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SOUP > SEC Filings for SOUP > Form 10-K on 14-Nov-2013All Recent SEC Filings

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Form 10-K for SOUPMAN, INC.


14-Nov-2013

Annual Report


Item 7. 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 audited consolidated financial statements and notes thereto for the year ended August 31, 2013 found in this report and the risk factors other information set forth in herein or in our Current Reports filed with the Securities and Exchange Commission. 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, including forward-looking information concerning pharmacy sales trends, prescription margins, number and location of new store openings, outcomes of litigation, and the level of capital expenditures, industry trends, demographic trends, growth strategies, financial results, cost reduction initiatives, acquisition synergies, regulatory approvals, and competitive strengths. 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.

Overview

Our Company manufactures and sells soups under the "Original Soupman" brand. We sell our soups in a new innovative Tetra Recart shelf stable cartons in the canned soup aisle where most "heat & serve" retail soup approximately $6 billion in purchases are made in the US each year. We believe that with our new shelf-stable Tetra Recart packaging, which allows our soups to be displayed in the canned soup aisle, 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 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.

Results of Operations - Year ended August 31, 2013

The following table summarizes our operating results for the years ended August 31, 2013 and 2012; all amounts have been rounded to the nearest thousandth.

                                                             2013             2012
         Revenue                                         $  2,383,000     $  1,898,000
         Cost of Sales                                      1,987,000        1,502,000
         Gross Profit                                         396,000          396,000
         Operating Expenses                                 4,805,000        5,473,000
         Loss From Operations                              (4,409,000 )     (5,077,000 )
         Other Income (Expense)                            (2,159,000 )     (1,253,000 )
         Net Loss (including non-controlling interest)   $ (6,568,000 )   $ (6,330,000 )


Revenue
Soup sales accounted for approximately 92% and 90% of overall revenue for the years ended August 31, 2013 and 2012, respectively, while franchise revenues accounted for the remaining 8% and 10%, respectively. Our year-over-year revenues increase of approximately 26% was primarily attributable to the continued introduction of our new Tetra Recart line of soups and the soup line sold to the New York City school system.

Our Tetra Recart line of soups accounted for approximately $1,154,000 (48%) of total revenue, while sales to the New York City school system accounted for approximately another $261,000 (11%) of total revenue. Our year-over-year soup sales increased 29%, primarily attributable to a 159% increase in Tetra Recart sales and a 23% increase in sales to the New York City School System. These were offset by a 19% decrease in sales to our franchisees.

Reported revenues are net of slotting fees (a fee charged by supermarkets in order to have the product placed on their shelves) and sales discounts (early payment discounts). Slotting fees for the years ended August 31, 2013 and 2012 were approximately $260,000 and $139,000, respectively, while sales discounts for the same periods were approximately $35,000 and $28,000 respectively.

Cost of Sales
Costs of sales, for the years ended August 31, 2013 and 2012, included freight of approximately $181,000 and $111,000 respectively. Cost of sales represents costs associated with soup sales only; the Company had no cost of sales associated with franchise activities.

Cost of Sales as a percent of soup sales was approximately 91% and 88% for the years ended August 31, 2013 and 2012, respectively. This percentage is negatively impacted by slotting fees and sales discounts, which lowers the reportable revenue and therefore increase our cost of sales percentage. Cost of sales as a percentage of soup sales increased approximately 3% year-over-year, primarily due to a 4% increase in year-over-year slotting fees as a percentage of cost of sales and a 2% increase in freight costs as a percentage of cost of sales. Actual costs of manufacturing our soups (shown as a percentage of total costs of sales) dropped 1% between the years ended August 31, 2012 and 2013. We expect our costs of sales (specifically cost of ingredients, packaging and freight due) to decrease in 2014 as we transition to our packers Maryland location.

Operating Expenses
Operating expenses for the years ended August 31, 2013 and 2012 were approximately $4,805,000 and $5,472,000, respectively, or 184% and 268% of revenue, respectively. Major components of our operating expenses for the year ended August 31, 2013 primarily consisted of approximately $2,043,000 for stock issued for services, approximately $1,179,000 for payroll and payroll related expenses, approximately $656,000 in professional fees, approximately $215,000 for the promotion of our products, $225,000 in royalty fees, approximately $137,000 for business travel and approximately $88,000 in insurance expense.

Other Expenses
Other expenses were approximately $2,159,000 and $1,253,000, respectively, for the years ended August 31, 2013 and 2012. Our year-over-year increase in other expenses of approximately $906,000 was primarily associated with an approximately $759,000 increase in interest expense, an approximately $828,000 change in derivative expense, an approximately $176,000 charge in 2013 for non-payment of debt, offset by an approximately $862,000 gain from the deconsolidation of our variable interest entity.

Net Loss
Our net loss for the year ended August 31, 2013 as compared to the year ended August 31, 2012 increased approximately $238,000 or approximately 4%, primarily due to the many factors discussed above under Revenue, Cost of Sales, Operating Expenses and Other Expenses. Net loss for the year ended August 31, 2013 was approximately $6,568,000 or $0.20 per share (basic and diluted).

There were no unusual or infrequent events or transactions, or significant economic changes that materially affected the amount of reported income or expenses from operations and nor is the Company aware of any known uncertainties that it reasonably expects will have a material impact income or expenses from operations, other than in the normal course of business such as seasonality or as otherwise described in our Annual Report in Part I - Item 1A - Risk Factors.

Liquidity and Capital

The following table summarizes our working capital for the years ended August
31, 2013 and 2012; all amounts have been rounded to the nearest thousandth.

                                                   As of                  As of
                                              August 31, 2013        August 31, 2012
                 Current assets              $         779,000      $         481,000
                 Current liabilities         $      11,564,000      $       8,355,000
                 Working capital (deficit)   $     (10,785,000 )    $      (7,874,000 )


At August 31, 2013, we had cash and cash equivalents of approximately $115,000 as compared to approximately $174,000 at August 31, 2012. Since August 31, 2013, we have raised additional capital of $391,000 through the issuance of notes and sale of common stock. Our year-over-year working capital deficit increased approximately $2.9 million, primarily due to an increase in net debt of $1,392,000 an increase in derivative liabilities associated with the convertible notes payable and warrants of $1,382,000 and an increase in accounts payable and accrued liabilities of approximately $419,000, offset by an increase in inventory of approximately $332,000.

For the year ended August 31, 2013 net cash used in operating activities was approximately $2,256,000 as compared to approximately $1,605,000 for the year ended August 31, 2012. Our primary uses of net cash from operating activities for the year ended August 31, 2013 were losses from operations of approximately $6,568,000 and increases in accounts payable - net of approximately 1,218,000, inventory of approximately $332,000, accounts receivable - net of approximately $129,000, and a non-cash adjustment for the deconsolidation of SKI of approximately $862,000, offset by non cash adjustments to reconcile net loss to net cash of expenses relating to shares issued of approximately $2,402,000, amortization expenses relating to debt of approximately $1,072,000, change in derivative expenses of approximately $474,000 and losses on debt extinguishments of approximately $339,000.

Our primary uses of cash for the year ended August 31, 2012 were losses from operations of approximately $6,330,000 and increases in accounts payable and accrued liabilities of approximately $1,400,000, accounts receivable of approximately $237,000 and a non-cash adjustment for derivative expense of approximately $354,000, offset by non cash adjustments to reconcile net loss to net cash of expenses relating to shares issued of approximately $2,244,000, allowance taken on notes and franchise receivables of approximately $635,000, amortization expenses related to debt of approximately $534,000, losses on debt extinguishments of approximately $341,000 and bad debt expense of approximately $108,000.

Net cash used in investing activities for the year ended August 31, 2013 was approximately $1,000, from advances to franchisees. This compares with net cash used in investing activities of approximately $5,000 for the year ended August 31, 2012 which was primarily from the purchase of property and equipment.

Net cash provided by financing activities for year ended August 31, 2013 was approximately $2,197,000 which included approximately $2,088,000 from the issuance of convertible notes and approximately $410,000 from the sale of common stock offset by approximately $263,000 used for the repayment of debt and approximately $36,000 paid as direct offering costs.

Current and Future Financing Needs

We have incurred a stockholders' deficit of approximately $10,669,000 through August 31, 2013 and have incurred a net loss of approximately $6,568,000 for the year ended August 31, 2013. We have incurred negative cash flow from operations since inception and have primarily financed our operations through the sale of stock and the issuance of notes. At August 31, 2013, we had short term debt of approximately $6,001,000 and a working capital deficit of approximately $10,786,000. These factors raise substantial doubt about our ability to continue as a going concern. The opinion of our independent registered accounting firm for the fiscal year ended August 31, 2013 is unqualified, however the opinion does state that there is substantial doubt as to our ability to continue as a going concern. During the year ended August 31, 2013, we raised approximately $2,497,000 (net of expenses) from the issuance of our common stock and the issuance of notes and since then we have raised an additional $391,000 from the issuance of notes and the issuance of common stock. Our debt of approximately $6,001,000 includes a guarantee of SKI's debt in the amount of approximately $2,991,000; however none of it is past due. 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 Pak, 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. We do not have sufficient cash to operate our business at the current level for the next twelve months and insufficient cash to achieve our business goals. 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 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 9 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.

Critical Accounting Policies

The information required by this section is incorporated herein by reference to the information set forth under the caption "Summary of Significant Accounting Policies" in Note 1 of the Notes to the Consolidated Financial Statements included in "Item 1 - Financial Statements" and is incorporated herein by reference.


Off-Balance Sheet Arrangements

We do not have any unconsolidated special purpose entities and, we do not have significant exposure to any off-balance sheet arrangements. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

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, including forward-looking information concerning pharmacy sales trends, prescription margins, number and location of new store openings, outcomes of litigation, and the level of capital expenditures, industry trends, demographic trends, growth strategies, financial results, cost reduction initiatives, acquisition synergies, regulatory approvals, and competitive strengths. 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.

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