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SOUP > SEC Filings for SOUP > Form 10-Q on 22-Apr-2013All Recent SEC Filings

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Form 10-Q for SOUPMAN, INC.


22-Apr-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following analysis of our consolidated financial condition and results of operations for the quarter ended February 28, 2013 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 December 14, 2012.

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.

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

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, the New York City School System 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.

Our Company manufactures and sells soups under the "Original SoupMan" brand. We sell our soups in a new innovative Tetra-Recart self stable packaging in the canned soup aisle where most "heat & serve" retail soup purchases are made. We believe that with the new, shelf-stable, Tetra-Recart packaging that allows our soups to be displayed in the canned soup aisle, and many consumers will choose the SoupMan's famous soups from Al Yeganeh over the other typical inferior tasting canned soups. We believe we will capture the health conscientious consumers who are aware that recent reports have warned consumers that canned products contain BPA, a known cancer causing agent. Tetra Recart packaging is BPA free and recyclable.

We also have franchised and licensed restaurants in specifically designated heavy traffic locations such as casinos, airports, and other travel destinations including the Mohegan Sun Casino in Connecticut. We sell the Original SoupMan soups in bulk 8 lb. frozen "heat 'n serve" pouches to our franchised and licensed restaurants. The bulk 8 lb. pouches are also used for the Original SoupMan soups and products which we sell to the New York City Public School system.

-13-

Results of Operations - Six Months ended February, 28, 2013

The following table summarizes our operating results for the six months ended
February 28, 2013 and February, 29, 2012.

                                                               February,28,       February 29,
                                                                   2013               2012
Revenue                                                        $   1,409,513      $     943,310
Cost of sales                                                      1,115,996            696,093
Gross profit                                                         293,517            247,217
Operating expenses                                                 2,173,490          2,098,176
Other income (expense)                                              (634,605 )         (136,401 )
Net loss including noncontrolling interest                        (2,514,578 )       (1,987,360 )
Less: net loss attributable to noncontrolling interest               (32,494 )          (40,498 )
Net loss attributable to Soupman                                  (2,482,084 )    $  (1,946,862 )

For the six months ended February 28, 2013 and February 29, 2012, soup sales accounted for 92% and 89% of overall revenues, and franchise revenues accounted for the remaining 8% and 11% respectively. The increase in soup sales of approximately 55% was primarily attributed to the sales of our new shelf stable Tetra Recart carton soups.

Net loss attributable to Soupman for the six months ended February 28, 2013 was $2,482,084, or $0.08 per share (basic and diluted) compared to a loss of $1,946,862 or $0.07 per share (basic and diluted) for the six months ended February 29, 2012. The net loss increase of $535,222 was primarily attributable to an increase in interest expense as a result of higher debt and the effect of derivative expenses from the increase in convertible notes.

Cost of Sales as a percent of soup revenues was 86% for the six months ended February 28, 2013 compared to 83% for the six months ended February 29, 2012. This percentage increase in cost of sales wasnot an increase in our costs of sales; it is, however, directly related to the net effect slotting fees have on reducing revenue.

Operating expenses for the six months ended February 28, 2013 and February 29, 2012 were $2,173,490 and $2,098,176, respectively and as a percentage of total revenue were 154% and 222%, for the respective periods. The operating expenses for the six months ended February 28, 2013 and February 29, 2012 include approximately $729,499 and $465,750 of expenses for the issuance of shares for services and $9,224 and $217,861 for share based payments; approximately $574,111 and $512,551 for payroll, payroll taxes and benefits; $363,146 and $423,688 in professional fees which include legal, accounting, strategic planning, public relations and branding and marketing; $94,887 and $91,980 for promotion; $112,500 for both years for royalties; $40,659 and $3,868 for advertising; and $36,791 and $65,416 for insurance.

Other expenses for the six months ended February 28, 2013 were $634,605 compared to $136,401 for the six months ended February 29, 2012. The increase is primarily due to an increase in interest expense on new convertible notes issued and as a result of the accounting for the derivative value of such debt. We also had costs associated with the issuance of stock in conjunction with the issuance of convertible notes which was charged to other expense.

-14-

Results of Operations - Three Months ended February, 28, 2013

The following table summarizes our operating results for the three months ended
February 28, 2013 and February, 29, 2012.

                                                               February,28,        February 29,
                                                                   2013                2012
Revenue                                                        $     619,239      $      559,367
Cost of sales                                                        582,773             396,447
Gross profit                                                          36,466             162,920
Operating expenses                                                   996,841             833,642
Other income (expense)                                              (335,862 )           (70,445 )
Net loss including noncontrolling interest                        (1,296,237 )          (741,167 )
Less: net loss attributable to noncontrolling interest               (20,584 )           (13,893 )
Net loss attributable to Soupman                                  (1,275,653 )    $     (727,274 )

For the three months ended February 28, 2013 and February 29, 2012, soup sales accounted for 92% and 90% of overall revenues, and franchise revenues accounted for the remaining 8% and 10% respectively. The increase in soup sales of approximately 12% was primarily attributed to the sales of our new shelf stable Tetra Recart carton soups. The sales of $567,887 for the three months ended February 28, 2013 have been reduced by approximately $168,377 for slotting fees paid in accordance with accounting rules.

Net loss attributable to Soupman for the three months ended February 28, 2013 was $1,275,653, or $0.04 per share (basic and diluted) compared to a loss of $727,274 or $0.03 per share (basic and diluted) for the three months ended February 29, 2012. The net loss increase of $548,379 was primarily attributable to slotting fees mentioned above; an increase in stock issued for services and an increase in interest expense as a result of higher debt and the effect of derivative expenses from the increase in convertible notes.

Cost of Sales as a percent of soup revenues was 103% for the three months ended February 28, 2013 compared to 78% for the three months ended February 29, 2012. This increase is attributable to the effect that slotting fees, expenses for the roll out of the new product and promotions has as a result of decreasing revenue for those fees as per accounting rules. Had the slotting fees not been incurred, the cost of sales would have been 79%.

Operating expenses for the three months ended February 28, 2013 and February 29, 2012 were $996,841 and $833,642, respectively and as a percentage of total revenue were 161% and 149%, for the respective periods. The operating expenses for the three months ended February 28, 2013 and February 29, 2012 include approximately $437,167 and $78,223 of expenses for the issuance of shares for services and share based payments; approximately $304,709 and $252,664 for payroll, payroll taxes and benefits; $83,311 and $279,776 in professional fees which include legal, accounting, strategic planning, public relations and branding and marketing; $5,382 and $63,590 for promotion; $56,250 for both years for royalties; and $12,822 and $32,811 for insurance.

Other expenses for the three months ended February 28, 2013 were $335,862 compared to $70,445 for the three months ended February 29, 2012. The increase is primarily due to an increase in interest expense on new convertible notes issued and as a result of the accounting for the derivative value of such debt and costs associated with the issuance of stock in conjunction with the issuance of convertible notes which was charged to other expense.

Liquidity and Capital

                                 As at             As at
                             February 29,,       August 31,
                                 2013               2012
Current assets              $       597,914     $    480,661
Current liabilities         $    10,033,438     $  8,354,784
Working capital (deficit)   $    (9,435,524 )   $ (7,874,123 )

At February 28, 2013, we had cash of $48,701 as compared to $174,315 at August 31, 2012. Our working capital deficit at February 28, 2013 was $9,435,524 as compared to $7,874,123 at August 31, 2012. The increase of $1,561,401 is attributable primarily to increases in accounts payable and accrued expenses and convertible debt and a decrease in accounts receivable. These were partially offset by increases in inventory and prepaid expenses. It should also be noted that included in the current liabilities as at February 28, 2013 are the current liabilities in the amount of $4,978,625 of Soup Kitchen International, Inc. a company not owned by us but included, for accounting purposes, in the financial statements as a "variable interest entity", which negatively impacts the total working capital deficit shown above (see note 3 Variable Interest Entities to the Soupman, Inc. and subsidiaries and Soup Kitchen International, Inc. Financial Statements).

For the six months ended February 28, 2013 cash used in operating activities was $619,209 as compared to $845,212 for the six months ended February 29, 2012. Our primary uses of cash from operating activities for the six months ended February 28, 2013 were losses from operations and an increase in inventory offset by increases in stock issued for services, amortization of dent discount and debt issue costs and increases in accounts payable and accrued expenses.

-15-

Net cash used in investing activities for the six months ended February 28, 2013 was $41,925, which is a result of an increase in due from franchisees.

Net cash provided by financing activities for six months ended February 28,, 2013 was $535,520 which includes proceeds from the issuance of convertible notes of $672,500, debt extinguishment of $154,942 which were offset by repayment of debt of $100,500.

Current and Future Financing Needs

We have incurred a stockholders' deficit of $9,164,570 through February 28,, 2013 and have incurred a net loss of $2,514,578 for the six months ended February28, 2013. We have incurred negative cash flow from operations since inception and have primarily financed our operations through the sale of stock and convertible notes. At February 28,, 2013, we had debt of $5,149,273 and a working capital deficit of $9,435,524. These factors raise substantial doubt about our ability to continue as a going concern. Our debt in the amount of $5,149,273 includes a guarantee of Soup Kitchen International Inc's debt in the amount of $2,990,897 all of which is past due. See Note 8 of the Notes to Consolidated Financial Statements included in the report. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including the promotion of our new shelf stable tetra recant packaging, our advertising and marketing campaign, and fees in connection with regulatory compliance and corporate governance. 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 an offering of our securities 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,
2013 (remaining 6 months)    $ 112,500
2014                           187,500
Total                          300,000

We are currently seeking additional funding from investors as well as an investment bank for an operating line of credit secured by receivables and inventory. In 2013, we raised $407,500 from the issuance of two convertible notes, which we believe will be sufficient to support our operations for the next few months. While we will require approximately $6,000,000 to implement our full business strategy, we believe that if we are able to raise no less than $1,500,000, it will be sufficient to support our operations for the next 12 months. If we are unable to raise the entire $6,000,000, we will be forced to reduce our marketing and promotion efforts unless current sales increase enough to support implementing our full business plan. Due to the fact that we use co-packers to manufacture our products, have no bricks and mortar, rent very modest space and only have 10 full time employees, our fixed costs are minimal and will remain unchanged regardless of how much money we are able to raise.

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