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EX-32.2 - CERTIFICATION OF CFO - SOUPMAN, INC.f10q051132ii_soupman.htm
EX-32.1 - CERTIFICATION OF CEO - SOUPMAN, INC.f10q0511ex32i_soupman.htm
EX-31.1 - CERTIFICATION OF CEO - SOUPMAN, INC.f10q0511ex31i_soupman.htm
EX-31.2 - CERTIFICATION OF CFO - SOUPMAN, INC.f10q0511ex31ii_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, 2011
 
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  o       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
¨
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 14, 2011 was 25,472,084.
 
 
 

 

PART I - FINANCIAL INFORMATION
  
Item 1. Financial Statements.
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Consolidated Balance Sheets
 
   
May 31,
2011
   
August 31,
2010
 
   
(Unaudited)
       
             
Assets
           
             
Current Assets
           
Cash
  $ 9,861     $ 551  
Accounts receivable - net
    240,597       -  
Accounts receivable - Related party
    12,167          
Note receivable - Related party
    22,037       -  
Prepaid expenses
    10,772       -  
Total Current Assets
    295,434       551  
                 
Property and equipment  - net
    40,127       -  
                 
Other Assets
               
Due from franchisees
    41,232       -  
Due from franchisees - related party
    442,309          
Note receivable - Related party
    180,238       -  
Intangible assets - net
    66,399       -  
Security deposits
    4,800       -  
Total Other Assets
    734,978       -  
                 
    $ 1,070,539     $ 551  
                 
                 
Liabilities and Stockholders' Deficit
               
                 
Current Liabilities
               
Accounts payable and accrued liabilities
  $ 2,333,731     $ 28,711  
Debt
    3,724,442       63,873  
Deferred franchise revenue
    118,750       -  
Total Current Liabilities
    6,176,923       92,584  
Stockholders' Deficit
               
Preferred stock, par value $0.001; 25,000,000 shares authorized, 1,987,783 and none issued and outstanding
    1,988       -  
Common stock, par value $0.001; 75,000,000 shares authorized
 25,172,084 and 3,893,600 issued; 24,672,084 and 3,893,600 outstanding
    24,672       3,894  
Additional paid in capital
    (902,153 )     11,131  
Accumulated deficit
    (4,230,891 )     (107,058 )
Total Stockholders' Deficit
    (5,106,384 )     (92,033 )
                 
Total Liabilities and Stockholders' Deficit
  $ 1,070,539     $ 551  

The Accompanying Notes are an Integral Part of these Financial Statements
 
2

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Consolidated Statements of Operations
(Unaudited)
 
   
Three Months ended May 31,
   
Nine Months Ended May 31,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues
                       
Soup sales - net
 
$
367,075
   
$
4,351
   
$
665,433
   
$
10,141
 
Franchise royalty income
   
44,579
     
-
     
95,018
     
-
 
Total revenues
   
411,654
     
4,351
     
760,451
     
10,141
 
                                 
Cost of sales
   
312,997
     
1,776
     
503,396
     
4,766
 
                                 
Gross profit
   
98,657
     
2,575
     
257,055
     
5,375
 
                                 
General and administrative expenses
   
1,698,112
     
9,134
     
4,237,626
     
45,333
 
                                 
Loss from operations
   
(1,599,455
)
   
(6,559
)
   
(3,980,571
)
   
(39,958
)
                                 
Other income (expense)
                               
Royalty expense
   
(56,250
)
   
-
     
(108,386
)
   
-
 
Other income
   
90,645
             
90,645
         
Interest expense - net
   
(66,155
)
   
-
     
(125,521
)
   
-
 
Total other expense - net
   
(31,760
)
   
-
     
(143,262
)
   
-
 
                                 
Net loss
 
$
(1,631,215
)
 
$
(6,559
)
 
$
(4,123,833
)
 
$
(39,958
)
                                 
Net loss per common share  - basic and diluted
 
$
(0.07
)
 
$
(0.00
)
 
$
(0.26
)
 
$
(0.01
)
                                 
Weighted average number of common shares outstanding  during the period - basic and diluted
   
24,287,350
     
3,893,500
     
16,016,013
     
3,893,500
 
 
The Accompanying Notes are an Integral Part of these Financial Statements
 
3

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Consolidated Statement of Stockholders'Deficit
Nine months ended May 31, 2011
(Unaudited)
 
   
Preferred Stock
$0.001 Par Value
   
Common Stock
$0.001 Par Value
     
Additional
Paid In
    Accumulated    
Total
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Deficit
 
                                           
Balance, August 31, 2010
    -     $ -       3,893,600     $ 3,894     $ 11,131     $ (107,058 )   $ (92,033 )
                                                         
Preferred and common stock issued in merger
    1,987,783       1,988       14,004,230       14,004       (15,992 )     -       -  
                                                         
Convertible debt and accrued interest exchanged for stock in merger
    -               4,830,254       4,830       4,825,424       -       4,830,254  
                                                         
Forgiveness of note receivable - related party - in merger
    -       -       -       -       (386,354 )     -       (386,354 )
                                                         
Debt forgiveness - related party - in merger
    -       -       -       -       106,698       -       106,698  
                                                         
Net equity of subsidiaries acquired in merger
    -       -       -       -       (8,951,275 )     -       (8,951,275 )
                                                         
Issuance of common stock for cash and warrants ($1/share)
    -       -       984,000       984       983,016       -       984,000  
                                                         
Issuance of common stock for services ($2.25/share)
    -       -       560,000       560       1,259,440       -       1,260,000  
                                                         
Issuance of common stock for services ($2.15/share)
    -       -       400,000       400       859,600       -       860,000  
                                                         
Share based payment
    -       -       -       -       406,159       -       406,159  
                                                         
Net loss
    -       -       -       -       -       (4,123,833 )     (4,123,833 )
Balance, May 31, 2011
    1,987,783     $ 1,988       24,672,084     $ 24,672     $ (902,153 )   $ (4,230,891 )   $ (5,106,384 )
 
The Accompanying Notes are an Integral Part of these Financial Statements
 
4

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Statements of Cash Flows
(Unaudited)
 
   
Nine Months Ended May 31,
 
   
2011
   
2010
 
Cash Flows From Operating Activities:
           
Net loss
  $ (4,123,833 )   $ (39,958 )
Adjustments to reconcile net loss to net cash used in operating activities
         
Recognition of stock-based compensation
    406,159          
Recognition of stock issued for services
    2,120,000       -  
Amortization of intangibles
    14,769       -  
Depreciation
    18,196       -  
Changes in operating assets and liabilities:
               
Accounts receivable - net
    216,729       -  
Accounts receivable - related party
    (12,167 )        
Note receivable
    (16,132 )     -  
Due from franchisees
    119,781       -  
Prepaid expenses
    (38,763 )     2,000  
Accounts payable and accrued liabilities
    (163,761 )     4,393  
Net Cash Used in Operating Activities
    (1,459,022 )     (33,565 )
                 
Cash Flows From Investing Activities:
               
Cash acquired in merger
    582,590       -  
Purchase of property and equipment
    (26,933 )     -  
Net Cash Provided by Investing Activities
    555,657       -  
                 
Cash Flows From Financing Activities:
               
Proceeds from issuance of debt
    -       28,656  
Repayment of debt
    (71,325 )     -  
Proceeds from issuance of common stock and warrants
    984,000       -  
Net Cash Provided by Financing Activities
    912,675       28,656  
                 
Net increase (decrease) in cash
  $ 9,310     $ (4,909 )
                 
Cash at beginning of period
    551       16,577  
                 
Cash at end of period
  $ 9,861     $ 11,668  
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $ 50,412     $ -  
                 
Supplemental disclosures of non-cash investing and financing activities:
               
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     $ -  
 
The Accompanying Notes are an Integral Part of these Financial Statements
 
5

 
 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Condensed Consolidated Financial Statements
May 31, 2011
(Unaudited)


Note 1 Basis of Presentation
 
The accompanying unaudited condensed 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, 2010, is derived from the audited financial statements presented in the Company’s Annual Report on Form 10-K for the year ended August 31, 2010.  The unaudited condensed 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, 2010.
 
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 condensed or 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, 2011, 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
 
On December 15, 2010, Passport Arts, Inc. (“PPOR”) acquired the entities of, The Original Soupman, Inc. (“OSM”) and its wholly owned subsidiary International Gourmet Soups, Inc. (“IGS”) as well as its eighty percent (80%) owned subsidiary Kiosk Concepts, Inc. (“Kiosk”), collectively referred to as the Company. See Note 14 – Acquisition.
 
On January, 31 2011, PPOR reincorporated in Delaware and changed its name to Soupman, Inc. (“Soup” or the “Company”).
 
The Company currently markets, manufactures and sells soup to grocery chains and other outlets and is the franchisor of gourmet soup retail outlets under the name “The Original Soupman.”
 
Note 3 Summary of Significant Accounting Policies
 
Principles of Consolidation
 
The consolidated financial statements include Soup, OSM and its subsidiaries IGS and Kiosk as well as Soup Kitchen International, Inc. (“Soup Kitchen”).  OSM and Soup Kitchen remain separate legal entities, and neither OSM nor Soup Kitchen retained any legal ownership in the other although the acquisition was accounted for as a business combination, under the purchase method of accounting.  See Note 14 – Acquisition.
 
 
6

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Condensed Consolidated Financial Statements
May 31, 2011
(Unaudited)
 
The consolidated statements of operations and cash flows include PPOR from September 1, 2010 as well as all of the entities identified above for the period from December 15, 2010 (the date of acquisition) to May 31, 2011.  The balance sheets of all entities have been consolidated at May 31, 2011.
 
All intercompany transactions have been eliminated.
 
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, 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.
 
Cash
 
The Company minimizes credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits; however, at May 31, 2011 and August 31, 2010, the balance did not exceed the federally insured limit.

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.

Accounts Receivable and Allowance for Doubtful Accounts

The Company does not require collateral but instead assesses the financial strength of its customers and franchisees. See Note 4.
 
A related party of the Company is the owner of a franchise that has outstanding accounts receivable in the amount of $12,167 as of May 31, 2011.  This related party does not have any preferential terms.
 
 
7

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Condensed Consolidated Financial Statements
May 31, 2011
(Unaudited)
 
Property and Equipment

Property and equipment is stated at 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:
 
Machinery and equipment           5-7 years
Transportation equipment      5 years
Furniture and Fixtures      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 for the three and nine months ended May 31, 2011 and 2010.
 
Intangible Assets
 
Identifiable intangible assets with finite lives are amortized over their estimated useful lives. Intangible assets are reviewed for impairment if indicators of potential impairment exist.  Indefinite-lived intangible assets are tested for impairment on an annual basis or sooner if an indicator of impairment occurs.
 
Amortization of intangible assets is provided utilizing the straight-line method over the estimated lives of the respective assets.
 
No impairment charges of intangible assets were recorded for the three and nine months ended May 31, 2011 or the year ended August 31, 2010.
 
Fair Value of Financial Instruments
 
The guidance defines fair value 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.

 
8

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Condensed Consolidated Financial Statements
May 31, 2011
(Unaudited)
 
The guidance also establishes a fair value hierarchy for measurements of fair value 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 Company's financial instruments consisted primarily of its current assets and current liabilities.
 
The carrying amounts of the Company's financial instruments generally approximate their fair values as of May 31, 2011 and August 31, 2010, due to the short term nature of these accounts.
 
Share-based payments
 
Generally, all forms of share-based payments, including stock option grants, warrants, restricted stock grants and stock appreciation rights are measured at fair value on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest.  Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable.  Expensing of share-based payments is done using the straight line method over the term of the vesting period.
 
 
9

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Condensed Consolidated Financial Statements
May 31, 2011
(Unaudited)
 
Revenue Recognition

The Company records revenue 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.
 
OSM and IGS recognize sales when products are shipped and the risk of ownership is transferred to the customer.
 
Kiosk recognizes revenue from individual franchise sales when substantially all significant services to be provided by Kiosk have been performed.  When an individual franchise is sold, Kiosk agrees to provide certain services to the franchisee. Generally, these include assistance in the site selection, training personnel, advertising, construction plans, initial soup supplies and continuing supervision. Additionally, continuing royalty fees are charged to the franchisee at the rate of 5% of the franchisee's gross sales.  Kiosk also sells soup products directly to franchise units.  Kiosk recognizes revenue on the sale of soup to the franchise units once the products are shipped from the producer, at which time the risk of loss is transferred to the customer.
 
Revenues for soup sales are netted with sales discounts and slotting fees.
 
The Company does not offer a right of return.
 
Certain related parties of the Company are also owners of certain franchises. Revenue is recognized for these as described above for Kiosk.
 
There are deferred revenues collected from all franchises for advertising of the brand and are non-refundable.  At May 31, 2011, the Company recognized $90,645 of these deferred revenues, which is a component of accounts payable and accrued liabilities, for certain franchises that are no longer in business and for which no advertising will be provided.  The balance of deferred revenues at May 31, 2011 is $19,089.
 
Cost of Sales
 
Cost of sales is derived based on actual costs incurred and billed by our co-packer.  All other costs related to sales are expensed as incurred.
 
General and Administrative Expenses
 
Primarily consists of salaries, contract labor, legal and professional costs, occupancy costs, and expenses directly related to the office(s).  Other administrative costs include advertising, insurance, depreciation and amortization.

 
10

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Condensed Consolidated Financial Statements
May 31, 2011
(Unaudited)
 
Earnings (Loss) Per Share

Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period.  Diluted earnings (loss) per share  is computed by dividing net income (loss) by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.
 
The Company reflected a net loss for the three and nine months ended May 31, 2011, therefore, the effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive.  Consequently, a separate computation of diluted earnings (loss) per share in not presented.
 
The Company has the following common stock equivalents at May 31, 2011.  There were no common stock equivalents for the year ended August 31, 2010.
 
    May 31, 2011  
 Stock options (exercise price $0.50/share)      810,000  
 Warrants (exercise price - $1.25/share)      472,240  
 Total common stock equivalents           1,282,240  
                                                                                                                                                                                                                                                                                                                                                  
In connection with the acquisition, the Company exchanged options and warrants that were outstanding when it was a private company for those of the public Company under the same terms and conditions.  There was no accounting impact for this transaction (see Note 14 – Acquisition).
 
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 and its subsidiaries 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 the then subsequent 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.
 
Management has tested for potential variable interest entities and has determined that because of the aforementioned; 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.

 
11

 

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Condensed Consolidated Financial Statements
May 31, 2011
(Unaudited)
 
Concentrations

Sales

Those accounting for a more than 10% Sales concentration at May 31, 2011 are two customers accounting for 46% and 22% of total Sales.  There were no concentrations at May 31, 2010.

Accounts Receivable

Those accounting for a more than 10% Accounts Receivable concentration at May 31, 2011 are two customers accounting for 57% of total Accounts Receivable.  There were no concentrations at May 31, 2010.
 
Vendors

At May 31, 2011, the Company had one vendor who accounted for 100% of purchases of soup .  This vendor is our co-packer and our costs of goods sold arise out of our purchases from them. There were no concentrations at May 31, 2010.

Recently Issued Accounting Pronouncements

There are no new accounting pronouncements that have any impact on the Company’s financial statements.
 
Reclassification

We have reclassified certain prior period amounts to conform to the current period presentation. These reclassifications have no repeated effect on the financial position effect on the fincial position or on the results of operations or cash flows for the periods presented.

Note 4 Accounts Receivable (and Related Party) and Allowance for Doubtful Accounts
 
Accounts receivable consisted of the following at May 31, 2011. There was no accounts receivable at August 31, 2010.

     
May 31, 2011
 
Accounts receivable
 
$
260,294
 
Accounts receivable – related party
   
12,167
 
Allowance
   
(19,697
)
Accounts receivable including related party
 
$
252,764
 
 
Based upon the best available evidence, including industry statistics, the Company has determined that approximately 7% of the outstanding receivables reflect the most accurate allowance for its receivables.
 
Note 5 Prepaid Expenses
 
Consists of insurance premiums paid in advance of the period of benefit.
 
 
12

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Condensed Consolidated Financial Statements
May 31, 2011
(Unaudited)
 
Note 6 Property and Equipment
 
Property and equipment consisted of the following at May 31, 2011. There was no property and equipment at August 31, 2010.

 
Description
 
Amount
 
Vehicles
 
$
30,222
 
Equipment
   
22,968
 
Furniture and fixtures
   
10,940
 
  Total
   
64,130
 
Less: accumulated depreciation
   
(24,003
)
  Property and equipment – net
 
$
40,127
 
 
Note 7 - Due from Franchisees
 
The Company has advanced monies to certain franchisees in the course of normal business operations. These funds are to complete renovations and help with operating expenses in better performing franchise locations. The following is breakdown of amounts due the Company at May 31, 2011.  The Company fully expects to be reimbursed for these amounts. There were no amounts due from franchisees at August 31, 2010.
 
Franchisee
Amount
 
A - Related party
$
196,443
 
B – Related party
 
194,112
 
C – Related party
 
51,754
 
D
 
36,034
 
E
 
5,198
 
Total due from franchisees including related parties
$
483,541
 
 
These entities, which are elated parties, are controlled by officers and directors of the Company.
 
Note 8 – Notes Receivable
 
On January 1, 2010, the Company executed a 7 year, 7%, note receivable with a franchisee for $208,180.  Monthly payments from the franchisee are approximately $3,170, which include principal and interest.  The following table shows the amount due as of August 31, in the year so specified.
 
Fiscal Year Ended
 
Amount
 
2011
 
$
22,037
 
2012
   
25,855
 
2013
   
27,723
 
2014
   
29,728
 
2015
   
34,434
 
Thereafter
   
62,498
 
Total
 
$
202,275
 
Less current portion
   
(22,037)
 
Total long term
 
$
180,238
 
  
 
13

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Condensed Consolidated Financial Statements
May 31, 2011
(Unaudited)
 
Note 9 – Intangible Assets
 
At May 31, 2011 the Company’s intangible assets were as follows. There were no intangibles at August 31, 2010.
 
   
May 31, 2011
       
Accumulated
   
   
Gross
 
Amortization
 
Net
Soup Formulas
 
 $
27,418
   
 $
(5,132)
   
 $
22,286
 
Recipes
   
 53,750
     
(9,637)
     
 44,113
 
                         
Total intangible assets
 
 $
81,168
   
 $
 (14,769)
   
 $
66,399
 

The estimated useful lives of the Company’s intangible assets are as follows:

 
Amount
Soup formulas
5 years
Recipes
4 years

Estimated future annual amortization expense of finite-lived intangible assets as of May 31, 2011 are as follows:

Fiscal Year ended August 31,
 
Amount
 
2011
 
$
8,449
 
2012
   
18,921
 
2013
   
18,921
 
2014
   
18,921
 
2015
   
1,187
 
Total
 
$
66,399
 
 
Note 10 Debt
 
At May 31, 2011 the Company’s debts were as follows:
 
OSM has two equipment notes with equipment financing entities for a total of $37,508. The first note was entered into on January 13, 2006. The note is a six-year note, due January 13, 2012, with an 8% fixed interest rate. The note is paid in monthly installments of $503.  The second note was entered into on January 22, 2008, with a third party, and bears a 50 month term at a fixed interest rate of 19.239% with monthly required installments of $3,559.
 
A former sales representative previously advanced OSM $37,500.  The loan bears no interest, is unsecured and due on demand.
 

 
14

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Condensed Consolidated Financial Statements
May 31, 2011
(Unaudited)
 
Soup Kitchen has notes payable in the aggregate amount of $1,500,000 from three promissory note agreements with the former chairman of the Board of Directors of Soup Kitchen. These notes having a maturity date of June 17, 2009 are in default and guaranteed by OSM. Two of the notes bear an interest rate of prime plus one percent. The third loan bears an interest rate of 6%. Principal repayments of $65,000 have been made during fiscal 2011, and the total balance including accrued interest at May 31, 2011 is $1,934,378. These notes are secured by the assets of OSM.  Although in default, management believes that it will resolve any issue that may arise out of the default.  This note has first position to all OSM assets.  On May 20, 2011 we entered into a Forbearance Agreement with Penny Fern Hart pursuant to which we issued Ms. Hart 500,000 shares (at the time of the share exchange on December 15, 2010), of our common stock and placed another 500,000 shares in escrow. These securities were issued pursuant to Section 4(2) of the Securities Act.
 
Soup Kitchen has a promissory note for $290,902. This is a non-interest bearing loan and is due on demand. This note is also secured by the assets of OSM.
 
In 2008, Soup Kitchen entered into a promissory note payable in the amount of $1,200,000. This note bears interest at 7% and has a maturity date of July 1, 2011.  At May 31, 2011, the amount owed under this note including accrued interest is $1,424,154. This note is also secured by the assets of OSM.  The note is in default.
 
Note 11 Deferred Franchise Revenue
 
At May 31, 2011, the Company had deferred franchise revenues of $118,750.  Deferred franchise revenues result from advance fees payments received from new franchises prior to the Company’s performance under the terms of the franchise agreement(s). Often these payments are made before store locations have been identified.
 
Note 12 Stockholders’ Deficit
 
Stock Issued for Services
 
For the nine months ended May 31, 2011, the Company issued 960,000 shares of common stock for services rendered, having a fair value of $2,120,000 ($2.15 – $2.25/share), based upon the quoted closing trading price on the dates issued.
 
Stock Issued for Cash
 
For the nine months ended May 31, 2011, the Company issued 984,000 shares of common stock and 98,400 five-year warrants, exercisable at $1.25/share, for $984,000 ($1/share).
 
Stock Options
 
On December 31, 2010, the Company's board of directors authorized the issuance of 2,050,000 stock options, having a grant date fair value of $738,472.  The Company expenses the value of these options over the vesting period using the straight-line method.  The options have an exercise price of $0.50 and a life of 10 years.  The options vest 40% upon issuance, 40% on September 1, 2011 and 20% on September 1, 2012. For the three and nine months ended May 31, 2011 option expense was $339,697 and $406,159, respectively. The Company will expense the remaining $332,313 over the vesting term.

 
15

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Condensed Consolidated Financial Statements
May 31, 2011
(Unaudited)

The Company applied fair value accounting for all share based payment awards. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes assumptions used for the nine months ended May 31, 2011 are as follows:
 
       
Exercise price
 
$
0.50
 
Expected dividends
   
0
%
Expected volatility
   
150
%
Risk free interest rate
   
2.01
%
Expected life of option
 
5 years
Expected forfeitures
   
0
%

The following is a summary of the Company’s stock option activity for the nine months ended May 31, 2011:

   
 
Options
   
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Life
 
Aggregate Intrinsic Value
 
Balance – August 31, 2010
   
-
     
-
         
  Granted
   
2,050,000
   
$
0.50
         
Exercised
   
-
                 
Forfeited
   
(15,000
)
 
$
0.50
         
Balance – May 31, 2011
   
2,035,000
     
0.50
 
1.67 years
 
$
3,663,000
 
Exercisable – May 31, 2011
   
810,000
     
0.50
 
1.67 years
 
$
1,458,000
 
  Grant date fair value of options granted
         
$
738,472
           
Weighted average grant date Fair value
           
0.50
           
                           
Outstanding options held by related parties
   
1,450,000
                   
Exercisable options held by related parties
   
570,000
                   
FMV of options granted to related parties
 
$
432,275
                   
 
 
16

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Condensed Consolidated Financial Statements
May 31, 2011
(Unaudited)
 
Stock Warrants
 
Prior to the merger, the Company had 373,840 warrants outstanding.  These warrants were exercisable for 5 years at $1.25. The warrants were exchanged with those of the public company under the same terms.
 
The following is a summary of the Company’s stock warrant activity:
  
   
Number of Warrants
   
Weighted Average Exercise Price
 
Balance at August 31, 2010
   
373,840
   
$
1.25
 
Granted
   
98,400
   
$
1.25
 
Exercised
   
-
   
$
-
 
Forfeited
   
-
   
$
-
 
Balance at May 31, 2011
   
    472,240
   
$
1.25
 

The weighted average remaining life for all outstanding warrants is 1.58 years. The intrinsic value at May 31, 2011 is $547,202.
 
Note 13 Commitments and Contingencies
 
OSM is obligated to pay the minority stockholder of Kiosk, quarterly payments for ongoing services through June 30, 2014 (as described in Note 14 – Acquisition). The annual payments are as follows:

Period Ending May 31,
 
2012
   
225,000
 
2013
   
225,000
 
2014
   
225,000
 
2015
   
18,750
 
   
$
693,750
 

In July 2010, OSM entered into a two-year non-cancellable facility lease agreement. Monthly payments are $3,000 per month for year 1, and $3,200 per month for year 2.   The minimum required payments are as follows:
 
Period Ending May 31,
 
2012
 
$
38,000
 
2013
   
3,200
 
   
$
41,200
 
 
 
17

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Condensed Consolidated Financial Statements
May 31, 2011
(Unaudited)
 
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.
 
There are no material-pending legal proceedings to which the Company or any of our subsidiaries is a party or of which any of their property is the subject thereof, other than the proceeding described below.
 
On September 21, 2009, Penny Hart, a former Chairman of the Board of Soup Kitchen, as successor to the Commerce Bank loan to Soup Kitchen, 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 Soup Kitchen’s defaulted loan. 
 
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 intends to vigorously defend this action believing it to be wholly without merit, especially in the light of the fact that an independent appraisal was performed prior to the asset transfer which completely supported the fairness of the asset transfer to the Company in which the Company paid $100,000 in cash, guaranteed secured debt in the amount of $3,600,000 plus some additional Soup Kitchen receivables and there was Soup Kitchen shareholder approval  obtained in connection with the transaction. 
 
No assurance, however, can be given as to the ultimate outcome of this action or its effect on the Company.  If the Company is not successful in its defense of this action it could have a material adverse effect on its business, operations and prospects. 
 
Note 14 Acquisition
 
Acquisition of OSM and related entities
 
On December 15, 2010, PPOR acquired OSM, IGS and Kiosk.
 
While a private company and prior to the merger, the Company loaned $386,354 in the form of a note receivable, to the Chairman in order to use those funds to acquire PPOR, and then to effectuate the acquisition.  The loan to the Chairman was in substance a capital transaction because the Chairman controlled PPOR and Soup concurrently at the time of the merger.   The note was forgiven and under the structure of the merger, charged to additional paid in capital. As a result of this accounting treatment, the Company did not record goodwill or account for any assets acquired or liabilities assumed at fair value.

 
18

 

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Condensed Consolidated Financial Statements
May 31, 2011
(Unaudited)

Consideration exchanged in the merger was 1,987,783 shares of non-voting preferred stock, 14,004,230 shares of common stock, and the conversion of $4,830,254 (principal and accrued interest on convertible debt) into 4,830,254 shares of common stock.
 
Additionally, in connection with the merger, PPOR forgave related party debt of $106,698 and charged this amount to additional paid in capital.
 
The following represents assets acquired and liabilities assumed:
 
Assets acquired:
     
Cash
 
$
582,590
 
Accounts receivable
   
457,326
 
Property and equipment
   
31,390
 
Notes receivable
   
572,497
 
Due from franchisee
   
603,322
 
Security deposits
   
4,800
 
Intangible assets
   
81,168
 
     
2,333,093
 
Liabilities Assumed:
       
Debt
   
8,654,007
 
Accounts payable and accrued expenses
   
2,511,611
 
Deferred franchise fees
   
118,750
 
     
11,284,368
 
         
Total Net Deficit of Subsidiaries Acquired:
   
(8,951,275
)
  
The business combination is considered a tax-free reorganization.  There is no allocation for goodwill or intangibles because this acquisition was a related party capital transaction.
 
The Company paid approximately $82,000 in professional fees related to the acquisition, these fees were expensed as incurred.
 
The following unaudited condensed consolidated pro forma information gives effect to the acquisition as if the transaction had occurred on September 1, 2009 the first day of the prior fiscal year.  The pro forma information presented is also for the current period in which the transaction occurred, which is September 1, 2010 to the acquisition date of December 15, 2010.
 
The following unaudited pro-forma information is presented for illustration purposes only and is not necessarily indicative of the results that would have been attained had the acquisition been completed on September 1, 2009, nor are they indicative of results that may occur in any future periods:
 
 
19

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Condensed Consolidated Financial Statements
May 31, 2011
(Unaudited)
   
Year Ended
August 31, 2010
   
Period Ended
December 15, 2010
Revenues
 
$
1,638,966
   
$
775,227
 
Net Income loss
 
$
(1,968,982
)
 
$
(884,716
)
                 
Net loss per
Common Share - Basic and Diluted
 
$
(.09
)
 
$
(.04
)
Weighted Average Common Shares Outstanding - Basic and Diluted  
   
22,728,084
     
22,728,084
 
 
The weighted average shares calculation assumes that 18,834,484 shares that were issued on December 15, 2010 in connection with the merger, were deemed to be issued and outstanding as of September 1, 2009, and combined with the outstanding 3,893,600 shares of PPOR.
 
Note 15 Going Concern
 
As reflected in the accompanying financial statements, the Company had a net loss of $4,123,833 and net cash used in operations of $1,459,022 for the nine months ended May 31, 2011; and a working capital deficit of $5,881,489 and a stockholders’ deficit of $5,106,384, respectively, at May 31, 2011. 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, sale of aged debt to third parties in exchange for free trading stock, 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 may 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,
· 
continue opening new franchised locations,
· 
obtain co-manufacturing agreements which provide for lower production costs,
· 
generate new sales from domestic and international customers; and
· 
allocate sufficient resources to continue with advertising and marketing efforts

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.
 
Note 16 Subsequent Event

In June and July 2011, the Company raised $800,000 in working capital (at $1/unit) and issued 800,000 shares of unregistered (restricted) common stock and 80,000 five-year warrants, exercisable at $1.25/share to 4 individuals.
 
 
20

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
General
 
The following analysis of our consolidated financial condition and results of operations for the period December 15, 2010 through May 31, 2011 should be read in conjunction with the consolidated financial statements, including footnotes, and other information presented elsewhere in this Report on Form 10-Q and the risk factors and the financial statements  and the other information set forth in our Current Report on Form 8-K filed with the Securities and Exchange Commission filed on December 20, 2010 and our amendment thereto filed with the Securities and Exchange Commission filed on February 11, 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 outstanding 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 4,830,254 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 currently focusing on having our soups displayed in the frozen aisle in grocery stores and have plans to sell our soups in a new shelf stable tetra pak that will be located  in the soup aisles in grocery and club stores.  We also have and will continue to open our franchised restaurants in specifically designated heavy traffic locations such as casinos, airports and travel malls to increase our penetration in existing markets and new prime franchise locations.  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.  
 
Results of Operations - 9 months ended May 31, 2011
 
For the nine months ended May 31, 2011 soup sales accounted for 89% of overall revenues, and franchise revenues accounted for the remaining 11%.
 
Net loss for the nine months ended May 31, 2011 was $4,123,833 or $(0.26) per share (basic and diluted).  The net loss increase of $4,083,875 from the nine months ended May 31, 2010 was attributable to the change in our focus from the sale of on line art products to the sale of soup. The cost of sales and general and administrative expenses of our soup line of business, which includes general and administrative expenses such as the issuance of shares and stock options in the amount of $2,526,159; payroll and payroll expenses of $726,085 and legal and professional fees of $554,349 is higher than the online art business. Other expenses for the period included interest expense of $125,521 and royalties of $108,386.  Revenues of the acquired companies are only included from the date of acquisition, December 15, 2010 to May 31, 2011 and therefore a meaningful comparison between periods cannot be made.  Moreover, since the acquisition changed the Company’s business focus from the sale of art on the internet to the manufacturer and wholesaler of soup as well as a franchisor of soup stores, a meaningful comparison between the nine months ended May 31, 2011 and the nine months ended May 31, 2010  cannot be made.
 
 
21

 

Cost of Sales as a percent of soup revenues was 76% for the nine months ended May 31, 2011.
 
General and administrative expenses as a percentage of total revenue was 557% for the nine months ended May 31, 2011 compared to 447% for the nine month period ended May 31, 2010; however, as previously stated, since the Company’s primary focus  during these two periods was on different lines of business, a meaning comparison cannot be made.
 
Results of Operations - 3 months ended May 31, 2011
 
For the three months ended May 31, 2011 revenues from soup sales accounted for 89% of overall revenues, and franchise revenues accounted for the remaining 11%.
 
Net loss for the three months ended May 31, 2011 was $1,631,215 or $(0.07) per share (basic and diluted) compared to a loss of $6,559 for the comparative period of May 31, 2010.  The net loss increase was again, primarily attributable to the change in our focus from the sale of on line art products to the sale of soup and the related costs and expenses. The general and administrative expenses for the period of $1,698,112 includes the issuance of shares and stock options in the amount of $926,463; payroll and payroll costs of $296,068 and legal and professional fees of $265,448.  Other expenses for the quarter included interest expense of $66,155 and royalties of $56,250 which were offset $90,645 of deferred advertising revenue which was recognized.
 
Cost of Sales as a percent of soup revenues was 85% for the three months ended May 31, 2011 which is higher than normal due to the increase in cost of some ingredients along with increased fuel costs and freight as well as the mix of our product sales.  The higher cost of sales % can also be attributable to the cost associated with promoting our product by offering discounts as well as the cost of “slotting fees” to get our product on shelf.  Those costs were netted against soup sales resulting in a higher cost of sales as a percentage of soup revenue.  These are one time non - recurring fees.
 
General and administrative expenses as a percentage of revenue was 412% for the three months ended May 31, 2011 compared to 210% for the period ended May 31, 2010, however, the company was in two separate business lines during these equal periods, thus a meaningful comparison cannot be made.
 
Liquidity and Capital Resources
 
At May 31, 2011, we had cash and cash equivalents of $9,861 as compared to $551 at August 31, 2010.  Since May 31, 2011, we have raised additional working capital of $800,000 from the sale of 800,000 shares of restricted common stock and related warrants.  Our working capital deficit at May 31, 2011 was $5,881,489 and as of August 31, 2010 was $92,033.  Because the merger occurred on December 15, 2010, a meaningful comparison of these amounts cannot be made.
 
For the nine months ended May 31, 2011 cash used in operating activities was $1,459,022.  Our primary uses  of cash from operating activities for the period were losses from operations offset by increases in share based payments, stock issued for services, and decreases in accounts receivable and due from franchisees.
 
Net cash provided by investing activities for the nine months ended May 31, 2011 was $555,657, predominantly from the cash received in the merger.
 
Net cash provided by financing activities for the nine months ended May 31, 2011 was $912,675 which included $984,000 from the issuance of common stock and warrants offset by $71,325 used for the repayment of debt.
 
 
22

 
 
Current and Future Financing Needs
 
We have incurred a stockholders’ deficit of $ 5,106,384 through May 31, 2011 and a net loss of $4,123,833 for the nine months ended May 31, 2011.   We have incurred negative cash flow from operations since inception and have primarily financed our operations through the sale of stock. At May 31, 2011, we had short term debt of $3,724,442 and a working capital deficit of $5,881,489.   These factors raise substantial doubt about our ability to continue as a going concern. .  During the nine months ended May 31, 2011, we raised $984,000 from the issuance of our common stock and warrants and since then we have raised an additional $800,000 from the sale of our common stock and warrants.  Our debt in the amount of $3,724,442 includes a guarantee of Soup Kitchen International Inc’s debt in the amount of $3,649,433 part of which is past due.  We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including 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 a stock offering or otherwise.
 
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 3 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.
 
 
23

 

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, 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
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
Not applicable.
 
Item 4. Controls and Procedures.
 
As required by Rules 13a-15 under the Securities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report, being May 31, 2011. This evaluation was carried out under the supervision and with the participation of our management, including our president and chief executive officer and our chief financial officer. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the applicable time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures which are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our president and chief executive officer and our chief financial officer to allow timely decisions regarding required disclosure.
 
Based upon that evaluation, our president and chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective as at the end of the period covered by this quarterly report. There have been no changes in our internal control over financial reporting that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
 
 
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PART II - OTHER INFORMATION
  
Item 1. Legal Proceedings.
 
There are no known material-pending legal proceedings to which our company or any of our subsidiaries is a party or of which any of their property is the subject of, other than the proceeding described below. In addition, we do not know of any such proceedings contemplated by any governmental authorities.
 
We know of no material proceedings in which any director, officer or affiliate of our company, or any registered or beneficial stockholder of our company, or any associate of any such director, officer, affiliate, or stockholder is a party adverse to our company or subsidiary or has a material interest adverse to our company or subsidiary.
 
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 The Original Soupman, Inc. (“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 our company, certain principals of our company, and other third parties by the bankruptcy trustee for SKI seeking to avoid and/or recover the value of assets of SKI, realleging various claims made in the October 26, 2010 action.  We intend 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 which completely supported the fairness of the asset transfer to our company in which we paid $100,000 in cash, guaranteed secured debt in the amount of $3,600,000 plus some additional SKI receivables.  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 this action or its effect on our company. If our company is not successful in its defense of this action it would have a material adverse effect on its business and operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

For the nine months ended May 31, 2011, we issued 400,000 shares of common stock at $2.15 per share for services rendered by a consultant, having a fair value of $860,000, based upon the quoted closing trading price on the date issued.

For the three months ended May 31, 2011, we issued 119,500 shares of common stock and 11,950 five-year warrants, exercisable at $1.25/share for $119,500 ($1/unit) to 6 individuals. These securities were issued pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. 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 May 20, 2011 we entered into a Forbearance Agreement with Penny Fern Hart pursuant to which we issued Ms. Hart 500,000 shares of our common stock and placed another 500,000 shares in escrow. These securities were issued pursuant to Section 4(2) of the Securities Act.

In June and July 2011, we issued 800,000 shares of common stock and 80,000 five-year warrants, exercisable at $1.25/share for $800,000 ($1/unit) to 4 individuals. These securities were issued pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. 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.
 
 
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 Item 3. Defaults upon Senior Securities.
 
None.
 
Item 4. (Removed and Reserved).
 
 
Item 5. Other Information.
 
On May 20, 2011, we entered into a thirteen-month Forbearance Agreement with Penny Fern Hart relating to approximately $1,500,000 in principal amount of secured debt of SKI that our subsidiary, OSM, guaranteed when it acquired assets from SKI in December 2009. In connection with this Forbearance Agreement, OSM and its subsidiary, International Gourmet Soups, Inc. (“IGS”), have entered into a Secured Guaranty relating to the above debt and the related interest and fees due thereunder. We also entered into a Keepwell Agreement regarding our subsidiaries, and issued Ms. Hart 500,000 shares (at the time of the share exchange on December 15, 2010), of our common stock and placed another 500,000 shares in escrow to secure OSM’s guarantee. If the underlying loan is repaid before the forbearance period ends, 400,000 of the escrowed shares will be returned to us. If the underlying loan is not repaid before the forbearance period ends, the Forbearance Agreement provides that the 500,000 escrowed shares will vest with Ms. Hart and that the average market value of the shares will be applied to satisfy all of or a portion of the loan, to the extent of such market value.

 
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Item 6. Exhibits.
 
Exhibit
   
Number
 
Description
     
(3)
 
Articles of Incorporation and Bylaws
     
3.1 (1)
 
Articles of Incorporation
     
3.2 (1)
 
Bylaws
     
(4)
 
Instruments Defining the Rights of Security Holders
     
4.1 (1)
 
2010 Stock Incentive Plan
     
(10)
 
Material Contracts
     
 10.1 (2)
 
 Merger Agreement between OSM Merge and Passport Arts, Inc.
     
10.2 (3)
 
Agreement, dated as of April 27, 2004, between International Gourmet Soups, Inc., Kiosk Concepts, Inc, Yegan Food Inc and Al Yeganeh (portions of the exhibit have been omitted pursuant to a request for confidential treatment.  The omitted portions have been filed with the SEC).
     
10.3 (3)
 
Amendment, dated February 20, 2004, between International Gourmet Soups, Inc., Kiosk Concepts, Inc, Yegan Food Inc and Al Yeganeh (portions of the exhibit have been omitted pursuant to a request for confidential treatment.  The omitted portions have been filed with the SEC).
     
10.4 (4)
 
Forbearance Agreement, dated May 20, 2011, between The Original Soupman, Inc., Soupman, Inc., International Gourmet Soups Inc. and Penny Fern Hart.
     
10.5 (4)
 
Secured Guaranty, dated May 20, 2011, by The Original Soupman, Inc. and International Gourmet Soups Inc. in Favor of Penny Fern Hart.
     
10.6 (4)
 
Keepwell Agreement, dated May 20, 2011, by Soupman, Inc. in favor of Penny Fern Hart.
     
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
 
* Filed herewith.
 
(1) 
Incorporated by reference from our registration statement on Form S-8 filed on February 2, 2011.
(2) 
Incorporated by reference from our quarterly report on Form 10-Q filed on January 14, 2011.
(3)
Incorporated by reference from our quarterly report on Form 10-Q filed on April 19, 2011.
(4)
Incorporated by reference from our current report on Form 8-K filed on May 25, 2011.

 
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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 15, 2011
By:
/s/  Arnold Casale
 
   
Arnold Casale
 
   
Chairman and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
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