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SOUP > SEC Filings for SOUP > Form 10-Q on 18-Jul-2013All Recent SEC Filings

Show all filings for SOUPMAN, INC.

Form 10-Q for SOUPMAN, INC.


18-Jul-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 May 31, 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 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 (box) shelf stable packaging in the canned soup aisle where most "heat & serve" retail soup purchases are made. The introduction of the new shelf-stable Tetra-Recart packaging has allowed us to sell our soups in the canned soup aisle of grocery stores, which we believe will dramatically increase our presence in grocery stores and thus increase sales. Previously, because of packaging restrictions, our soups were sold only in the frozen foods section.

We believe consumers will choose the SoupMan's famous soups from Al Yeganeh over the other typical inferior tasting canned soups. We also 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 free of BPA and recyclable.

We have also franchised and licensed restaurants in specifically designated heavy-traffic locations such as casinos, airports and other travel destinations such as 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 and the City University of New York (CUNY). We also recently launched a food truck franchise program, which allows operators to secure a franchise from us at a comparatively low up-front entry fee ($15,000) plus the cost of the truck and will be able change locations frequently and avoid the rental expense typically associated with a "bricks and mortar" location. We believe that the truck program will only help to grow the retail tetra business as it will allow us to get more guests to try our soups.


Results of Operations - Nine Months ended May 31, 2013

The following table summarizes our operating results for the nine months ended
May 31, 2013 and 2012.

                                                                2013              2012
Revenue                                                    $    1,905,667     $   1,304,350
Cost of sales                                                   1,503,594           943,266
Gross profit                                                      402,073           361,084
Operating expenses                                              3,786,816         2,992,504
Other income (expense)                                            324,867         (561,288)
Net loss including non-controlling interest                   (3,059,876)       (3,192,708)
Less: net loss attributable to non-controlling interest         (56,795)           (78,132)
Net loss attributable to Soupman                            $ (3,003,081)     $ (3,114,576)

For the nine months ended May 31, 2013 and 2012, respectively, soup sales accounted for 92% and 89% of overall sales; franchise sales accounted for the remaining 8% and 11%, respectively. Our year-over-year increase in soup sales of approximately 52% was primarily attributed to the sales of our new shelf stable Tetra Recart carton soups. Pursuant to generally accepted accounting principles, slotting fees (which are fees paid to some retail supermarket customers in connection with the initial set-up of their account with us) are netted against sales (i.e. reducing sales) and are not recorded as a cost of sales. Had slotting fees of $220,262 and $19,996 for the nine months ended May 31, 2013 and 2012, respectively, not existed, our revenue would have been $2,125,929 and $1,324,346, respectively.

Cost of Sales as a percent of revenues was 79% for the nine months ended May 31, 2013 compared to 82% for the nine months ended May 31, 2012; however, our cost of sales as a percentage of sales was negatively affected by slotting fees, because, as stated above, revenue is net of slotting fees. The increase in cost of sales as a percentage of sales was primarily the result of the effect of slotting fees. Excluding the effect of slotting fees, our cost of sales as a percent of revenue would have been 76% for the nine months ended May 31, 2013 compared to 81% for 2012.

Operating expenses for the nine months ended May 31, 2013 and 2012 were $3,786,816 and $2,992,504, respectively and as a percentage of total revenue were 198% and 229%, for each respective periods. Our operating expenses for the nine months ended May 31, 2013 as compared to the nine months ended May 31, 2012 include, respectively, approximately $1,600,000 and $521,000 of expenses for the issuance of shares for services and $14,000 and $262,000 for share based payments; approximately $806,000 and $798,000 for payroll, payroll taxes and benefits; $578,000 and $584,000 in professional fees which include legal, accounting, strategic planning, public relations and branding and marketing; $108,000 and $172,000 for promotion; $169,000 for both years for royalties; $45,000 and $16,000 for advertising; and $64,000 and $83,000 for insurance.

Other income (expense) for the nine months ended May 31 2013 was $324,867 compared to ($561,288) for the nine months ended May 31, 2012. The increase is primarily a result of the deconsolidation of a VIE and income recognized as the change in fair value of derivative liabilities, offset by 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.

Net loss attributable to Soupman for the nine months ended May 31, 2013 was $3,003,081, or $0.09 per share (basic and diluted) compared to a net loss of $3,114,576 or $0.11 per share (basic and diluted) for the nine months ended May 31, 2012.


Results of Operations - Three Months ended May 31, 2013

The following table summarizes our operating results for the three months ended
May 31, 2013 and 2012.

                                                             May 31,           May 31
                                                               2013             2012
Revenue                                                    $    496,154     $    361,576
Cost of sales                                                   387,598          247,680
Gross profit                                                    108,556          113,896
Operating expenses                                            1,613,326          894,357
Other income (expense)                                          959,472        (424,887)
Net loss including noncontrolling interest                    (545,298)       (1,205,348 )
Less: net loss attributable to noncontrolling interest         (24,301)          (35,661 )
Net loss attributable to Soupman                            $ (520,997)     $ (1,169,687 )

For the three months ended May 31, 2013 and 2012, soup sales accounted for 91% and 87% of overall revenues, and franchise sales accounted for the remaining 9% and 13% respectively. Our year-over-year increase in soup sales of approximately 44% was primarily attributed to the sales of our new shelf stable Tetra Recart carton soups. Pursuant to generally accepted accounting principles, slotting fees (which are fees paid to some retail supermarket customers in connection with the initial set-up of their account with us) are netted against sales (i.e. reducing sales) and are not recorded as a cost of sales. Had the slotting fees of $34,187 and $2,954 for the three months ended May 31, 2013 and 2012, respectively not existed, our revenue would have been $530,341 and $364,530, respectively.

Cost of Sales as a percent of revenues was 86% for the three months ended May 31, 2013 compared to 78% for the three months ended May 31, 2012; however, our cost of sales as a percentage of sales was affected by slotting fees, because, as stated above, revenue is net of slotting fees. The increase in cost of sales as a percentage of sales was primarily the result of the effect slotting fees. Excluding the effect of slotting fees, our cost of sales as a percent of revenue would have been 79% for the three months ended May 31, 2013 compared to 77% for 2012.

Operating expenses for the three months ended May 31, 2013 and 2012 were $1,613,326 and $894,357, respectively and as a percentage of total revenue were 325% and 247%, for each respective periods. Our operating expenses for the three months ended May 31, 2013 as compared to the nine months ended May 31, 2012 include, respectively, approximately $857,000 and $55,400 of expenses for the issuance of shares for services and $4,700 and $44,400 for share based payments;, approximately $232,000 and $279,000 for payroll, payroll taxes and benefits; $172,000 and $157,000 in professional fees which include legal, accounting, strategic planning, public relations and branding and marketing; $9,000 and $80,000 for promotion; $56,250 for both years for royalties; and $27,000 and $21,000 for insurance.

Other income (expense) for the three months ended May 31, 2013 was $959,472 compared to ($424,887) for the three months ended May 31, 2012. The increase is primarily a result of the deconsolidation of the VIE and change in fair value of derivative liabilities, offset an increase in interest expense on new convertible notes issued and as a result of the accounting for the derivative value of such debt.

Net loss attributable to Soupman for the three months ended May 31, 2013 was $520,997, or $0.02 per share (basic and diluted) compared to a loss of $1,169,687 or $0.04 per share (basic and diluted) for the three months ended May 31, 2012.

Liquidity and Capital

                              May 31,         August 31,
                                2013             2012
Current assets              $    618,967     $    480,661
Current liabilities            9,714,222        8,354,784
Working capital (deficit)   $ (9,095,255 )   $ (7,874,123 )

At May 31, 2013, we had cash of $29,260 as compared to $174,315 at August 31, 2012. Our working capital deficit at May 31, 2013 was $9,095,255 as compared to a deficit of $7,874,123 at August 31, 2012. The increase of $1,221,132 is primarily attributable to increases in convertible debt and derivative liabilities, and a decrease in accounts receivable, offset by increases in inventory and a decrease on overall cash.

For the nine months ended May 31 2013 cash used in operating activities was $1,333,121 as compared to $1,275,306 for the nine months ended May 31, 2012. Our primary uses of cash from operating activities for the nine months ended May 31, 2013 were losses from operations, change in fair value of derivatives and an increase in inventory offset by increases in stock issued for services, amortization of debt discount and debt issue costs and increases in accounts payable and accrued expenses.


Net cash used in investing activities for the nine months ended May 31, 2013 was $75,149 compared to cash provided by investing activities for the nine months ended May 31, 2012 of $43,172. The use of cash is a result of an increase in due from franchisees.

Net cash provided by financing activities for nine months ended May 31, 2013 was $1,263,215 that includes proceeds from the issuance of convertible notes of $1,569,500, which were offset by repayment of debt of $296,805. This compares to net cash provided by financing for the nine months ended May 31, 2012 in the amount of $904,366 which included proceeds from the issue of convertible notes of $875,250, the exercise of common stock options of $100,000 which were offset by the repayment of debt of $70,884.

Current and Future Financing Needs

We have incurred a stockholders' deficit of $8,847,429 through May 31, 2013 2013 and have incurred a net loss of $3,003,081 for the nine months ended May 31, 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 May 31, 2013, we had net debt of $5,564,056 of which $2,510,652 is in default and a working capital deficit of $9,095,255. These factors raise substantial doubt about our ability to continue as a going concern. Our net debt in the amount of $5,564,056 includes a guarantee of Soup Kitchen International, Inc's debt in the amount of $2,990,897 all of which is past due from when we purchased their assets. 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 Recart 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)    $  56,250
2014                           187,500
Total                       $  243,750

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. While we believe 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 and potentially the size of our operations as well, unless current sales increase enough to support implementing our full business plan. We believe that at $6,000,000 in sales, our operations would be self-sustaining and cash flow positive. 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, many of our fixed costs are minimal and will remain unchanged regardless of how much money we are able to raise. If we are forced to reduce our marketing and promotion efforts and/or size of our operations because we are unable to raise the entire $6,000,000 and current sales do not increase enough to support implementing our full business plan, our revenues will likely be less than had we been able to implement our full program, and as a direct result our income may suffer, and may not be sufficient to cover our negative cash flow, negatively affecting our liquidity.

Following mediation, we have also entered into a settlement agreement in connection with the Soup Kitchen litigation described in note 8 above, in which the parties have agreed to settle the action against the Company for $950,000, of which $350,000 is payable by the Company and $600,000 is payable by the D&O insurance carrier. In connection with the settlement agreement, OSM will be released from approximately $300,000 in secured debt which OSM had guaranteed in connection with its purchase of the assets of Soup Kitchen. As a result, the expense of the settlement to the Company will not be significant; however, its effect on the Company's immediate cash position, once paid, is expected to be significant.

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