	4
	Consolidated Statements of Other Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2016 and 2015	5
	Consolidated Statement of Changes in Stockholders’ Deficit (Unaudited) for the Nine Months Ended September 30, 2016	6
	Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2016 and 2015	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	32
Item 4.	Controls and Procedures.	32
PART II OTHER INFORMATION		34
Item 1.	Legal Proceedings.	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	34
Item 3.	Defaults Upon Senior Securities.	34
Item 4.	Mine Safety Disclosures.	34
Item 5.	Other Information.	34
Item 6.	Exhibits.	35
SIGNATURES		36

 

 

PART I

 

FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

 

SUREPURE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

 

		September 30, 2016				December 31, 2015
		(Unaudited)				(Audited)
Assets
Current assets:
Cash		$	747			$	5,476
Accounts receivable			123,422				-
Prepaid expenses and other current assets			36,340				235,262
Total current assets			160,509				240,738
Property and equipment, net			-				-
Intangible assets, net			66,452				78,954
Total assets		$	226,961			$	319,692
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and other current liabilities		$	1,444,387			$	1,124,104
Customer deposits			59,612				388,497
Due to officers			146,119				233,486
Income taxes payable			490				479
Loan payable			386,000				-
Total current liabilities			2,036,608				1,746,566
Total liabilities			2,036,608				1,746,566
Stockholders' deficit:
Common stock, $.001 par value, 200,000,000 shares authorized, 61,750,000 shares issued and outstanding (58,533,992 shares issued and outstanding at December 31, 2015)			61,750				58,534
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, 2015)			148,000				148,000
Additional paid-in capital			32,861,552				32,324,095
Other comprehensive income			997,750				1,064,911
Accumulated deficit			(35,878,699	)			(35,022,414	)
Total stockholders' deficit			(1,809,647	)			(1,426,874	)
Total liabilities and stockholders' deficit		$	226,961			$	319,692

 

See Notes to Unaudited Consolidated Financial Statements.

 

 

SUREPURE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2016				2015				2016				2015
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Revenue		$	2,540			$	893,253			$	1,297,524			$	2,443,396
Cost of revenue			106				460,801				731,296				1,293,759
Gross profit			2,434				432,452				566,228				1,149,637
Expenses:
General and administrative expenses (includes equity-based compensation of $0, $12,691, $0 and $37,522 respectively)			408,875				427,332				1,363,065				1,459,634
Promotion and marketing			1,367				2,767				3,579				12,058
Research and development			-				11,081				58,317				47,803
Amortization			4,168				4,167				12,502				12,501
Total expenses			414,410				445,347				1,437,463				1,531,996
Income (Loss) from operations			(411,976	)			(12,895	)			(871,235	)			(382,359	)
Other income (expense):
Interest expense (net)			(40,010	)			(9,030	)			(87,579	)			(48,540	)
Gain on settlement of debt with issuance of stock			102,529				28,951				102,529				28,951
Total other income (expense)			62,519				19,921				14,950				(19,589	)
Income (loss) before provision for taxes			(349,457	)			7,026				(856,285	)			(401,948	)
Provision for income taxes			-				-				-				-
Net income (loss)		$	(349,457	)		$	7,026			$	(856,285	)		$	(401,948	)
Income (loss) per share – basic and diluted		$	(0.01	)		$	0.00			$	(0.01	)		$	(0.01	)
Weighted average shares outstanding - basic and diluted			59,949,480				52,851,545				59,012,684				49,201,227

 

See Notes to Unaudited Consolidated Financial Statements.

 

 

SUREPURE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

 

		Three Months Ended								Nine Months ended
		September 30,								September 30,
		2016				2015				2016				2015
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Net income (loss)		$	(349,457	)		$	7,026			$	(856,285	)		$	(401,948	)
Other comprehensive income, net of tax
Unrealized gain (loss) on foreign currency translation			(35,593	)			79,420				(67,161	)			55,034
Comprehensive income (loss) net of tax		$	(385,050	)		$	86,446			$	(923,446	)		$	(346,914	)

 

See Notes to Unaudited Consolidated Financial Statements.

 

 

SUREPURE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

 

																										Accumulated
		Common				Range of												Additional								Other				Total
		Shares				Price Per				Common				Preferred				Paid-in				Accumulated				Comprehensive				Stockholders'
		Issued				Share				Stock				Stock				Capital				Deficit				Income				Deficit
December 31, 2015 (audited)			58,533,992							$	58,534			$	148,000			$	32,324,095			$	(35,022,414	)		$	1,064,911			$	(1,426,874	)
Issuance of common stock for cash			500,000			$	0.20				500								99,500												100,000
Issuance of common stock to settle liabilities			2,716,008			$	0.20				2,716								437,957												440,673
Net (loss) for the year																							(856,285	)							(856,285	)
Unrealized loss on foreign currency translation adjustment			-								-				-				-				-				(67,161	)			(67,161	)
September 30, 2016 (unaudited)			61,750,000							$	61,750			$	148,000			$	32,861,552			$	(35,878,699	)		$	997,750			$	(1,809,647	)

 

See Notes to Unaudited Consolidated Financial Statements.

 

 

SUREPURE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

 

		Nine Months Ended
		September 30,
		2016				2015
		(Unaudited)				(Unaudited)
Cash from operating activities:
Net loss		$	(856,285	)		$	(401,948	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization			12,502				12,501
Non-cash interest expense and loan costs			86,000				46,332
Non-cash gain on settlement of debt with issuance of stock			(102,529	)			(28,951	)
Issuance of common stock for consulting services			-				-
Equity-based compensation			-				37,522
Changes in assets and liabilities:
Accounts receivable			(123,422	)			(3,200	)
Prepaid expenses and other current assets			198,922				380,128
Accounts payable and other current liabilities			506,283				(84,215	)
Customer deposits payable			(328,885	)			(412,703	)
Due to officers			269,835				434,378
Income taxes payable			-				-
Total cash provided by (used in) operating activities			(337,579	)			(20,156	)
Cash from financing activities:
Proceeds from issuance of equity			100,000				-
Proceeds from issuance of note			300,000				-
Total cash provided by financing activities			400,000				-
Effect of exchange rate changes on cash			(67,150	)			31,742
Net increase (decrease) in cash			(4,729	)			11,586
Cash, beginning of period			5,476				526
Cash, end of period		$	747			$	12,112
Supplemental disclosures:
Interest paid		$	1,579			$	2,208
Issuance of common stock in settlement of liabilities		$	186,000			$	-
Issuance of common stock in settlement of loans		$	-			$	251,400
Issuance of common stock in settlement of amounts due to officers		$	357,202			$	1,148,000

 

See Notes to Unaudited Consolidated Financial Statements.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

 

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 a patent in 68 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

 

Our accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by U.S. GAAP for complete financial statements. Our consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods presented. All such adjustments are of a normal recurring nature. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2015. Amounts in our unaudited consolidated financial statements are, except as otherwise noted, expressed in U.S. Dollars.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

 

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 31, 2016.

 

Basis of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Inter-company items and transactions have been eliminated in consolidation.

 

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

 

· SurePure Investment Holding AG (“SPI”), which wholly-owns 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”), is 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 Holdings South Africa (Pty) Ltd., which holds the South African patent, and its wholly-owned subsidiary, SurePure Marketing South Africa (Pty) Ltd. (“SPMSA”), which sells or otherwise distributes 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 “$.”

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

 

Adoption of New Accounting Standards

 

The Company has, effective January 1, 2015, 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.

 

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.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

 

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 either of the three and nine months ended September 30, 2016 and 2015.

 

Revenue

 

Revenue is earned from sales or use of equipment that uses the Company’s patented technology and is recognized, net of returns and discounts, 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 and customer acceptance testing of the product by the customer.

 

Major Customers and Accounts Receivable

 

The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable, as follows:

 

For the three months and nine months ended September 30, 2016, 1 customer accounted for 100% of revenue. For the nine months ended September 30, 2016 1 customer accounted for 97% of revenue.

 

For the three months ended September 30, 2015, 1 customer accounted for 98% of revenue and for the nine months ended September 30, 2015, 2 customer accounted for 93% of revenue.

 

As of September 30, 2016 1 customer made up 99% of accounts receivable.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

 

Shipping and Handling Costs

 

Shipping and handling costs are expensed as cost of goods sold when the related inventory is sold.

 

Research and Development

 

Research and development costs are charged to expense as incurred.

 

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								Nine Months Ended
		September 30,								September 30,								December 31,
		2016				2015				2016				2015				2015
CHF:
Reporting date			1.0319				1.0284				1.0319				1.0284				1.0073
Average for period			1.0246				1.0374				1.0204				1.0499				1.0398
BRL:
Reporting date			0.3071				0.2437				0.3071				0.2437				0.2523
Average for period			0.3080				0.2851				0.2832				0.3202				0.3046
ZAR:
Reporting date			0.0721				0.0712				0.0721				0.0712				0.0643
Average for period			0.0709				0.0772				0.0669				0.0816				0.0788

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

 

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 Notes 5, 6 and 9 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:

 

		September 30,				December 31,
		2016				2015
		(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 nine months ended September 30, 2016 and 2015.

 

3. Intangible Assets

 

Intangible assets consist of the following:

 

		September 30,				December 31,
		2016				2015
		(Unaudited)				(Audited)
Patents		$	208,943			$	208,943
Less: Accumulated amortization			142,490				129,989
Intangible assets, net		$	66,453			$	78,954

 

Amortization expense was $4,168 and $4,167 for the three months ended September 30, 2016 and 2015 respectively and $12,502 and $12,501 for the nine months ended September 30 2016 and 2015 respectively.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

 

4. Due to Officers

 

Due to officers consists of unpaid salaries and advances from executives totaling $146,119 and $233,486 at September 30, 2016 and December 31, 2015, respectively. The chief executive officer has not been paid a portion of his salary and unreimbursed expenses and was due $49,221 as of September 30, 2016. The Company’s chief financial officer has not been paid a portion of his salary and unreimbursed expenses and was due $96,898 as of September 30, 2016.

 

On August 7, 2015, the Company entered into separate agreements with two of its executive officers, under which each agreed to discharge the Company from a portion of amounts owed to them in respect of consulting fees due from its subsidiary, SPO, and also, in the case of one executive, a loan obligation and consulting fees due from its subsidiary, SPMSA, in each case in exchange for the issuance of shares of Common Stock. The chief executive officer discharged the Company from $30,000 of the amount of $30,000 owed to him by SPO in respect of fees accrued and unpaid as of June 30, 2015 and $292,500 due in respect of an aggregate of $301,800 of loans made to and fees owed to him by SPMSA, all in exchange for 2,150,000 shares of Common Stock. The chief financial officer discharged the Company from approximately $680,000 of the total amount of approximately $1,030,000 owed to him by SPO in respect of fees for services accrued and unpaid as of June 30, 2015 in exchange for 4,500,000 shares of Common Stock.

 

On November 16, 2015, the Company entered into an agreement with its chief financial officer, under which he agreed to discharge the Company from a portion of amounts owed to him in respect of fees due from its subsidiary, SPO, in exchange for the issuance of shares of Common Stock. The chief financial officer discharged the Company from approximately $250,000 of approximately $353,500 owed in respect of fees for services accrued and unpaid as of September 30, 2015 in exchange for 1,250,000 shares of Common Stock.

 

On August 22, 2016, the Company entered into separate agreements with two of its executive officers, under which each agreed to discharge the Company from a portion of amounts owed to them in respect of consulting fees due from its subsidiary, SPO, and also, in the case of one executive, consulting fees due from its subsidiary, SPMSA, in each case in exchange for the issuance of shares of Common Stock. The chief executive officer discharged the Company from $150,000 of the amount of approximately $179,780 owed to him by SPO in respect of fees accrued and unpaid as of July 31, 2016 and $50,000 due in respect of an amount of approximately $50,000 of fees owed to him by SPMSA as of July 31, 2016, all in exchange for 1,000,000 shares of Common Stock. The chief financial officer discharged the Company from approximately $157,200 of the total amount of approximately $218,000 owed to him by SPO in respect of fees for services accrued and unpaid as of July 31, 2016 in exchange for 786,001 shares of Common Stock.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

 

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 security 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 $16,500 and $15,500 for the three months ended September 30, 2015 and 2014 and approximately $38,000 and $44,200 for the nine months ended September 30, 2015 and 2014. As of August 10, 2015, the loan was settled with the issuance of 1,676,000 shares of Common Stock. The Company recognized a gain of $28,951 representing the difference between the fair value of the consideration issued in the settlement transaction and the carrying value of the amounts due to the lender. This gain has been included as ‘‘Gain on settlement of debt’’ under ‘‘Other income (expense)’’ within income from continuing operations in the accompanying Consolidated Statement of Operations for the year ended December 31, 2015.

 

On February 11, 2016 the Company entered into a Securities Purchase Agreement with SBI Investments LLC, 2014-1, a statutory series of Delaware limited liability company (“SBI”). Under the Purchase Agreement, SBI purchased the Company’s promissory note (the “SBI Note”) in the principal amount of $330,000 for a purchase price of $300,000. The SBI Note bears interest at the rate of 0% per annum until the occurrence of an Event of Default, at which time the SBI Note bears default interest at the rate of 22% per annum. SBI has the right to convert the SBI Note into shares of the Company’s Common Stock following the occurrence of an event of default under the SBI Note, including the failure to repay the note on or before its maturity date. On August 1, 2016 the Company and SBI agreed to extend the maturity date of the SBI Note from August 9, 2016 to October 11, 2016. On November 17, 2016 the Company and SBI agreed to extend the maturity date of the SBI Note from October 11, 2016 to January 11, 2017. As part of the agreement on November 17, 2016 to extend the maturity of the SBI Note until January 11, 2017, SBI and the Company agreed that (i) the number of shares of the Company’s Common Stock into which SBI could convert the SBI Note following the occurrence of an event of default under the SBI Note, including the failure to repay the SBI Note on or before January 11, 2017 would be based on a conversion price that is 52.5% of the market price of the Company’s shares, rather than 55%; and (ii) the principal amount to be paid to SBI to discharge the SBI Note in full is $390,000 if the Company repays the SBI Note prior to or on January 11, 2017. In connection with Amendment No. 2, the Company entered into a fee letter agreement with SBI under which the Company agreed to pay SBI a structuring fee on November 17, 2016 in the amount of $90,000 with 1,058,824 shares of its Common Stock and a loan monitoring fee of $45,000 which is due on the maturity of the SBI Note.

 

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. 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.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

 

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 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 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 Common Stock.  At both September 30, 2016 and December 31, 2015, there were 14,800,000 issued and outstanding shares of Nonvoting Convertible Preferred Stock.

 

On August 7, 2015, the Company entered into separate agreements with two of its executive officers and one consultant, under which each agreed to discharge the Company from a portion of amounts owed to them in respect of consulting fees due from its subsidiary, SPO, and also, in the case of one executive, a loan obligation and consulting fees due from its subsidiary, SPMSA, in each case in exchange for the issuance of shares of Common Stock. In each case, shares of Common Stock were valued at $0.15 per share for purposes of determining the number of shares to be issued under the three agreements. The Company issued an aggregate of 7,620,000 shares of Common Stock in these transactions to obtain the discharge of $1,148,000 of liabilities. The chief executive officer discharged the Company from $30,000 of the amount of $30,000 owed to him by SPO in respect of fees accrued and unpaid as of June 30, 2015, and $292,500 due in respect of an aggregate of $301,800 of loans made to and fees owed to him by SPMSA, all in exchange for 2,150,000 shares of Common Stock. The chief financial officer discharged the Company from approximately $680,000 of the total amount of approximately $1,030,000 owed in respect of fees for services accrued and unpaid as of June 30, 2015 in exchange for 4,500,000 shares of Common Stock; and a consultant to SPO, discharged the Company from $145,500 of the total amount of $236,498 owed to him in respect of fees accrued and unpaid as of June 30, 2015 in exchange for 970,000 shares of Common Stock. 

 

On August 10, 2015, the Company and M Cubed Holdings Limited (“MCubed”), a corporation formed under the laws of South Africa, entered into a share purchase agreement under which MCubed agreed to purchase 1,676,000 shares of Common Stock, in exchange for the cancellation in full of loan indebtedness of ZAR 3,542,204 (approximately $280,400), including interest and loan fees, due from its subsidiary SPMSA. SPMSA and MCubed had entered into the loan agreement under which MCubed loaned ZAR 2,000,000 to SPMSA on April 17, 2013.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

 

On November 16, 2015, the Company entered into separate agreements with its chief financial officer its investor relations consultant, and a former employee, under which the Company was discharged from approximately $364,570 of obligations in exchange for 1,892,176 shares of the Company’s Common Stock. Specifically, the chief financial officer discharged the Company from approximately $250,000 of approximately $363,400 owed in respect of fees for services accrued and unpaid as of October 31, 2015 in exchange for 1,250,000 shares of the Common Stock; the consultant discharged the Company from $36,000 owed in respect of fees for services accrued and unpaid as of October 31, 2015 in exchange for 180,000 shares of the Company’s Common Stock; and the former employee discharged the Company from $78,570 owed in respect of its obligation to pay past due compensation in exchange for 462,176 shares of the Company’s Common Stock.  

 

On August 16, 2016 the Company issued 500,000 shares to an investor at a value of $0.20 per share.

 

On August 22, 2016, the Company entered into separate agreements with two of its executive officers and two consultants, under which each agreed to discharge the Company from a portion of amounts owed to them in respect of consulting fees due from the Company and its subsidiary, SPO, and also, in the case of one executive, consulting fees due from its subsidiary, SPMSA, in each case in exchange for the issuance of shares of Common Stock. In each case, shares of Common Stock were valued at $0.20 per share for purposes of determining the number of shares to be issued under the three agreements. The Company issued an aggregate of 2,716,008 shares of Common Stock in these transactions to obtain the discharge of $543,202 of liabilities. The chief executive officer discharged the Company from $150,000 of the amount of approximately $179,780 owed to him by SPO in respect of fees accrued and unpaid as of July 31, 2016 and $50,000 due in respect of an amount of approximately $50,000 of fees owed to him by SPMSA as of July 31, 2016, all in exchange for 1,000,000 shares of Common Stock. The chief financial officer discharged the Company from approximately $157,200 of the total amount of approximately $218,000 owed to him by SPO in respect of fees for services accrued and unpaid as of July 31, 2016 in exchange for 786,001 shares of Common Stock; a consultant to SPO, discharged the Company from $150,000 of the total amount of approximately $235,800 owed to him in respect of fees accrued and unpaid as of July 31, 2016 in exchange for 750,000 shares of Common Stock; and a consultant to the Company discharged the Company from $36,000 of the total amount of approximately $36,000 owed to it in respect of fees accrued and unpaid as of July 31, 2016 in exchange for 180,000 shares of Common Stock.

 

There were 61,750,000 shares of Common Stock issued and outstanding at September 30, 2016 and 58,533,992 shares of Common Stock issued and outstanding at December 31, 2015.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

 

7. Shareholders’ Deficit

 

The consolidated shareholders’ deficit of the Company consists of common stock, additional paid-in capital, deficit and accumulated other comprehensive income.

 

8. 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 September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Switzerland		$	(267,034	)		$	148,693			$	(337,859	)		$	232,014
South Africa		$	(55,483	)			(79,243	)			(156,625	)			(337,553	)
United States		$	(26,940	)			(62,424	)			(361,801	)			(296,409	)
Brazil			-				-				-				-
Total Net income (loss)		$	(349,457	)		$	7,026			$	(856,285	)		$	(401,948	)

 

The provision for income taxes shown in the accompanying consolidated statements of operations consists of the following for the three and nine months ended September 30, 2016 and 2015:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Current tax provision:
Switzerland		$	-			$	-			$	-			$	-
South Africa			-				-				-				-
United States			-				-				-				-
Brazil			-				-				-				-
Total current tax provision		$	-			$	-			$	-			$	-
Deferred tax provision:
Switzerland		$	(47,996	)		$	27,588			$	(60,556	)		$	43,347
South Africa			(15,500	)			(22,021	)			(43,765	)			(94,277	)
United States			(9,429	)			(21,849	)			(126,630	)			(103,743	)
Brazil			-				-				-				235,375
Change in valuation allowance			72,925				16,282				230,951				(80,702	)
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 100% 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:

 

		September 30,				December 31,
		2016				2015
Deferred tax assets:
Net operating loss carryforwards		$	6,324,983			$	6,094,032
Less: valuation allowance			(6,324,983	)			(6,094,032	)
Total		$	-			$	-

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

  

The following reconciles the effective income tax rates with the statutory rates for three and nine months ended September 30, 2016 and 2015:

 

										United
		Switzerland				South Africa				States				Brazil				Total
Statutory rate of tax			8.5%/18	%			28.0	%			35.0	%			25.0	%
Three months ended September 30, 2016:
Net (loss)  from operations before taxes		$	(267,034	)		$	(55,483	)		$	(26,940	)		$	-			$	(349,457	)
As calculated at the statutory rate			(47,996	)			(15,535	)			(9,429	)			-				(72,960	)
Permanent differences			-				35				-				-				35
Change in valuation reserves			47,996				15,500				9,429				-				72,925
Provision for income taxes		$	-			$	-			$	-			$	-			$	-
Three months ended September 30, 2015:
Net income (loss)  from operations before taxes		$	148,693			$	(79,243	)		$	(62,424	)		$	-			$	7,026
As calculated at the statutory rate			27,588				(22,188	)			(21,849	)			-				(16,449	)
Permanent differences			-				167				-				-				167
Change in valuation reserves			(27,588	)			22,021				21,849				-				16,282
Provision for income taxes		$	-			$	-			$	-			$	-			$	-
Nine months ended September 30, 2016:
Net (loss) from operations before taxes		$	(337,859	)		$	(156,625	)		$	(361,801	)		$	-			$	(856,285	)
As calculated at the statutory rate			(60,556	)			(43,855	)			(126,630	)			-				(231,041	)
Permanent differences			-				90				-				-				90
Change in valuation reserves			60,556				43,765				126,630				-				230,951
Provision for income taxes		$	-			$	-			$	-			$	-			$	-
Nine months ended September 30, 2015:
Net income (loss) from operations before taxes		$	232,014			$	(337,553	)		$	(296,409	)		$	-			$	(401,948	)
As calculated at the statutory rate			43,347				(94,515	)			(103,743	)			-				(154,911	)
Permanent differences			-				238				-				235,375				235,613
Change in valuation reserves			(43,347	)			94,277				103,743				(235,375	)			(80,702	)
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 two years ended December 31, 2015 in Switzerland and South Africa, for the seven years ended December 31, 2015 in the U.S and for the five years ended December 31, 2015 in Brazil.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

  

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.

 

During June 2016, the IRS levied penalties of $120,000 relating to filings of United States income tax returns for the year ended December 31, 2014 and December 31, 2015 beyond the required deadlines. These penalties have been provided for in current liabilities as at September 30, 2016. The Company has proposed settlements of these penalties to the IRS, but as of September 30, 2016 had not received a response from the IRS.

 

9. 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 Common Stock have been reserved for future issuance. The Plan authorizes the granting of non-qualified stock options to the Company’s 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.

 

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 now are fully vested.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

 

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 and nine months ended September 30, 2016 and 2015 was $0, $12,691, $0 and $37,522, respectively. These amounts are included in general and administrative expenses in the accompanying Consolidated Statements of Operations.

 

10. Commitments, Contingencies and Tax Obligation

 

Lease Commitments

 

On June 1, 2014, the Company leased new office and workshop facilities for a one-year term with an automatic extension for another year unless cancelled with due notice. A new lease for these premises was entered into on May 30, 2016 for an additional one-year term, commencing June 1, 2016, with an option for extension for another year with due notice. The monthly rent for the workshop lease is approximately $850. In addition to the payments required under the workshop lease, payments are made for space rentals on an as-needed basis. The total rent expense was approximately $3,800 and $11,000 for the three and nine months ended September 30, 2016 and 2015, respectively. Rent expense is included in general and administrative expenses in the accompanying Consolidated Statements of Operations.

 

The future rent commitments under the above lease for the year ending December 31, 2016 is approximately $2,600.

 

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 September 30, 2016, the total monthly salary commitment applicable to these employees was approximately $10,200.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

 

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 September 30, 2016 and December 31, 2015, the unpaid balance of this liability was approximately $104,000 and $93,000, 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 and social security obligations in Switzerland relating to the employment of the chief financial officer by SPOAG. As at September 30, 2016 and December 31, 2015, the unpaid balance of this liability was approximately $210,000 and $169,000, 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 $138,400 over the year ending December 31, 2016

 

The total compensation to these executives was approximately $147,000 and $153,000 for the three ended September 30, 2016 and 2015 and approximately $432,000 and $452,000 for the nine months ended September, 2016 and 2015.

 

The Company has 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 $63,000 over the year ending December 31, 2016.

 

Other Commitments

 

The Company is obligated to make payments of approximately $25,500 subsequent to September 30, 2016 in connection with purchase orders open as of September 30, 2016 for the purchase of parts to be delivered in 2016. Payments to vendors relating to these purchases are scheduled to be made prior to December 31, 2016.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

 

11. Subsequent Events

 

The Company has evaluated its subsequent events since September 30, 2016. The Company has determined that, other than as noted under Note 5, there were no material subsequent events requiring adjustment to or disclosure in these unaudited consolidated financial statements. 

  

12. Going Concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the continuation of the Company as a going concern.

 

The Company 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 unaudited consolidated financial statements, the Company’s total consolidated liabilities exceed total consolidated assets at September 30, 2016 and December 31, 2015 by $1,809,647 and $1,426,874, 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. Additionally, as disclosed in Note 8, with respect to payroll tax obligations due in both Switzerland and South Africa and tax penalties due the IRS, the Company has been unable to meet its obligations for payment of its taxes and the filing of tax returns.

 

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.

 

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.

 

 

SurePure, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Three and nine months ended September 30, 2016 and 2015

 

 

Management is currently pursuing plans to address the cash flow requirements of the Company for the year ending December 31, 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 significant additional equity financing during the nine months to September, 2016 from existing shareholders or otherwise, despite its efforts to do so. In addition, although the Company has projected that increase in the commercialization of its technology may provide additional cash flow for operations, it has not generated any new equipment sales orders in the past nine months.

 

The unaudited 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, 2015 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 results presented below pertain to our unaudited consolidated financial statements for the three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2016 and 2015.

 

Insufficient Funding

 

For the period from our inception on August 24, 2005 to September 30, 2016, we had net losses of approximately $35,879,000. During the quarter ended September 30, 2016, we continued to experience a significant shortfall in funding from operations and 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. We continue to do research work either by ourselves or in conjunction 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 one 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 September 30, 2016, we did not have adequate working capital resources to satisfy our current liabilities which included penalties owed to the United States and Swiss tax authorities, 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:

 

·

Relying on the regulatory approval that was granted in January 2016 by the European Food Standards Agency for dairy milk treated with our Technology to extend its shelflife and increase its vitamin D content, to generate additional customer interest and transactions in the EU and elsewhere for dairy applications;

 

·

Attend and promote our product at international trade shows in 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”; and

 

 

·

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 nine months ended September 30, 2016, 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

 

·

attempting to negotiate financing arrangements.

 

Subsequent to September 30, 2016, 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 nine months ended September 30, 2016 compared with our results of operations for the three and nine months ended September 30, 2015:

 

		Three Months Ended:								Variance
		September 30, 2016				September 30, 2015				$				%
Revenues		$	3,000				893,000				(890,000	)			-100	%
General and Administrative Expenses			409,000				427,000				(18,000	)			-4	%
Research and Development			0				11,000				(11,000	)			-100	%
Interest Expense			40,000				9,000				31,000				344	%
Net Income / (Loss)			(349,000	)			7,000				(356,000	)			-5087	%

 

		Nine Months Ended:								Variance
		September 30, 2016				September 30, 2015				$				%
Revenues		$	1,298,000				2,443,000				(1,145,000	)			-47	%
General and Administrative Expenses			1,363,000				1,460,000				(97,000	)			-7	%
Research and Development			58,000				48,000				10,000				21	%
Interest Expense			88,000				49,000				39,000				80	%
Net Loss			856,000				402,000				454,000				113	%

 

 

Revenues

 

We had revenues of approximately $3,000 during the three months ended September 30, 2016, representing a 100% decrease as compared to approximately $893,000 for the three months ended September 30, 2015. This decrease as compared to the 2015 year was primarily due to timing of a customer installation during the period resulting from a less orders for the period. Revenue for the nine months ended September 30, 2016 was approximately $1,298,000, a decrease of 47% compared to the $2,443,000 for the nine months ended September 30, 2015.

 

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 three 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 $409,000 during the three months ended September 30, 2016, representing a 4% decrease as compared with approximately $427,000 during the three months ended September 30, 2015. This increase as compared to 2015 was to lower professional fees , as well as reduced travel expenditures due to timing of customer visits. For the nine months ended September, 2016, general and administrative expenses of approximately $1,363,000 were 7% lower than the comparable expenses of approximately $1,460,000 for the nine months ended September 30, 2015. This decrease as compared to 2015 was also primarily due to lower professional fees, 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 $0 for the three months ended September 30, 2016, representing a 100% decrease as compared with approximately $11,000 for the three months ended September 30, 2015. Research and development expenses for the nine months ended September 30, 2016 were approximately $58,000, or 21% higher than the approximately $48,000 of research and development expenses for the nine months ended September 30, 2015. This increase as compared to the first nine months of 2015 was primarily due to timing of research work related to new client development.

 

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 $40,000 for the three months ended September 30, 2016, representing a 344% increase, as compared to approximately $9,000 of interest expense for the three months ended September 30, 2015. Interest expense was approximately $88,000 for the nine months ended September 30, 2016, representing a 80% increase as compared to approximately $49,000 of interest expense for the nine months ended September 30, 2015. This increase was primarily due to the fact that a new loan was taken out during 2016 which quantum was higher than the loan on hand during the comparable period in 2015.

 

Net Income (Loss)

 

For the reasons discussed above, we had a net loss of approximately $349,000 for the three months ended September 30, 2016, compared with a net income of approximately $7,000 for the three months ended September 30, 2015. Net losses for the nine months ended September 30, 2016 were approximately $856,000 as compared to net losses of approximately $402,000 for the nine months ended September 30, 2015, or an increase of 113%.

 

We have not as yet generated sufficient revenue to fund our operations for the nine months to date in 2016, 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 2016.

 

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 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 September 30, 2016.

 

Capital Expenditures

 

We did not invest in property and equipment during the nine months ended September 30, 2016.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity have historically been through sales of our Common Stock to our investors. During the nine months ended September30, 2016, however, we were only able to obtain minimal additional equity funding. We issued 500,000 shares of our Common Stock in regard to an investment of $100,000 by an investor. Additionally we issued 1,786,008 shares of our Common Stock in settlement of a portion of the liability (approximately $357,200) to our officers and directors and we issued 930,000 shares of our Common Stock, in settlement of a portion of the liability (approximately $186,000) to various consultants.

 

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 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 September 30, 2016, compared with our financial position at December 31, 2015:

 

		As of:								Variance
		September 30, 2016				December 31, 2015				$				%
Cash		$	1,000			$	5,000				(4,000	)			-80	%
Other Current Assets			160,000				235,000				(75,000	)			-32	%
Total Assets			227,000				320,000				(93,000	)			-29	%
Current Liabilities			2,027,000				1,747,000				290,000				17	%

 

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

 

As of September 30, 2016, we had cash of approximately $1,000 and other current assets of approximately $160,000, consisting of accounts receivable and prepaid expenses, and total assets of approximately $227,000. As of September 30, 2016, we had current liabilities of approximately $2,037,000, consisting of accounts payable, accounts payable to related parties, accrued liabilities and loans. Of this amount, approximately $227,000 represented liabilities that were due to officers and directors, a decrease in liabilities to officers and stockholders of approximately $87,000 as compared to such amount as of December 31, 2015. This was attributable to the fact that during August 2016 we issued 1,786,008 shares of our Common Stock in settlement of a portion of the liability (approximately $357,200) to our officers and directors. Additionally we issued 930,000 shares of our Common Stock, in settlement of a portion of the liability (approximately $186,000) to various consultants.

 

Our shareholders’ deficit was approximately $1,810,000 as of September 30, 2016, compared with deficit of approximately $1,427,000 as of December 31, 2015.

 

 

Cash Flow Analysis

 

For the nine months ended September 30, 2016 our cash used in operating activities was approximately $338,000, which amount corresponded mainly to net losses from our operations, reduction in customer deposits payable, increase in accounts receivable offset by an increase in accounts payable and prepaid expenses for the period to date. Cash from financing activities was approximately $400,000, $300,000 arising from a loan note secured during the quarter ended March 31, 2016 and $100,000 arising from the issuance of common stock during the quarter ended September 30, 2016. 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.

 

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 September 30, 2016, 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 September 30, 2016.

 

 

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 September 30, 2016, and has concluded that there was no change that occurred during the quarterly period ended September 30, 2016 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.

 

During the third quarter of 2016, we issued 3,216,008 shares of our Common Stock, in the following four transactions.

 

As previously reported in our Current Report on Form 8-K filed on August 25, 2016, we issued an aggregate of 2,716,008 shares of our Common Stock to our chief executive officer, our chief financial officer and two consultants, to discharge certain obligations owed by two of our subsidiaries and ourselves to those individuals for unpaid fees.

 

We issued 500,000 shares of our Common Stock to an investor under a subscription agreement..

 

Other than as set forth above, there were no unregistered sales of equity securities during the 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.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Document*
101.DEF		XBRL Taxonomy Extension Definition Document*
101.LAB		XBRL Taxonomy Extension Labeled Document*
101.PRE		XBRL Taxonomy Extension Presentation Document*

 

_____________

*

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:  November 21, 2016	By:	/s/ Guy R. Kebble
		Name:	Guy R. Kebble
		Title:	President and Chief Executive Officer
			(Principal Executive Officer)
Date:  November 21, 2016	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.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Document*
101.DEF		XBRL Taxonomy Extension Definition Document*
101.LAB		XBRL Taxonomy Extension Labeled Document*
101.PRE		XBRL Taxonomy Extension Presentation Document*

 

_____________

*

Filed herewith.