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EXCEL - IDEA: XBRL DOCUMENT - SOUPMAN, INC.Financial_Report.xls
EX-31.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER - SOUPMAN, INC.f10q0512ex31i_soupman.htm
EX-32.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER - SOUPMAN, INC.f10q0512ex32i_soupman.htm
EX-32.2 - CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT - SOUPMAN, INC.f10q0512ex32ii_soupman.htm
EX-31.2 - CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER - SOUPMAN, INC.f10q0512ex31ii_soupman.htm


UNITED STATES
  SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended May 31, 2012
 
or
 
o
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:  000-53943
 
SOUPMAN, INC.
 (Exact name of registrant as specified in its charter)
 
Delaware
 
61-1638630
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
1110 South Avenue, Suite 100
Staten Island, New York 10314
 (Address of principal executive offices) (Zip Code)
 
(212) 768-7687
 (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 o
   
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x       No o
 
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated filer                       
¨
Non-accelerated filer
o
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   o      No x
 
Number of shares of common stock outstanding as of July 16, 2012 was 28,653,906
 
 
 

 
 
PART I - FINANCIAL INFORMATION
  
Item 1.
Financial Statements.
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
 
Consolidated Balance Sheets
 
             
   
May 31, 2012
   
August 31, 2011
 
   
(Unaudited)
       
Assets
 
             
Current Assets
           
Cash
  $ 16,159     $ 343,927  
Accounts receivable - net
    117,193       134,242  
Accounts receivable - related parties
    25,211       18,614  
Prepaid expenses and other
    61,852       56,901  
Note receivable - franchisee
    9,992       -  
Note receivable - other
    -       6,000  
Due from franchisee
    5,742       5,742  
Due from franchisee - related parties
    31,544       -  
Total Current Assets
    267,693       565,426  
                 
Property and equipment  - net
    30,110       33,418  
                 
Other Assets
               
Notes receivable - franchisees - related parties
    485,771       662,141  
Note receivable - franchisee
    60,092       -  
Intangible assets - net
    53,538       67,690  
Other
    4,800       4,800  
Total Other Assets
    604,201       734,631  
                 
Total Assets
  $ 902,004     $ 1,333,475  
                 
Liabilities and Stockholders' Deficit
 
                 
Current Liabilities
               
Accounts payable and accrued liabilities
  $ 2,706,950     $ 2,192,905  
Debt – net
    4,519,642       3,704,305  
Deferred franchise revenue
    118,750       118,750  
Derivative liabilities
    539,343       -  
Total Current Liabilities
    7,884,685       6,015,960  
                 
Stockholders' Deficit
               
Preferred stock, par value $0.001; 25,000,000 and 25,000,000 shares
               
  authorized; 1,250,461 and 1,523,033 issued and outstanding
    1,251       1,523  
Common stock, par value $0.001; 75,000,000 and 75,000,000 shares authorized;
               
  28,703,906 and 27,791,834 issued; 28,203,906 and 27,291,834 outstanding
    28,204       27,292  
Additional paid in capital
    2,502,526       1,610,654  
Accumulated deficit
    (9,514,662 )     (6,321,954 )
Total Stockholders' Deficit
    (6,982,681 )     (4,682,485 )
                 
Total Liabilities and Stockholders' Deficit
  $ 902,004     $ 1,333,475  
 
 
 
 
1

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
 
Consolidated Statements of Operations
 
(Unaudited)
 
                         
   
Three Months Ended
May 31,
   
Three Months Ended
May 31,
   
Nine Months Ended
May 31,
   
Nine Months Ended
May 31,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Sales
                       
Soup sales - net
  $ 315,093     $ 367,075     $ 1,150,836     $ 665,433  
Franchise royalties
    46,483       44,579       153,514       95,018  
Total sales
    361,576       411,654       1,304,350       760,451  
                                 
Cost of sales
    247,680       312,997       943,266       503,396  
                                 
Gross profit
    113,896       98,657       361,084       257,055  
                                 
Operating expenses:
                               
General and administrative
    838,107       1,698,112       2,823,754       4,237,626  
Royalty
    56,250       56,250       168,750       108,386  
Total operating expenses
    894,357       1,754,362       2,992,504       4,346,012  
                                 
Loss from operations
    (780,461 )     (1,655,705 )     (2,631,420 )     (4,088,957 )
                                 
Other income (expense)
                               
Interest income
    7,761       -       19,922       -  
Other income
    -       90,645               90,645  
Interest expense
    (339,891 )     (66,155 )     (513,681 )     (125,521 )
Change in fair value of derivative liabilities
    (92,757     -       (67,529     -  
Total other (expense)  - net
    (424,887 )     24,490       (561,288 )     (34,876 )
                                 
Net loss
  $ (1,205,348 )   $ (1,631,215 )   $ (3,192,708 )   $ (4,123,833 )
                                 
Basic and diluted loss per common share:
  $ (0.04 )   $ (0.07 )   $ (0.11 )   $ (0.26 )
                                 
Weighted average number of common shares outstanding
                         
  during the period - basic and diluted
    27,990,901       24,287,350       28,100,866       16,016,013  
 
 
2

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
 
Consolidated Statement of Stockholders 'Deficit
 
Year Ended August 31, 2011 and Nine Months Ended May 31, 2012
 
(Unaudited)  
                                           
                                           
   
Preferred Stock
   
Common Stock
   
Additional
         
Total
 
   
$0.001 Par Value
   
$0.001 Par Value
         
Paid-in
   
Accumulated
   
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Deficit
 
Balance, August 31, 2011
    1,523,033     $ 1,523       27,291,834     $ 27,292     $ 1,610,654     $ (6,321,954 )   $ (4,682,485 )
                                                         
Issuance of common stock and warrants for cash ($1/share)
    -       -       10,000       10       9,990       -       10,000  
                                                         
Cash paid as direct offering cost
    -       -       -       -       (1,000 )     -       (1,000 )
                                                         
Stock options exercised ($0.50/share)
    -       -       200,000       200       99,800       -       100,000  
                                                         
Issuance of common stock for services rendered ($0.65 - 1.55/share)
    -       -       429,500       430       520,820       -       521,250  
                                                         
Share based payment
    -       -       -       -       262,262       -       262,262  
                                                         
Conversion of preferred stock to common stock
    (272,572 )     (272 )     272,572       272       -       -       -  
                                                         
Net loss
    -       -       -       -       -       (3,192,708 )     (3,192,708 )
                                                         
Balance, May 31, 2012
    1,250,461     $ 1,251       28,203,906     $ 28,204     $ 2,502,526     $ (9,514,662 )   $ (6,982,681 )
 
 
 
3

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
 
Consolidated Statements of Cash Flows
 
(Unaudited)
 
             
   
Nine Months Ended
May 31,
   
Nine Months Ended
May 31,
 
   
2012
   
2011
 
Cash Flows From Operating Activities:
           
Net loss - continuing operations
 
$
(3,192,708
)
 
$
(4,123,833
)
Adjustments to reconcile net loss to net cash used in operating activities
               
Stock issued for services
   
521,250
     
2,120,000
 
Share based payment
   
262,262
     
406,159
 
Bad debt expense     53,000          
Change in fair market value of derivative liabilities
   
67,529
     
-
 
Amortization of debt discount
   
275,789
     
-
 
Amortization
   
14,152
     
14,769
 
Depreciation
   
7,990
     
18,196
 
Changes in operating assets and liabilities:
               
(Increase) Decrease in:
               
 Accounts receivable
   
(35,951
   
216,729
 
 Accounts receivable - related party
   
(6,597
)
   
(12,167
)
 Notes receivable
   
-
     
(16,132
)
 Due from franchisees
   
-
     
119,781
 
 Due from franchisees - related party
   
(31,544
)
   
-
 
 Prepaid expenses
   
(4,951
)
   
(38,763
)
Increase (Decrease) in:
               
 Accounts payable and accrued liabilities
   
762,929
     
(163,761
)
Net Cash Used in Operating Activities
   
(1,306,850
)
   
(1,459,022
)
                 
Cash Flows From Investing Activities:
               
Cash acquired in merger
   
-
     
582,590
 
Proceeds from notes receivable - franchisees
   
143,482
     
-
 
Proceeds from note receivable - other
   
6,000
     
-
 
Advance in connection with sale of franchise - related party
   
(70,084
)
   
-
 
Purchase of property and equipment
   
(4,682
)
   
(26,933
)
Net Cash Provided by Investing Activities
   
74,716
     
555,657
 
                 
Cash Flows From Financing Activities:
               
Proceeds from issuance of convertible notes
   
875,250
     
-
 
Repayment of debt
   
(79,884
)
   
(71,325
)
Proceeds from exercise of stock options
   
100,000
     
-
 
Proceeds from issuance of common stock and warrants - net
   
9,000
     
984,000
 
Net Cash Provided by Financing Activities
   
904,366
     
912,675
 
                 
Net increase (decrease) in cash
   
(327,768
)
   
9,310
 
                 
Cash at beginning of period
   
343,927
     
551
 
                 
Cash at end of period
 
$
16,159
   
$
9,861
 
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
 
$
56,370
   
$
50,412
 
Cash paid for taxes
 
$
-
   
$
-
 
                 
Supplemental disclosures of non-cash investing and financing activities:
               
Reduction of accrued payroll - related party and related reduction of due from franchise - related party
 
$
32,888
   
$
-
 
Conversion of preferred stock to common stock
 
$
272
   
$
-
 
Debt discount recorded on convertible debt
 
$
539,343
   
$
-
 
Exchange of convertible debt and accrued interest into common stock
 
$
-
   
$
4,830,254
 
Issuance of preferred stock in merger
 
$
-
   
$
1,988
 
Forgiveness of debt - related party
 
$
-
   
$
106,698
 
Forgiveness of note receivable - related party
 
$
-
   
$
386,354
 
 
 
4

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)
 
Note 1 Basis of Presentation

The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, the rules and regulations of the United States Securities and Exchange Commission for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
 
The financial information as of August 31, 2011, is derived from the audited financial statements presented in the Company’s Annual Report on Form 10-K for the year ended August 31, 2011.  The unaudited  interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, which contains the audited financial statements and notes thereto, together with the Management’s Discussion and Analysis, for the year ended August 31, 2011.
 
Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The interim results for the period ended May 31 2012, are not necessarily indicative of results for the full fiscal year.

The Company’s fiscal year end is August 31.

Note 2 Organization and Nature of Operations

Passport Arts, Inc. (“PPOR”) was incorporated in the State of Nevada on December 2, 2008, and during the year ended August 31, 2010, sold art from an on-line gallery. After December 15, 2010, the Company no longer sold art and these operations were reported as discontinued operations (See Note 3).

On December 15, 2010, PPOR acquired The Original Soupman, Inc. (“OSM”) and its wholly owned subsidiary, International Gourmet Soups, Inc. (“IGS”), as well as its 80% owned subsidiary, Kiosk Concepts, Inc. (“Kiosk”), collectively “the Company”.  On January 31, 2011, PPOR reincorporated in Delaware, and changed its name to Soupman, Inc. (the “Company”).

The Company manufactures and sells soup to its franchisees and to grocery chains.

Note 3 Summary of Significant Accounting Policies

Principles of Consolidation

All significant intercompany transactions and balances have been eliminated.
 
 
5

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share based payments and derivative liabilities, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, actual results could differ significantly from estimates.

Risks and Uncertainties

The Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business failure.  These conditions may limit our access to capital.

The Company has experienced, and in the future expects to continue to experience, variability in sales and earnings.  The factors expected to contribute to this variability include, among others, (i) the uncertainty associated with the success of franchisees, (ii) the cyclical nature of the soup business, (iii) general economic conditions, and (iv) the related volatility of prices pertaining to the cost of ingredients.

Cash

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.  There were no cash equivalents at May 31, 2012 and August 31, 2011, respectively.

Allowance for Doubtful Accounts

The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible.

 
6

 

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)
 
Property and Equipment

Property and equipment are carried at depreciated cost. The costs of additions and betterments are capitalized and expenditures for repairs and maintenance are expensed in the period incurred.

Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful lives of the respective assets as follows:
 
Equipment
Vehicles
Furniture and fixtures
5-7 years
5 years 
5 years
 
Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  There were no impairment charges taken during the three and nine months ended May 31, 2012 and May 31, 2011.
 
Intangible Assets
 
Amortization of identifiable intangible assets is provided utilizing the straight-line method over the estimated lives of the respective assets.

Intangible assets are reviewed for impairment if indicators of potential impairment exist.  There were no impairment charges taken during the three and nine months ended May 31, 2012 and May 31, 2011.
 
Fair Value of Financial Instruments
 
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact business and considers assumptions that marketplace participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

The fair value hierarchy for measurements is as follows:

●   Level 1 – quoted market prices in active markets for identical assets or liabilities.
 
●   Level 2 - inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
●   Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
The carrying amounts of the Company's financial instruments generally approximate their fair values as of May 31, 2012 and August 31, 2011, due to the short term nature of these accounts.
 
 
7

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)

The following are the major categories of liabilities measured at fair value on a recurring basis, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):

   
May 31, 2012
   
August 31, 2011
 
Level 1            
None
  $     $  
Level 2
               
None
           
Level 3
               
Derivative liability
    539,343        
    $ 539,343     $  

The Level 3 valuation relates to derivative liabilities measured using management's estimates of fair value as well as other significant inputs are unobservable. See below for additional discussion.

The following table reflects the change in fair value of derivative liabilities for the nine months ended May 31, 2012, there were no such instruments at August 31, 2011:

 
May 31, 2012
Balance at August 31, 2011
 
$
-
 
Derivative liability arising from issuance of convertible debt and warrants
   
471,814
 
Change in fair value of derivative liability – convertible debt and warrants
   
67,529
 
Balance at May 31, 2012
 
$
539,343
 

The Company has determined the estimated fair value amounts presented in these financial statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in the financial statements are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Fair value estimates are based upon pertinent information available as of the respective balance sheet dates and the Company has determined that the carrying value of all financial instruments approximates fair value.

Derivative Liabilities

Fair value accounting requires bifurcation of embedded derivative instruments, such as ratchet provisions or conversion features in convertible debt or equity instruments, and measurement of their fair value. In determining the appropriate fair value, the Company uses the Black-Scholes pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.

 
8

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)
 
Once derivative liabilities are determined, they are adjusted to reflect fair value at the end of each reporting period. Any increase or decrease in the fair value is recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes pricing model.
 
Debt Issue Costs and Debt Discount

The Company may pay debt issue costs, and record debt discounts in connection with raising funds through the issuance of convertible debt.  These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

Share-based payments
 
The Company has incentive plans that reward employees with stock options, warrants, and restricted stock and stock  The amount of compensation cost for these share-based awards is measured based on the fair value of the awards, as of the date that the share-based awards are issued and adjusted to the estimated number of awards that are expected to vest.
 
Fair value of stock options and warrants, is generally determined using a Black-Scholes pricing model, which incorporates assumptions about expected volatility, risk free rate, dividend yield, and expected life. Compensation cost for share-based awards is recognized on a straight-line basis over the vesting period.

Revenue Recognition

Revenue is recorded when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) asset is transferred to the customer without further obligation, (3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.

The Company recognizes sales when products are received by the customer and the risk of ownership is transferred.

Revenues from individual franchise sales will be recognized when substantially all significant services to be provided by the Company have been performed.  Additionally, continuing royalty fees are charged to the franchisee at 5% of the franchisee's gross sales.  The Company also sells soup products directly to franchise units.

Sales discounts and promotions, such as “buy one, get one free”, and slotting fees are netted against soup revenue.

The Company does not offer a right of return.

The Company charges an advertising fee to its franchisees, under the terms of the franchise agreement, which is non-refundable. Deferred advertising income is included as a component of accounts payable and accrued liabilities.
 
 
9

 

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)
 
Earnings (Loss) Per Share

Net earnings (loss) per share is computed by dividing net income (loss) less preferred dividends for the period by weighted average number of shares of common stock outstanding during each period.  Diluted earnings (loss) per share is computed by dividing net income (loss) less preferred dividends by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.

Since the Company reflected a net loss for the three and nine month periods ended May 31, 2012 and May 31, 2011, respectively, the effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive. A separate computation of diluted earnings (loss) per share is not presented.

The Company has the following potential common stock equivalents at May 31, 2012 and May 31, 2011:
   
May 31, 2012
   
May 31, 2011
 
Stock options (exercise price - $0.50 - $0.75/share)
   
1,470,000
     
810,000
 
Warrants (exercise price $0.80- $1.25/share)
   
1,201,177
     
            472,240
 
Convertible preferred shares  (exercise price $0.001/share)
   
1,250,461
     
-
 
Convertible debt (exercise price $0.89/share)
   
1,151,357
     
-
 
Total common stock equivalents
   
5,072,995
     
1,282,240
 

In the above table, some of the outstanding convertible debt from 2012 and 2011 contains ratchet provisions that would cause variability in the exercise price at the balance sheet date.  As a result, common stock equivalents could change at each reporting period.

Variable Interest Entities

A variable interest entity is a legal entity, other than an individual, used for business purposes that either (a) has equity investors that do not provide sufficient financial resources for the entity to support its activities, or (b) has equity investors that lack certain characteristics of controlling interest.

A legal entity is required to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity’s residual returns or both.
 
On December 29, 2009, OSM purchased all of the assets of Soup Kitchen International, Inc. and its subsidiaries (“Soup Kitchen”) for $100,000 and guaranteed $3,670,000 of Soup Kitchen’s secured debt.  In addition, OSM agreed to pay Soup Kitchen royalties of 1% of all of OSM sales for five years (through 2014), which will represent substantively all of Soup Kitchen’s revenue.

The guaranty of the secured debt was a significant part of the Acquisition, because the assets acquired by OSM comprised substantially all of the income producing assets of Soup Kitchen, creating an obligation on the part of OSM that is almost certain to occur. In addition, the assets securing the debt were the assets obtained in the acquisition.

See Note 11 regarding Soup Kitchen bankruptcy.
 
 
10

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)
 
Management has determined that Soup Kitchen is a variable interest entity.  Accordingly, the remaining post-acquisition net assets of Soup Kitchen have been consolidated with OSM’s net assets as of December 29, 2009; however, each entity still maintains its separate legal existence.

Concentrations

Sales

For the nine months ended May 31, 2012, one customer accounted for 59% of soup sales compared to two customers accounting for 46% and 22% for the nine months ended May 31, 2011.

Accounts Receivable

At May 31, 2012 three customers accounted for 26%, 14% and 13% of accounts receivable. At August 31, 2011 one customer accounted for 40% of accounts receivable.

Vendors

For the nine months ended May 31, 2012 and May 31, 2011, one vendor accounted for 98% and 100% of soup purchased. This vendor is the Company’s soup co-packer for the bulk product and all accounts receivable are pledged to this vendor.

Segments

During 2012 and 2011, the Company only operated in one segment; therefore, segment information has not been presented.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The guidance in ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, including clarification of the FASB's intent about the application of existing fair value and disclosure requirements and changing a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
 
 
11

 

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)
 
Note 4 Accounts Receivable
 
Accounts receivable consists of the following at May 31, 2012 and August 31, 2011.

   
May 31, 2012
   
August 31, 2011
 
Accounts receivable
  $ 263,059     $ 216,999  
Allowance for doubtful accounts
    (120,655 )     (64,143 )
Accounts receivable – net
  $ 142,404     $ 152,856  
 
At May 31, 2012 and August 31, 2011, the Company has related party accounts receivable of $25,211 and $18,614, respectively included in the above.

Note 5 Property and Equipment
 
Property and equipment consists of the following at May 31, 2012 and August 31, 2011.

   
May 31, 2012
   
August 31, 2011
 
Vehicles
  $ 11,843     $ 18,219  
Equipment
    21,843       17,161  
Furniture and fixtures
    12,410       12,410  
  Total
    46,096       47,790  
Less: accumulated depreciation
    (15,986 )     (14,372 )
  Property and equipment – net
  $ 30,110     $ 33,418  
 
Note 6 – Notes Receivable - Franchisees
 
The Company has advanced funds to certain franchisees to complete renovations and help with operating expenses in better performing locations. Related parties who own these franchisees are Senior VP of Franchise Development and a family member of one of the Company’s subsidiaries executive officers. On November 1, 2011, the Company executed 7% notes receivable with these franchisees for $485,771, maturing on October 31, 2018.   

Monthly interest only payments from the franchisees are approximately $4,100, until November 1, 2012, when the franchisees will begin to pay principal and interest. The aggregate monthly principal and interest payments will be approximately $12,000, unless the location is closed or sold, at which time, the note will become due.

All franchisees are current with their interest only payments.

On November 18, 2011, one location was sold to a third party and payment of $143,482 was received.  The balance due at May 31, 2012 was $70,084, for which a 5% note receivable was executed with the purchaser of the franchise, maturing on November 18, 2016.
 
The following is a summary of amounts due to the Company at May 31, 2012 and August 31, 2011.  
 
 
12

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)
 
Franchisee
 
May 31, 2012
   
August 31, 2011
 
A -  Related party
  $ 255,879     $ 208,271  
B –  Related party
    229,892       197,991  
C –  Third party
    70,084       255,879  
Total notes receivable – franchisees
    555,855       662,141  
Less:  allocation to short term (third party)
    (9,992 )     -  
Total notes receivable long term
    545,863       662,141  
Notes receivable – franchisees – related parties
    485,771       662,141  
Notes receivable – franchisee (third party)
  $ 70,084     $ -  

The following table shows the amount due for the years ended August 31, in the year so specified.

Fiscal Year Ended
 
Amount
 
2012 (remaining 3 months)
 
$
26,433
 
2013
   
64,996
 
2014
   
87,029
 
2015
   
93,011
 
2016
   
99,409
      
Thereafter
   
184,977
 
Total
 
$
555,855
 
 
The above table includes current principal payments which are being deferred by the Company for 2 franchisees.
 
Note 7 – Intangible Assets
 
Intangible assets consist of the following at May 31, 2012 and August 31, 2011.

   
May 31, 2012
   
August 31, 2011
 
Soup formulas
  $ 27,418     $ 27,418  
Recipes
    53,750       53,750  
  Total
    81,168       81,168  
Less: accumulated amortization
    (27,630 )     (13,478 )
  Intangible assets – net– net
  $ 53,558     $ 67,690  
 
The estimated useful lives of the Company’s intangible assets are as follows:

 
Amount
Soup formulas
5 years
Recipes
4 years
 
 
13

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)
 
Estimated future amortization expense of intangible assets for the years ended August 31, for the year so specified is as follows:
 
Fiscal Year ended August 31,
 
Amount
 
2012 (remaining 3 months)
 
$
4,755
 
2013
   
18,921
 
2014
   
18,921
 
2015
   
9,364
 
2016
   
1,577
 
Total
 
$
53,538
 
 
 
14

 

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)
 
Note 8 – Debt

(A)  
Terms

At May 31, 2012 the Company’s debt consists of the following:

The Company executed various notes containing the following terms:

Notes
   
Interest Rate
 
Maturity Date
 
Monthly Installments
 
Collateral
 
Amount
 
1     8%  
June 2012 – November 2012
 
None
 
None
  $ 865,250  
2    
None
 
Due on demand
 
None
 
None
    37,500  
3    
Prime + 3%, Prime + 4% and 6%
 
Due on Demand
 
None
 
All assets of the Company
    2,003,631  
4    
None
 
Due on demand
 
None
 
All assets of the Company
    290,902  
5     7%  
Due on demand
 
None
 
All assets of the Company
    1,508,384  
6    
None
 
Due on demand
 
None
 
None
    10,000  
                      $ 4,715,667  

The following is additional information pertaining to the numbered notes above:

(1) This balance is made up of various convertible notes. With the exception of these notes, all other debt with a maturity date is in default. These notes were issued with 394,437 warrants. See 8(C) for computation of derivative liabilities for convertible debt and warrants. Included in this debt are  notes we issued on February 10, 2012 and March 21, 2012 in the aggregate principal amount of $151,500. These notes  bear interest at the rate of 8% per annum, and mature on November 10 and December  21, 2012 and are convertible into shares of our common stock beginning 180 days from the date of its issue at a conversion price of 58% of the average of the lowest three trading prices of our common stock during the ten trading days on the OTCBB proceeding the conversion date. The number of shares issuable upon conversion shall be proportionally adjusted to reflect any stock dividend, split or similar event. We are entitled to prepay the Note:  (i) from the date of the Note until 30 days thereafter at 120% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Note; (ii) 31 days from the date of the Note until 60 days after the issue date at 125% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Note; (iii) 61 days from the date of the Note until 90 days after the issue date at 130% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Notes; (iv) 91 days from the date of the Note until 120 days after the issue date at 135% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Note; (v) 121 days from the date of the Note until 150 days after the issue date at 140% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Note; and (vi) 151 days from the date of the Note until 180 days after the issue date at 150% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Note. We have no right to prepay the Note after 180 days from the issue date of the Note. Unless waived in writing by the holder of the Note, we are prohibited from effecting the conversion of the Note to the extent that as a result of such conversion the holder would beneficially own more than 4.99% in the aggregate of our issued and outstanding common stock immediately after giving effect to the issuance of common stock upon conversion. While the Note is outstanding, the holder is entitled to a reduction in the conversion price if we issue any securities for a per share price less than the conversion price in effect available to the holder.  The Note holder also has a right of first refusal on any offerings with similar terms in amounts under $100,000.
  
(2) The Company is in litigation regarding this debt, see note 11.
 
(3) The principal balance was $1,500,000, and was due to the former Chairman of Soup Kitchen.
 
On May 20, 2011, the Company entered into a 13 month agreement where the debt holder would be entitled to receive 500,000 shares of common stock if the debt is not repaid.  The shares are in escrow and will only be valued if the Company is unable to repay the debt.  The valuation of the stock will be determined on the issuance date.  The 500,000 shares in escrow are not considered outstanding for purposes of computing earnings (loss) per share. At May 31, 2012, the Company is in default of the agreement for non-payment of accrued interest and the requirement for accelerated payments of 20% of any capital or debt raised. The Company raised $865,250 during the nine months ended May 31, 2012. (See Note 13)
 
(4) Represented legal fees to the Soup Kitchen’s securities counsel.
 
(5) Represents amounts due to the primary food vendor.
 
(6) Represents an advance from a third party during the nine months ended May 31, 2012.

3, 4 and 5 were guaranteed in connection with the purchase of Soup Kitchen’s assets.  Soup Kitchen is consolidated as a VIE.
 
 
15

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)
 
(B)  
Debt Discount

During the nine months ended May 31, 2012, the Company recorded debt discounts totaling $471,814.

The debt discount recorded in 2012 pertains to convertible debt and warrants that contained embedded conversion options that are required to be bifurcated and reported at fair value (See Note 8 (C)).

The Company amortized $275,789 in 2012 to interest expense.

   
May 31, 2012
   
August 31, 2011
 
Total outstanding debt (See 8(A) above)
  $ 4,715,667     $ -  
Debt discount
    (471,814 )     -  
Amortization of debt discount
    275,789       -  
Debt – net
  $ 4,519,642     $ -  

(C)  
Derivative Liabilities

The Company identified conversion features embedded within convertible debt and warrants issued during the nine months ended May 31, 2012 (see Note 8(A)). The Company has determined that the features associated with the embedded conversion options and warrants should be accounted for at fair value as a derivative liability.

As a result of the application of ASC No. 815, the fair value of the conversion feature is summarized as follow:

Derivative liability – August 31, 2011
   
-
 
Fair value at the commitment date for convertible debt and warrants
   
471,814
 
Fair value mark to market adjustment for convertible debt and warrants
   
67,529
 
Derivative liability – May 31, 2012
 
$
539,343
 

The Company recorded the debt discount to the extent of the gross proceeds raised, which was $539,343.
 
The fair value at the commitment and re-measurement dates were based upon the following management assumptions as of May 31, 2012:

   
Commitment Date
   
Remeasurement Date
 
Expected dividends
   
0
%
   
0
%
Expected volatility
   
120
%
   
120
%
Expected term: convertible debt and warrants
 
0.33 – 3 years
   
0.26 – 3 years
 
Risk free interest rate
   
0.10% - 0.43
%
   
0.07% - 0.43
%
 
 
16

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)

Note 9 – Deferred Franchise Revenue
 
Deferred franchise revenues result from payments received from new franchises prior to the Company’s performance under the terms of the franchise agreements. Often these payments are made before stores locations have been identified.

Note 10 – Stockholders’ Deficit
 
Stock Issued for Cash and Warrants
 
During the nine months ended May 31, 2012, the Company issued 10,000 shares of common stock and 1,000 two-year warrants, exercisable at $1.25/share, for $10,000 ($1/share). In connection with raising these funds, the Company paid direct offering costs of $1,000, and net proceeds were $9,000. The warrants paid as direct offering costs have a net effect on additional paid in capital of $0.

In addition, the Company issued a two year warrant exercisable for 20,000 shares of common stock at an exercise price of $1/share  to a consultant for services rendered.  The warrants paid as direct offering costs have a net effect on additional paid in capital of $0.
 
Stock Issued for Services
 
During the nine months ended May 31, 2012, the Company issued 429,500 shares of common stock, for services rendered, having a fair value of $521,250 ($0.65 - $1.55/share) based upon the quoted closing trading price on the dates issued.

Conversion of Preferred Stock into Common Stock
 
For the nine months ended May 31, 2012, the Company issued 272,572 shares of common stock in connection with the conversion of 272,572 shares of preferred stock at $272 ($0.001/share).  The conversion did not result in any gain or loss on conversion.

Stock Options
 
On December 31, 2010, the Company issued 2,050,000 stock options, having a grant date fair value of $738,471.   The options have an exercise price of $0.50 and a life of 5 years.  The options vest 40% upon issuance, 40% on September 1, 2011 and 20% on September 1, 2012.

On January 18, 2012, the Company issued 200,000 stock options having a grant date fair value of $147,588 to a consultant.  The options have an exercise price of $0.75 and a life of 10 years.  100,000 of the options vest 50% on the date of grant and 50% on the second anniversary of the grant date. 100,000 of the options cannot be exercised or vested until services are performed. 10,000 shares will be vested and exercisable for every $1,000,000 in qualifying revenues received by the Company in connection with the consultants’ successful introduction of customers. The second 100,000 option grant has not been earned and is not considered exercisable at May 31, 2012.
 
The following is a summary of stock option expensing at May 31, 2012:

Grant date fair value – year end August 31, 2011
  $ 738,471  
Grant date fair value – nine months ended May 31, 2012
    147,588  
Expensed – year end August 31, 2011
    (510,959 )
Expensed – nine months ended May 31, 2012
    (262,262 )
Amount no longer subject to expensing (1)
    (14,737 )
Unrecognized compensation at May 31, 2012(2)
  $ 98,101  
 
 
17

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)
 
(1)  
Represents unvested portion of 60,000 stock options that were forfeited in fiscal year 2012.
(2)  
Represents amount of unvested option expense that will be amortized over remaining vesting period through January 31, 2014.

The assumptions used during the nine months ended May 31, 2012 were as follows:

       
Exercise price
  $ 0.50-0.75  
Expected dividends
    0 %
Expected volatility
    150 %
Risk fee interest rate
    1.92% - 2.01 %
Expected life of option
 
5 -10 years
 
Expected forfeitures
    0 %

The following is a summary of the Company’s stock option activity for the nine months ended May 31, 2012:

   
 
Options
   
Weighted Average
Exercise Price
 
Weighted Average Remaining Contractual Life
 
Aggregate Intrinsic Value
 
Balance – August 31, 2011
    2,035,000     $ 0.50          
 Granted
    200,000     $ 0.75          
Exercised*
    (200,000 )   $ 0.50          
Forfeited
    (60,000 )   $ 0.50          
Balance – May 31, 2012
    1,975,000     $ 0.53  
1.20 years
  $ 720,250  
Exercisable – May 31, 2012
    1,470,000     $ 0.51  
0.57 years
  $ 560,800  
Grant date fair value of options granted - 2012
          $ 147,588            
Weighted average grant date fair value - 2012
          $ 0.74            
                           
Outstanding options held by related parties
    1,450,000                    
Exercisable options held by related parties
    1,160,000                    
Fair value of options granted to related parties
  $ 522,333                    
* For the nine months ended May 31, 2012, the Company issued 200,000 shares of common stock, in connection with the exercise of outstanding options for $100,000 ($0.50/share).

 
18

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)
 
Stock Warrants
 
The following is a summary of the Company’s stock warrant activity:
    
   
Number of Warrants
   
Weighted Average
Exercise Price
 
Balance at August 31, 2011
   
785,740
   
$
1.19
 
Granted
   
415,437
   
$
0.88
 
Exercised
   
-
   
$
-
 
Forfeited
   
-
   
$
-
 
Balance at May 31, 2012
   
1,201,177
   
$
1.08
 

The weighted average remaining life for all outstanding warrants at May 31, 2012 is 1.43 years. The intrinsic value at May 31, 2012 and August 31, 2011 is $25,515 and $351,439, respectively.

Note 11 – Commitments and Contingencies
 
Commitments

The Company is obligated to pay the minority stockholder of Kiosk a royalty equal to 3% of the gross sales of all of its soup on the first $50,000,000 of gross sales, 2% on gross sales between $50,000,000 and $75,000,000, and 1% on gross sales thereafter.  The Company is required to pay a minimum of $225,000 per year if the gross sales threshold is not met.  Payments are due quarterly for ongoing services such as changing recipes, formulation of new recipes and appearances through June 30, 2014 and if the services are not performed, the payments would not be due. The annual payments are as follows:

Years Ending August 31,
 
2012 (remaining 3 months)
 
 $
56,250
 
2013
   
225,000
 
2014
   
187,500
 
Total
 
$
468,750
 

For the three and nine months ended May 31, 2012, the Company recorded a royalty expense of $56,250 and $168.750, respectively.

Litigations, Claims and Assessments
 
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business.

On September 21, 2009, a former Chairman of the Board of Soup Kitchen, as successor to the lender, commenced an action to enforce certain guarantees given by the former Directors and Officers Soup Kitchen to the lender regarding Soup Kitchen’s defaulted loan (See Note 8). 

On May 31, 2010, Soup Kitchen filed for bankruptcy.
 
 
19

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)
 
On October 26, 2010, a third party action was filed in this case by the defendants against the Company, certain principals of the Company and other third parties.  The action seeks, among other things, to invalidate the Company’s purchase of assets from Soup Kitchen. The Company is defending this action believing it to be without merit, especially in the light of the facts that (1) an independent appraisal was performed prior to the asset transfer, (2) an additional independent appraisal was performed by BDO in May of 2012 which showed Soup Kitchen had no value, (3) the Company paid $100,000 in cash and guaranteed secured debt in the amount of approximately $3,670,000; and (4) shareholder approval was obtained.   

Soupman, Inc. is one of several defendants in a lawsuit filed by Gourmet Sales and Marketing, LLC (“GSM”) in July 2011.  GSM claims that it is owed sales commissions based upon an August 2009 sales and marketing agreement. Aside from the claim for an accounting, compensatory damages and/or punitive damages are demanded with respect to the other claims. The Company served its answer to the complaint in October 2011, in which they denied the allegations of the complaint with respect to the claims of liability and asserted numerous defenses and affirmative defenses.  The matter is now in the discovery phase of litigation.  In Company counsel’s opinion, the complaint lacks merit as the agreement that forms the basis of GSM’s claims may be invalid and unenforceable, GSM is not owed any money, and the Company believes that punitive damages are without basis.

No assurance can be given as to the ultimate outcome of these actions or its effect on the Company.  If the Company is not successful in its defense of these actions it could have a material adverse effect on its business, as well as current and expected future operations.
 
Note 12 – Going Concern
 
As reflected in the accompanying financial statements, the Company had a net loss of $3,192,708 and net cash used in operations of $1,306,850 for the nine months ended May 31, 2012; and a working capital deficit of $7,616,992 and a stockholders’ deficit of $6,982,681, respectively, at May 31, 2012. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
 
The ability of the Company to continue its operations is dependent on management's plans, which may include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes until such time that funds provided by operations are sufficient to fund working capital requirements.  The Company may need to incur liabilities with certain related parties to sustain the Company’s existence.

The Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives.  The Company believes its current available cash along with anticipated revenues will be insufficient to meet its cash needs for the near future.  There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all.
In response to these problems, management has taken the following actions:
 
·
seeking additional third party debt and/or equity financing, and
·
opening new franchise locations in casinos and airports
 
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
 
 
20

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
May 31, 2012
(Unaudited)
 
Note 13 – Subsequent Events 

(A)  
Debt

In June 2012, the Company issued the following debt:

$197,500, 8% convertible notes;
Maturity dates six to nine months from date of issuance;
37,500, 3 year warrants, exercisable at $1; and
 
These notes  bear interest at the rate of 8% per annum, and mature on and are convertible into shares of our common stock beginning 180 days from the date of its issue at a conversion price of 58% of the average of the lowest three trading prices of our common stock during the ten trading days on the OTCBB proceeding the conversion date. The number of shares issuable upon conversion shall be proportionally adjusted to reflect any stock dividend, split or similar event. We are entitled to prepay the Note:  (i) from the date of the Note until 30 days thereafter at 120% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Note; (ii) 31 days from the date of the Note until 60 days after the issue date at 125% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Note; (iii) 61 days from the date of the Note until 90 days after the issue date at 130% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Notes; (iv) 91 days from the date of the Note until 120 days after the issue date at 135% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Note; (v) 121 days from the date of the Note until 150 days after the issue date at 140% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Note; and (vi) 151 days from the date of the Note until 180 days after the issue date at 150% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Note. We have no right to prepay the Note after 180 days from the issue date of the Note. Unless waived in writing by the holder of the Note, we are prohibited from effecting the conversion of the Note to the extent that as a result of such conversion the holder would beneficially own more than 4.99% in the aggregate of our issued and outstanding common stock immediately after giving effect to the issuance of common stock upon conversion. While the Note is outstanding, the holder is entitled to a reduction in the conversion price if we issue any securities for a per share price less than the conversion price in effect available to the holder.  The Note holder also has a right of first refusal on any offerings with similar terms in amounts under $100,000.
The Company identified conversion features embedded within these convertible notes and warrants. The Company has determined that the features associated with the embedded conversion options and warrants will be accounted for at fair value as a derivative liability. The fair value of these derivative liabilities at the commitment date was $129,948 based on the following assumptions:
 
    Commitment Date  
  Expected dividends  0%  
  Expected volatility   125%  
  Expected term: convertible debt and warrants 0.50-3 years  
  Risk free interest rate
0.15%-0.40%
 
 
(B)  
Equity

In June 13 2012, the Company issued 450,000 shares of common stock to two consultants for services rendered.  The shares had a fair market value of $373,500 ($0.83/share), based upon the quoted closing trading price, on the date of issuance.
 
 
21

 
 
ITEM 2. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited financial statements and notes thereto for the quarter ended May 31, 2012 found in this report. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Where possible, we have tried to identify these forward looking statements by using words such as “anticipate,” “believe,” “intends,” or similar expressions. Our actual results could differ materially from those anticipated by the forward-looking statements due to important factors and risks.
 
Cautionary Note Regarding Forward-Looking Statements
 
This report and other documents that we file with the Securities and Exchange Commission contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions.  Statements that are not historical facts are forward-looking statements.  Words such as “expect,” “outlook,” “forecast,” “would,” “could,” “should,” “project,” “intend,” “plan,” “continue,” “sustain”, “on track”, “believe,” “seek,” “estimate,” “anticipate,” “may,” “assume,” and variations of such words and similar expressions are often used to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are not guarantees of future performance and involve risks, assumptions and uncertainties, including, but not limited to, those described in our reports that we file or furnish with the Securities and Exchange Commission.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements.  Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made.  Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statements after the date they are made, whether as a result of new information, future events, changes in assumptions or otherwise.

General

The following analysis of our consolidated financial condition and results of operations for the quarter ended May 31, 2012 should be read in conjunction with the consolidated financial statements, including footnotes, and other information presented elsewhere in this Quarterly Report on Form 10-Q and the risk factors and the financial statements and the other information set forth in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 30, 2011

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition.

Overview

On December 15, 2010, we entered into a Merger Agreement in which The Original Soupman, Inc. (“OSM”) was merged with and into OSM Merge, Inc. our subsidiary. All the shares of OSM were converted into an aggregate of 14,004,230 shares of our common stock and 1,987,783 shares of our preferred stock.  In addition, principal and interest on $4,673,000 of OSM’s convertible notes were converted into 4,830,256 shares of our common stock.

On January 31, 2011, we reincorporated in Delaware and changed our name from Passport Arts, Inc. to Soupman, Inc. Thereafter, our stock began trading on the OTC-Bulletin Board under the symbol SOUP.

We currently manufacture and sell soup to grocery chains and other outlets and to our franchised restaurants under the brand name “The Original Soupman”.
 
Our brand is well known throughout the industry and our Chicken Vegetable soup has been rated as the best chicken soup in America by Consumer Reports.  We are focusing on having our soups displayed in a new shelf stable tetra recart package that will be located next to our competitors’ canned soup products in the soup aisles in grocery and club stores where most retail soup purchases are made. We have never sold any canned soup. Currently our soups can be found in the frozen food aisle. The Tetra Cart packaging will allow us to sell products in grocery stores that we previously could not sell such as our best selling soup in our restaurants, Lobster Bisque.  We believe that many consumers have had some difficulty finding our retail product in their local frozen foods section, but that with the shelf-stable, Tetra Recart it will be easy for a consumer to find our famous soups from Al Yeganeh. We also have franchised restaurants in specifically designated heavy traffic locations such as casinos, airports, tourist locations and other travel destinations. Although our primary focus is on retail organic growth; we will also consider retail and other acquisitions that provide unique opportunities and fit our business objectives.  
 
 
22

 
 
Results of Operations – Nine Months ended May 31, 2012

The following table summarizes our operating results for the nine months ended May 31, 2012 and May 31, 2011. Upon the consummation or our merger in December 2010, we changed our primary line of business and commenced operations as a public company engaged in the manufacture and sale of soup. Prior thereto we were engaged in a different line of business, the sale of art. Therefore, any comparisons between our three month numbers for the nine months ended May 31, 2012 and the nine months ended May 31, 2011 would not be meaningful to the reader on either a quantitative or qualitative basis. In addition, it should be noted that the sale of soup is seasonal and we experience a higher volume of sales during the period from October until March.  

The following table summarizes our operating results for the nine months ended May 31, 2012 and, 2011:
 
   
May 31, 2012
   
May 31, 2011
 
Revenue
  $ 1,304,350     $ 760,451  
Cost of Sales
    943,266       503,396  
Gross Profit
    361,084       257,055  
Operating Expenses
   
2,992,504
       4,346,012  
Other Income (Expense)
   
(561,288
)     (34,876 )
Net Loss
  $ (3,192,708 )   $ (4,123,833 )
 
For the Nine months ended May 31, 2012 soup sales accounted for 88% of overall revenues, and franchise revenues accounted for the remaining 12%.
 
Net loss for the nine months ended May 31, 2012 was $3,192,708 or $0.11 per share (basic and diluted).  The net loss decrease of $931,125 from the nine months ended May 31, 2011 was attributable to the increase in revenue and the reduction of operating expenses.
 
Cost of Sales as a percent of soup revenues was 72% for the nine months ended May 31, 2012.  This includes the disposition of packaging from the old frozen product of $21,527 as we move from the frozen food aisle to the soup aisle in the new tetra recart containers and some discounted selling prices as we burn through the remaining frozen soup inventory.  This percentage is also affected by sales promotional items of $19,997 which has been netted against soup revenues.
 
Operating expenses for the nine months ended May 31, 2012 were $2,992,504 and as a percentage of total revenue was 229% for the period. This is a decrease of 27% from the prior year and we continue to work to reduce costs.  These operating expenses for the nine months ended May 31,  2012 include $783,512 of expenses for the issuance of shares and stock options; $797,832 for payroll, payroll taxes and benefits; $1,104,529 in professional fees which include legal, accounting, strategic planning, public relations and branding and marketing;  $168,750 for royalties; $171,527 for promotion and trade shows and $82,957 for insurance and $68,155 for bad debt expense.
 
 
Results of Operations – Three Months ended May 31, 2012
 
The following table summarizes our operating results for the three months ended May 31, 2012 and 2011:
 
   
May 31, 2012
   
May 31, 2011
 
Revenue
  $ 361,576     $ 411,654  
Cost of Sales
    247,680       312,997  
Gross Profit
    113,896       98,657  
Operating Expenses
   
894,357
      1,754,362  
Other Income (Expense)
   
(424,887
)     24,490  
Net Loss
  $ (1,205,348 )   $ (1,631,215 )
 
 
23

 
 
For the three months ended May 31, 2012 soup sales accounted for 87% of overall revenues, and franchise revenues accounted for the remaining 13%.
 
Net loss for the three months ended May 31, 2012 was $1,205,348 or $0.04 per share (basic and diluted).  The net loss decrease of $425,867 or 26% from the three months ended May 31, 2011 was attributable to the reduction of operating expenses which included expenses for issuances of shares and stock options of $926,462 in 2011 compared to $85,901 in 2012.
 
Cost of Sales as a percent of soup revenues was 78% for the three months ended May 31, 2012.  This includes some discounted selling prices as we burn through the remaining frozen soup inventory while moving to the tetra recart which is now sold the soup aisle.  This percentage is also affected by sales promotional items of $2,955 which has been netted against soup revenues.
 
Operating expenses for the three months ended May 31, 2012 were $894,357 and as a percentage of total revenue was 247% for the period.  These operating expenses for the three months ended May 31, 2012 includes the $85,901 of expenses for the issuance of shares and stock options; $278,998 for payroll, payroll taxes and benefits; $157,339 in professional fees which include legal, accounting, strategic planning, public relations and branding and marketing;  $56,250 for royalties; $79,543 for promotion and trade shows, a reserve for bad debts of $53,000 and $21,220 for insurance.
 
Liquidity and Capital Resources
 
   
As at May 31, 2012
   
As at August 31, 2011
 
Current assets
  $ 267,693     $ 565,426  
Current liabilities
  $ 7,884,685     $ 6,015,960  
Working capital (deficit)
  $ (7,616,992 )   $ (5,450,534 )
 
At May 31, 2012, we had cash of $16,159 as compared to $343,927 at August 31, 2011.  The working capital deficit at May 31, 2012 of $7,616,992 and as of August 31, 2011 of $5,450,534 or an increase of $2,166,458 is attributable to an increase in accounts payable and accrued expenses and an increase in convertible notes and related derivative liabilities.  These have been partially offset by a decrease in notes receivable from franchisees. It should also be noted that included in the current liabilities as at May 31, 2012 are the current liabilities of Soup Kitchen International, Inc. in the amount of $4,997,020 which accounts for that amount of the total working capital deficit as that company has no assets and is included in the Soupman, Inc. statements (see note 3 Variable Interest Entities to the Soupman, Inc. and subsidiaries and Soup Kitchen International, Inc. Financial Statements).
 
For the nine months ended May 31, 2012 cash used in operating activities was $1,306,850 as compared to $1,459,022 for the nine months ended May 31, 2011.  Our primary uses of cash from operating activities for the nine months ended May 31, 2012 were losses from operations offset by increases in share based payments, stock issued for services, amortization of debt discount and an increase in accounts payable and accrued expenses.
 
Net cash provided by investing activities for the nine months ended May 31, 2012 was $74,716, predominantly from the cash repaid by franchisees compared to $555,657 last year which predominately came from the cash acquired in the merger.
 
Net cash provided by financing activities for nine months ended May 31, 2012 was $904,366 which includes proceeds from notes of $875,250 and $100,000 from the exercise of stock options offset by repayment of debt of $79,884.  For the nine months ended May 31, 2011, net cash provided by financing activities was $912,675 which was from the sale of common stock of $984,000 offset by the repayment of debt of $71,325.
 
Current and Future Financing Needs
 
We have incurred a stockholders’ deficit of $ 6,982,681 through May 31, 2012 and have incurred a net loss of $3,192,708 for the nine months ended May 31, 2012.  We have incurred negative cash flow from operations since inception and have primarily financed our operations through the sale of debt and equity. At May 31, 2012, we had short term debt of $4,519,462 and a working capital deficit of $7,613,577.  These factors raise substantial doubt about our ability to continue as a going concern.  Our debt in the amount of $4,519,462 includes a guarantee of Soup Kitchen International Inc’s debt in the amount of $3,802,917 all of which is past due. (See Note 3 of the Financial Statements Variable Interest Entities). We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including the launch of our new shelf stable tetra recart packaging, our advertising and marketing campaign, and fees in connection with regulatory compliance and corporate governance and to that end, we are in a capital raise mode at the time of this filing. The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. If our anticipated sales for the next few months do not meet our expectations, our existing resources will not be sufficient to meet our cash flow requirements. Furthermore, if our expenses exceed our anticipations, we will need additional funds to implement our business plan. We will not be able to fully establish our business if we do not have adequate working capital so we will need to raise additional funds, whether through a stock offering or otherwise.
 
We are obligated to pay the minority stockholder of Kiosk a royalty equal to 3% of the gross sales of all of its soup on the first $50,000,000 of gross sales, 2% on gross sales between $50,000,000 and $75,000,000, and 1% on gross sales thereafter.  We are required to pay a minimum of $225,000 per year if the gross sales threshold is not met.  Payments are due quarterly for ongoing services through June 30, 2014. The annual payments are as follows:
 
Years Ending August 31,
 
2012 (remaining 3 months)
 
 $
56,250
 
2013
   
225,000
 
2014
   
187,500
 
Total
 
$
468,750
 
  
At May 31, 2012 our debt includes the following:
 
Interest Rate
 
Maturity Date
 
Monthly Installments
 
Collateral
 
Amount
 
 8%  
June 2012 – November 2012
 
None
 
None
  $ 865,250  
None
 
Due on demand
 
None
 
None
    37,500  
Prime + 3%, Prime + 4% and 6%
 
Due on Demand
 
None
 
All assets of the Company
    2,003,631  
None
 
Due on demand
 
None
 
All assets of the Company
    290,902  
 7%  
Due on demand
 
None
 
All assets of the Company
    1,508,384  
None
 
Due on demand
 
None
 
None
    10,000  
                $ 4,715,667  
 
 
24

 
 
Item 3. 
Quantitative and Qualitative Disclosures About Market Risk.
  
Not applicable.
 
Item 4. 
Controls and Procedures.
 
Disclosure Controls and Procedures
 
The Company has adopted and maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Form 10-Q, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. As required under Exchange Act Rule 13a-15, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
 
Changes in Internal Control

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended May 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
25

 
  
PART II - OTHER INFORMATION
  
Item 1. 
Legal Proceedings.
 
On September 21, 2009, Penny Fern Hart, a former Chairman of the Board of Soup Kitchen International, Inc. (“SKI”), as successor to the Commerce Bank loan to SKI, commenced an action in N.Y. State Supreme Court, Case Index # 602538/09, against John Bello, Maj-Britt Rosenbaum and William McCreery (the “Defendants”) to enforce certain guarantees given by the Defendants to Commerce Bank regarding SKI’s defaulted loan.  On October 26, 2010, a third party action was filed in this case by the Defendants against OSM, certain principals of OSM and other third parties.  The action seeks, among other things, to invalidate OSM’s purchase of assets from SKI. On May 2, 2011, a proceeding was brought against the Company, certain principals of the Company and other third parties by the bankruptcy trustee for SKI seeking to avoid and/or recover the value of assets of SKI, re-alleging various claims made in the October 26, 2010 action. On October 22, 2011, the presiding judge in the bankruptcy action stayed the remaining third-party claims, in the Penny Fern Hart matter, and ordered all the parties to confer and submit a discovery schedule for the bankruptcy action. The Company intends to vigorously defend these actions believing them to be wholly without merit, especially in the light of the fact that an independent appraisal was performed prior to the asset transfer to OSM which completely supported the fairness of the asset transfer to OSM in which OSM paid $100,000 in cash, guaranteed secured debt in the amount of $3,670,000, and has since paid $352,907 in respect of SKI payables (including $256,205 owed to Al Yeganeh) and an additional independent appraisal was performed by BDO in May of 2012 which showed SKI had no value. In addition, there was SKI shareholder approval obtained in connection with the transaction.  No assurance, however, can be given as to the ultimate outcome of these actions or their effect on the Company.  If the Company is not successful in its defense of these actions it could have a material adverse effect on its business and operations.

Soupman, Inc. is one of several defendants in a lawsuit filed by plaintiff Gourmet Sales and Marketing, LLC (“GSM”) in the Supreme Court of the State of New York, County of New York on or about July 18, 2011.  Plaintiff GSM claims that it is owed sales commissions based upon an August 2009 sales and marketing agreement.  The complaint contains five causes of action.  Aside from the claim for an accounting, a material amount of compensatory damages and/or punitive damages are demanded with respect to the other claims.  Defendants served their answer to the complaint on or about October 31, 2011, in which they denied the allegations of the complaint with respect to the claims of liability and asserted numerous defenses and affirmative defenses.  The matter is now in discovery phase of litigation.  In counsel’s opinion the complaint lacks merit as the agreement that forms the basis of plaintiff’s claims is invalid and unenforceable, plaintiff is not owed any money, and there is absolutely no basis for a finding of willful conduct that is necessary to assess punitive damages.  It is anticipated the matter will be resolved by means of motion practice at the appropriate time. If the Company is not successful in its defense of this action it could have a material adverse effect on its business and operations.
 
Item 2. 
Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended May 31, 2012, we issued 70,000 shares of common stock for services rendered, having an aggregate fair market value of $45,500 based upon the quoted closing trading prices on the issue dates. These securities were issued pursuant to Section 4(2) of the Securities Act. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The holders were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.

During the three months ended May 31, 2012, we issued 8% convertible notes together with a three year warrant exercisable for 45,312 shares of common stock at a per share price of  $1.00 for aggregate proceeds of $181,250. These securities were issued pursuant to Section 4(2) of the Securities Act of 1933 (the “Securities Act”) promulgated thereunder and are convertible under certain circumstances into the next equity round of financing effected by the Company at the price offered in that round. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.
 
On March 21, 2012, we entered into a Securities Purchase Agreement with an accredited investor for the sale of a promissory note in the aggregate principal amount of $53,500 (the “Note”). The Note bears interest at the rate of 8% per annum, matures on December 21, 2012 and is convertible into shares of our common stock beginning 180 days from the date of its issue at a conversion price of 58% of the average of the lowest three trading prices of our common stock during the ten trading days on the OTCBB proceeding the conversion date. These securities were issued pursuant to section 4(2) of the Securities Act.  The holder represented their intention to acquire the securities for investment only and not with a view towards distribution.  The holder was given adequate information about us to make an informed investment decision.  We did not engage in any general solicitation or advertising
 
 
26

 
 
Item 3. 
Defaults upon Senior Securities.
 
None.
 
Item 4. 
Mine Safety Disclosure
 
Item 5. 
Other Information.
 
None.
  
Item 6. 
Exhibits.
 
Exhibit
 
Number
Description
   
31.1*
Certification of the Principal Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2*
Certification of the Principal Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1*
Certification of the Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
   
32.2*
Certification of the Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
     
101.INS**
XBRL Instance
 
     
101.XSD**
XBRL Schema
 
     
101.PRE**
XBRL Presentation
 
     
101.CAL**
XBRL Calculation
 
     
101.DEF**
XBRL Definition
 
     
101.LAB**
XBRL Label
 
 
*       Filed herewith
**     Filed herewith electronically
 
 
27

 
   
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
SOUPMAN, INC.
     
Date: July 16, 2012
By:
/s/  Arnold Casale
   
Arnold Casale
   
Chief Executive Officer and Director
(Principal Executive Officer)
 
 
 
 
 
 
27