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EX-31.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER, PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. - SOUPMAN, INC.f10q0212ex31i_soupman.htm
EX-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 - SOUPMAN, INC.f10q0212ex32i_soupman.htm
EX-31.2 - CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER, PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. - SOUPMAN, INC.f10q0212ex31ii_soupman.htm
EX-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 - SOUPMAN, INC.f10q0212ex32ii_soupman.htm
EXCEL - IDEA: XBRL DOCUMENT - SOUPMAN, INC.Financial_Report.xls


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
o
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended February 29, 2012
 
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________to ________
 
Commission File Number:  000-53943
 
SOUPMAN, INC.
 (Exact name of registrant as specified in its charter)
 
Delaware
 
61-1638630
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
1110 South Avenue, Suite 100
Staten Island, New York 10314
 (Address of principal executive offices) (Zip Code)
 
(212) 768-7687
 (Registrant’s telephone number, including area code)
 
 (Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes o     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
o
Accelerated filer                       
o
Non-accelerated filer
o
Smaller reporting company     
o
(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 o
 
Number of shares of common stock outstanding as of April 13, 2012 was 28,121,406.
 
 
 

 
 
PART I - FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
 
Consolidated Balance Sheets
 
             
   
February 29, 2012
   
August 31, 2011
 
   
(Unaudited)
       
Assets
             
Current Assets
           
Cash
  $ 295,075     $ 343,927  
Accounts receivable - net
    224,178       134,242  
Accounts receivable - related parties
    15,471       18,614  
Prepaid expenses and other
    108,886       56,901  
Note receivable - franchisee
    9,992       -  
Note receivable - other
    -       6,000  
Due from franchisee
    5,742       5,742  
Due from franchisee - related parties
    1,500       -  
Total Current Assets
    660,844       565,426  
                 
Property and equipment - net
    32,865       33,418  
                 
Other Assets
               
Notes receivable - franchisees - related parties
    485,771       662,141  
Note receivable - franchisee
    60,092       -  
Intangible assets - net
    58,256       67,690  
Other
    4,800       4,800  
Total Other Assets
    608,919       734,631  
                 
Total Assets
  $ 1,302,628     $ 1,333,475  
                 
Liabilities and Stockholders' Deficit
                 
Current Liabilities
               
Accounts payable and accrued liabilities
  $ 2,652,443     $ 2,192,905  
Debt - net
    4,093,382       3,704,305  
Deferred franchise revenue
    118,750       118,750  
Derivative liabilities
    315,287       -  
Total Current Liabilities
    7,179,862       6,015,960  
                 
Stockholders' Deficit
               
Preferred stock, par value $0.001; 25,000,000 and 25,000,000 shares
         
authorized; 1,250,461 and 1,523,033 issued and outstanding
    1,251       1,523  
Common stock, par value $0.001; 75,000,000 and 75,000,000 shares authorized;
 
28,621,406 and 27,791,834 issued; 28,121,406 and 27,291,834 outstanding
    28,121       27,292  
Additional paid in capital
    2,402,708       1,610,654  
Accumulated deficit
    (8,309,314 )     (6,321,954 )
Total Stockholders' Deficit
    (5,877,234 )     (4,682,485 )
                 
Total Liabilities and Stockholders' Deficit
  $ 1,302,628     $ 1,333,475  
 
See accompanying notes to financial statements
 
 
2

 

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
 
Consolidated Statements of Operations
 
(Unaudited)
 
                         
   
Three Months Ended February 29,
   
Three Months Ended February 28,
   
Six Months Ended February 29,
   
Six Months Ended February 28,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Sales
                       
Soup sales - net
  $ 505,717     $ 332,961     $ 836,278     $ 332,961  
Franchise royalties
    53,650       50,439       107,032       50,439  
Total sales
    559,367       383,400       943,310       383,400  
                                 
Cost of sales
    396,447       190,399       696,093       190,399  
                                 
Gross profit
    162,920       193,001       247,217       193,001  
                                 
Operating expenses:
                               
General and administrative
    803,906       2,547,492       2,012,190       2,561,809  
Royalty
    56,250       52,136       112,500       52,136  
Total operating expenses
    860,156       2,599,628       2,124,690       2,613,945  
                                 
Loss from operations
    (697,236 )     (2,406,627 )     (1,877,473 )     (2,420,944 )
                                 
Other income (expense)
                               
Interest income
    9,405       1,226       12,162       1,226  
Interest expense
    (105,078 )     (58,583 )     (173,791 )     (58,583 )
Change in fair value of derivative liabilties
    25,228       -       25,228       -  
Gain on settlement of accounts payable
    26,514       -       26,514       -  
Total other (expense) - net
    (43,931 )     (57,357 )     (109,887 )     (57,357 )
                                 
Loss from continuing operations
    (741,167 )     (2,463,984 )     (1,987,360 )     (2,478,301 )
                                 
Loss from discontinued operations
    -       (14,317 )     -       (14,317 )
                                 
Net loss
  $ (741,167 )   $ (2,478,301 )   $ (1,987,360 )   $ (2,492,618 )
                                 
Basic and diluted loss per common share:
                         
Continuing operations
  $ (0.03 )   $ (0.12 )   $ (0.07 )   $ (0.21 )
Discontinued operations
  $ -     $ (0.13 )   $ -     $ (0.21 )
                                 
Weighted average number of common shares outstanding
                 
during the period - basic and diluted
    27,913,008       19,750,254       28,056,255       11,788,345  
 
See accompanying notes to financial statements
 
 
3

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Consolidated Statement of Stockholders 'Deficit
Year Ended August 31, 2011 and Six Months Ended February 29, 2012
(Unaudited)
 
     
Preferred Stock
$0.001 Par Value
     
Common Stock
$0.001 Par Value
      Additional Paid-in Capital       Accumulated Deficit       Subscription Receivable       Total Stockholders' Deficit  
     
Shares
     
Amount
     
Shares
     
Amount
                         
Balance, August 31, 2011
    1,523,033     $ 1,523       27,291,834     $ 27,292     $ 1,610,654     $ (6,321,954 )   $ -     $ (4,682,485 )
                                                                 
Issuance of common stock and warrants for cash ($1/share)
    -       -       10,000       10       9,990       -       -       10,000  
                                                                 
Cash paid as direct offering cost
    -       -       -       -       (1,000 )     -       -       (1,000 )
                                                                 
Stock options exercised ($0.50/share)
    -       -       200,000       200       99,800       -       -       100,000  
                                                                 
Issuance of common stock for services rendered ($0.75 - 1.55/share)
    -       -       347,000       347       465,403       -       -       465,750  
                                                                 
Share based payment
    -       -       -       -       217,861       -       -       217,861  
                                                                 
Conversion of preferred stock to common stock
    (272,572 )     (272 )     272,572       272       -       -       -       -  
                                                                 
Net loss
    -       -       -       -       -       (1,987,360 )     -       (1,987,360 )
                                                                 
Balance, February 29, 2012
    1,250,461     $ 1,251       28,121,406     $ 28,121     $ 2,402,708     $ (8,309,314 )   $ -     $ (5,877,234 )
 
See accompanying notes to financial statements
 
 
4

 

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
   
Six Months Ended
February 29,
   
Six Months Ended
February 28,
 
   
2012
   
2011
 
Cash Flows From Operating Activities:
           
Net loss - continuing operations
  $ (1,987,360 )   $ (2,478,301 )
Net loss - discontinued operations
    -       (14,317 )
Adjustments to reconcile net loss to net cash used in operating activities
         
Stock issued for services
    465,750       1,260,000  
Share based payment
    217,861       339,696  
Bad debt expense
    6,885       -  
Change in fair market value of derivative liabilities
    (25,228 )     -  
Amortization of debt discount
    34,968       -  
Amortization
    9,434       10,000  
Depreciation
    5,234       5,641  
Changes in operating assets and liabilities:
               
(Increase) Decrease in
               
Accounts receivable
    (96,821 )     178,952  
Accounts receivable - related party
    3,143       -  
Notes receivable
    -       (22,037 )
Due from franchisees
    -       171,774  
Due from franchisees - related party
    (1,500 )     -  
Prepaid expenses
    (51,985 )     (43,470 )
Increase (Decrease) in
               
Accounts payable and accrued liabilities
    625,935       (88,827 )
Net Cash Used in Operating Activities
    (793,684 )     (680,889 )
                 
Cash Flows From Investing Activities:
               
Cash acquired in merger
    -       582,590  
Proceeds from notes receivable - franchisees
    143,482       -  
Proceeds from note receivable - other
    6,000       -  
Advance in connection with sale of franchise - related party
    (70,084 )     -  
Purchase of property and equipment
    (4,682 )     (8,086 )
Net Cash Provided by Investing Activities
    74,716       574,504  
                 
Cash Flows From Financing Activities:
               
Proceeds from issuance of convertible notes
    641,000       -  
Repayment of debt
    (79,884 )     (105,604 )
Proceeds from exercise of stock options
    100,000       -  
Proceeds from issuance of common stock and warrants - net
    9,000       864,500  
Net Cash Provided by Financing Activities
    670,116       758,896  
                 
Net increase (decrease) in cash
    (48,852 )     652,511  
                 
Cash at beginning of period
    343,927       551  
                 
Cash at end of period
  $ 295,075     $ 653,062  
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $ 56,370     $ 23,474  
Cash paid for taxes
  $ -     $ -  
                 
Supplemental disclosures of non-cash investing and financing activities:
         
Reduction of accrued payroll - related party and related reduction of due from franchise - related party
  $ 32,888     $ -  
Conversion of preferred stock to common stock
  $ 272     $ -  
Debt discount recorded on convertible debt
  $ 340,515     $ -  
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  
 
See accompanying notes to financial statements
 
 
5

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012
 
Note 1 Basis of Presentation

The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, the rules and regulations of the United States Securities and Exchange Commission for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
 
The financial information as of August 31, 2011, is derived from the audited financial statements presented in the Company’s Annual Report on Form 10-K for the year ended August 31, 2011. The unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, which contains the audited financial statements and notes thereto, together with the Management’s Discussion and Analysis, for the year ended August 31, 2011.
 
Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The interim results for the period ended February 29, 2012, are not necessarily indicative of results for the full fiscal year.

The Company’s fiscal year end is August 31.

Note 2 Organization and Nature of Operations

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

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

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

Note 3 Summary of Significant Accounting Policies

Principles of Consolidation

All significant intercompany transactions and balances have been eliminated.
 
 
6

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share based payments and derivative liabilities, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.

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

Risks and Uncertainties

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

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

Cash

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. There were no cash equivalents at February 29, 2012 and August 31, 2011, respectively.

Allowance for Doubtful Accounts

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

 
7

 

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012
 
Property and Equipment

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

Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful lives of the respective assets as follows:
 
  Equipment 5-7 years  
  Vehicles 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 during the three and six months ended February 29, 2012 and February 28, 2011, respectively.
 
Intangible Assets
 
Identifiable intangible assets with finite lives are amortized over their estimated useful lives.
 
Amortization of intangible assets is provided utilizing the straight-line method over the estimated lives of the respective assets.
 
Intangible assets are reviewed for impairment if indicators of potential impairment exist. There were no impairment charges taken during the three and six months ended February 29, 2012 and February 28, 2011, respectively.
 
Fair Value of Financial Instruments
 
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact business and considers assumptions that marketplace participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

The fair value hierarchy for measurements is as follows:
 
Level 1 – quoted market prices in active markets for identical assets or liabilities.
   
Level 2 - inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
   
Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
 
8

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012
 
The carrying amounts of the Company's financial instruments generally approximate their fair values as of February 29, 2012 and August 31, 2011, due to the short term nature of these accounts.

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

 
February 29, 2012
August 31, 2011
Level 1
         
None
 
$
 
$
Level 2
           
None
   
   
Level 3
           
Derivative liability
   
315,287
   
 
 
$
315,287
 
$
 
The Level 3 valuation relates to derivative liabilities measured using management's estimates of fair value as well as other significant inputs that are unobservable. See below for additional discussion.

The following table reflects the change in fair value of derivative liabilities for the six months ended February 29, 2012, there were no such instruments at August 31, 2011:
 
 
February 29, 2012
Balance at August 31, 2011
 
$
-
 
Derivative liability arising from issuance of convertible debt and warrants
   
340,515
 
Change in fair value of derivative liability – convertible debt and warrants
   
( 25,228)
 
Balance at February 29, 2012
 
$
315,287
 

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

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

Derivative Liabilities

Fair value accounting requires bifurcation of embedded derivative instruments, such as ratchet provisions or conversion features in convertible debt or equity instruments, and measurement of their fair value. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.
 
 
9

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012
 
Once derivative liabilities are determined, they are adjusted to reflect fair value at the end of each reporting period. Any increase or decrease in the fair value is recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.
 
Debt Issue Costs and Debt Discount

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

Share-based payments

The Company has incentive plans that reward employees with stock options, warrants, restricted stock and stock appreciation rights. The amount of compensation cost for these share-based awards is measured based on the fair value of the awards, as of the date that the share-based awards are issued and adjusted to the estimated number of awards that are expected to vest.

Fair value of stock options, warrants, and stock appreciation rights, is generally determined using a Black-Scholes option pricing model, which incorporates assumptions about expected volatility, risk free rate, dividend yield, and expected life. Compensation cost for share-based awards is recognized on a straight-line basis over the vesting period.

Revenue Recognition

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

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

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

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

The Company does not offer a right of return.

The Company charges an advertising fee to its franchisees, under the terms of the franchise agreement, which is non-refundable. Deferred advertising income is included as a component of accounts payable and accrued liabilities.
 
 
10

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012

Earnings (Loss) Per Share

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

Since the Company reflected a net loss for the three and six month periods ended February 29, 2012 and February 28, 2011, respectively, the effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive. A separate computation of diluted earnings (loss) per share is not presented.

The Company has the following potential common stock equivalents at February 29, 2012 and February 28, 2011:
 
   
February 29, 2012
   
February 28, 2011
 
Stock options (exercise price - $0.50 - $0.75/share)
   
1,470,000
     
810,000
 
Warrants (exercise price $0.80- $1.25/share)
   
1,155,865
     
460,290
 
Convertible preferred shares (exercise price $0.001/share)
   
1,250,461
     
-
 
Convertible debt (exercise price $0.81/share)
   
869,692
     
-
 
Total common stock equivalents
   
4,746,018
     
1,270,290
 

In the above table, some of the outstanding convertible debt from 2011 and 2010 contains ratchet provisions that would cause variability in the exercise price at the balance sheet date. As a result, common stock equivalents could change at each reporting period.

Variable Interest Entities

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

A legal entity is required to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity’s residual returns or both.

On December 29, 2009, OSM purchased all of the assets of Soup Kitchen International, Inc. and its subsidiaries (“Soup Kitchen”) for $100,000 and guaranteed $3,670,000 of Soup Kitchen’s secured debt. In addition, OSM agreed to pay Soup Kitchen royalties of 1% of all of OSM sales for five years (through 2014), which will represent substantively all of Soup Kitchen’s revenue.

 
11

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012
 
The guaranty of the secured debt was a significant part of the Acquisition, because the assets acquired by OSM comprised substantially all of the income producing assets of Soup Kitchen, creating an obligation on the part of OSM that is almost certain to occur. In addition, the assets securing the debt were the assets obtained in the acquisition.

See Note 12 regarding Soup Kitchen bankruptcy.

Management has determined that Soup Kitchen is a variable interest entity. Accordingly, the remaining post-acquisition net assets of Soup Kitchen have been consolidated with OSM’s net assets as of December 29, 2009; however, each entity still maintains its separate legal existence.

Concentrations

Sales

For the six months ended February 29, 2012, one customer accounted for 59% of total soup sales compared to two customers accounting for 44% and 35% for the period ended February 28, 2011.

Accounts Receivable

At February 29, 2012 two customers accounted for 33% and 10% of total accounts receivable. At August 31, 2011 one customer accounted for 40% of total accounts receivable.

Vendors

For the six months ended February 29, 2012 and February 28, 2011, one vendor accounted for 98% of soup purchased. This vendor is the Company’s soup co-packer and all accounts receivable are pledged to this vendor.

Segments

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

Discontinued Operations

The following table summarizes certain operating data for discontinued operations for the three months ended February 29, 2012 and 2011 (See Note 2):

   
2012
   
2011
 
Sales
  $ -     $ -  
Cost of sales
    -       -  
Operating expenses
    -       (14,317 )
Other income
    -       -  
Loss from discontinued operations
  $ -     $ (14,317 )

 
12

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012
 
Recent Accounting Pronouncements

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

In September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The guidance in ASU 2011-08 discusses when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. This update requires an entity to perform all steps in the test for a reporting unit whose carrying value is zero or negative if it is more likely than not (more than 50%) that a goodwill impairment exists based on qualitative factors, resulting in the elimination of an entity’s ability to assert that such a reporting unit’s goodwill is not impaired and additional testing is not necessary despite the existence of qualitative factors that indicate otherwise. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

Note 4 Accounts Receivable
 
Accounts receivable consists of the following at February 29, 2012 and August 31, 2011.

   
February 29, 2012
   
August 31, 2011
 
Accounts receivable
  $ 291,833     $ 198,385  
Allowance for doubtful accounts
    (67,655 )     (64,143 )
Accounts receivable – net
  $ 224,178     $ 134,242  
 
At February 29, 2012 and August 31, 2011, the Company has related party accounts receivable of $15,471 and $18,614, respectively.

 
13

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012
 
Note 5 Property and Equipment
 
Property and equipment consists of the following at February 29, 2012 and August 31, 2011.

   
February 29, 2012
   
August 31, 2011
 
Vehicles
  $ 11,843     $ 18,219  
Equipment
    21,843       17,161  
Furniture and fixtures
    12,410       12,410  
Total
    46,096       47,790  
Less: accumulated depreciation
    (13,231 )     (14,372 )
Property and equipment – net
  $ 32,865       33,418  
 
Note 6 – Notes Receivable - Franchisees
 
The Company has advanced funds to certain franchisees to complete renovations and help with operating expenses in better performing locations. Related parties who own these franchisees are Senior VP of Franchise Development and a family member of one of the Company’s subsidiaries executive officers. On November 1, 2011, the Company executed 7% notes receivable with these franchisees for $485,771, maturing on October 31, 2018.
 
Monthly interest only payments from the franchisees are approximately $4,100, until November 1, 2012, when the franchisees will begin to pay principal and interest. The aggregate monthly principal and interest payments will be approximately $12,000, unless the location is closed or sold, at which time, the note will become due.

All franchisees are current with their interest only payments.
 
On November 18, 2011, one location was sold to a third party and payment of $143,482 was received. The balance due at February 29, 2012 was $70,084, for which a 5% note receivable was executed with the purchaser of the franchise, maturing on November 18, 2016.
 
The following is a summary of amounts due to the Company at February 29, 2012 and August 31, 2011.
 
Franchisee
 
February 29, 2012
   
August 31, 2011
 
A - Related party
  $ 255,879     $ 208,271  
B – Related party
    229,892       197,991  
C – Third party
    70,084       255,879  
Total notes receivable – franchisees
    555,855       662,141  
Less: allocation to short term (third party)
    (9,992 )     -  
Total notes receivable long term
    545,863       662,141  
Notes receivable – franchisees – related parties
    485,771       662,141  
Notes receivable – franchisee (third party)
  $ 70,084     $ -  

 
14

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012

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

Fiscal Year Ended
 
Amount
 
2012 (remaining 6 months)
 
$
26,433
 
2013
   
64,996
 
2014
   
87,029
 
2015
   
93,011
 
2016
   
99,409
 
Thereafter
   
184,977
 
Total
 
$
555,855
 

Note 7 – Intangible Assets
 
At February 29, 2012, the Company’s intangible assets consist of the following:
 
 
   
       
Accumulated
   
   
Gross
 
Amortization
 
Net
Soup formulas
 
$
27,418
   
$
(6,640)
   
$
20,778
 
Recipes
   
53,750
     
(16,272)
     
37,478
 
Total intangible assets
 
$
81,168
   
$
(22,912)
   
$
58,256
 

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

 
Amount
Soup formulas
5 years
Recipes
4 years

Estimated future amortization expense of intangible assets for the years ended August 31, for the year so specified is as follows:

Fiscal Year ended August 31,
 
Amount
 
2012 (remaining 6 months)
 
$
9,486
 
2013
   
18,921
 
2014
   
18,921
 
2015
   
9,364
 
2016
   
1,577
 
Total
 
$
58,256
 

 
15

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012
 
Note 8 Debt

(A)  
Terms
 
At February 29, 2012 the Company’s debt consists of the following:

The Company executed various notes containing the following terms:

Notes
 
Interest Rate
 
Maturity Date
 
Monthly Installments
 
Collateral
 
Amount
1
 
8%
 
June 2012 – November 2012
 
None
 
None
$
631,000
2
 
None
 
Due on demand
 
None
 
None
 
37,500
3
 
Prime + 3%, Prime + 4% and 6%
 
Due on Demand
 
None
 
All assets of the Company
 
1,942,316
4
 
None
 
Due on demand
 
None
 
All assets of the Company
 
290,902
5
 
7%
 
Due on demand
 
None
 
All assets of the Company
 
1,487,211
6
 
None
 
Due on demand
 
None
 
None
 
10,000
                 
$
4,398,929

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

(1) This balance is made up of various convertible notes. With the exception of these notes, all other debt with a maturity date is in default. These notes were issued with 349,125 warrants. See 8(C) for computation of derivative liabilities for convertible debt and warrants.
(2) The Company is in litigation regarding this debt, see note 11.
(3) The principal balance was $1,500,000, and was due to the former Chairman of Soup Kitchen.
On May 20, 2011, the Company entered into a 13 month agreement where the debt holder would be entitled to receive 500,000 shares of common stock if the debt is not repaid. The shares are in escrow and will only be valued if the Company is unable to repay the debt. The valuation of the stock will be determined on the issuance date. The 500,000 shares in escrow are not considered outstanding for purposes of computing earnings (loss) per share. At February 29, 2012, the Company is in default of the agreement for non-payment of accrued interest and the requirement for accelerated payments of 20% of any capital or debt raised. The Company raised $631,000 during the six months ended February 29, 2012.
(4) Represented legal fees to the Company’s prior securities counsel.
(5) Represents amounts due to the primary food vendor.
(6) Represents an advance from a third party during the six months ended February 29, 2012.
 

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

(B)  
Debt Discount
 
During the six months ended February 29, 2011, the Company recorded debt discounts totaling $340,515.

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

 
16

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012
 
The Company amortized $34,968 in 2012 to interest expense.

   
February 29, 2012
   
August 31, 2011
 
Total outstanding debt (See 8(A) above)
  $ 4,398,929     $ -  
Debt discount
    (340,515 )     -  
Amortization of debt discount
    34,968       -  
Debt – net
  $ 4,093,382     $ -  

(C)
Derivative Liabilities

The Company identified conversion features embedded within convertible debt and warrants issued during the six months ended February 29, 2012 (see Note 8(A)). The Company has determined that the features associated with the embedded conversion options and warrants should be accounted for at fair value as a derivative liability.

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

Derivative liability – August 31, 2011
   
-
 
Fair value at the commitment date for convertible debt and warrants
   
340,515
 
Fair value mark to market adjustment for convertible debt and warrants
   
(25,228
)
Derivative liability – February 29, 2012
 
$
315,287
 

The Company recorded the debt discount to the extent of the gross proceeds raised, which was $340,515.
 
The fair value at the commitment and re-measurement dates were based upon the following management assumptions as of February 29, 2012:

   
Commitment Date
   
Remeasurement Date
 
Expected dividends
   
0
%
   
0
%
Expected volatility
   
120
%
   
120
%
Expected term: convertible debt and warrants
 
0.33 – 3 years
   
0.26 – 3 years
 
Risk free interest rate
   
0.10% - 0.43
%
   
0.13% - 0.43
%

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

 
17

 

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012
 
Note 10 Stockholders’ Deficit
 
Stock Issued for Cash and Warrants
 
During the six months ended February 29, 2012, the Company issued 10,000 shares of common stock and 1,000 two-year warrants, exercisable at $1.25/share, for $10,000 ($1/share). In connection with raising these funds, the Company paid direct offering costs of $1,000, and net proceeds were $9,000. The warrants paid as direct offering costs have a net effect on additional paid in capital of $0.

In addition, the Company paid $5,000 and 20,000 two-year warrants, exercisable at $1/share, to a consultant for services rendered. The warrants paid as direct offering costs have a net effect on additional paid in capital of $0.

Stock Issued for Services
 
During the six months ended February 29, 2012, the Company issued 347,000 shares of common stock, for services rendered, having a fair value of $465,750 ($0.75 - $1.55/share) based upon the quoted closing trading price on the dates issued.

Conversion of Preferred Stock into Common Stock

For the six months ended February 29, 2012, the Company issued 272,572 shares of common stock in connection with the conversion of 272,572 shares of preferred stock, having a fair value of $273 ($0.001/share). The conversion did not result in any gain or loss on conversion.

Stock Options
 
On December 31, 2010, the Company issued 2,050,000 stock options, having a grant date fair value of $738,471. The options have an exercise price of $0.50 and a life of 10 years. The options vest 40% upon issuance, 40% on September 1, 2011 and 20% on September 1, 2012.
 
On January 18, 2012, the Company issued 200,000 stock options having a grant date fair value of $147,588 to a consultant. The options have an exercise price of $0.75 and a life of 10 years. 100,000 of the options vest 50% on the date of grant and 50% on the second anniversary of the grant date. 100,000 of the options cannot be exercised or vested until services are performed. 10,000 shares will be vested and exercisable for every $1,000,000 in qualifying revenues received by the Company in connection with the consultants’ successful introduction of customers. The second 100,000 option grant has not been earned and is not considered exercisable at February 29, 2012.

 
18

 

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012
 
The following is a summary of stock option expensing at February 29, 2012:

Grant date fair value – year end August 31, 2011
  $ 738,471  
Grant date fair value – six months ended February 29, 2012
    147,588  
Expensed – year end August 31, 2011
    (510,959 )
Expensed – six months ended February 29, 2012
    (217,861 )
Amount no longer subject to expensing (1)
    ( 14,737 )
Unrecognized compensation at February 29, 2012(2)
  $ 142,502  

(1)
Represents unvested portion of 60,000 stock options that were forfeited in fiscal year 2012.
(2)
Represents amount of unvested option expense that will be amortized over remaining vesting period through January 31, 2014.

The assumptions used during the six months ended February 29, 2012 were as follows:
 
       
Exercise price
 
$
0.50 - 0.75
 
Expected dividends
   
0
%
Expected volatility
   
150
%
Risk fee interest rate
   
1.92% - 2.01
%
Expected life of option
 
5 -10 years
Expected forfeitures
   
0
%

The following is a summary of the Company’s stock option activity for the six months ended February 29, 2012:

   
 
Options
   
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Life
 
Aggregate Intrinsic Value
 
Balance – August 31, 2011
   
2,035,000
   
$
0.50
         
Granted
   
200,000
   
$
0.75
         
Exercised*
   
(200,000)
   
$
0.50
         
Forfeited
   
(60,000)
   
$
0.50
         
Balance – February 29, 2012
   
1,975,000
   
$
0.66
 
1.45 years
 
$
772,850
 
Exercisable – February 29, 2012
   
1,470,000
   
$
0.65
 
0.82 years
 
$
613,300
 
Grant date fair value of options granted - 2012
         
$
147,588
           
Weighted average grant date fair value - 2012
         
$
0.74
           
                           
Outstanding options held by related parties
   
1,450,000
                   
Exercisable options held by related parties
   
1,160,000
                   
Fair value of options granted to related parties
 
$
522,333
                   
 
19

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012
 
* For the six months ended February 29, 2012, the Company issued 200,000 shares of common stock, in connection with the exercise of outstanding options for $100,000 ($0.50/share).

Stock Warrants
 
The following is a summary of the Company’s stock warrant activity:
 
   
Number of
Warrants
   
Weighted Average Exercise Price
 
Balance at August 31, 2011
   
785,740
   
$
1.19
 
Granted
   
370,125
   
$
0.92
 
Exercised
   
-
   
$
-
 
Forfeited
   
-
   
$
-
 
Balance at February 29, 2012
   
1,155,865
   
$
1.10
 

The weighted average remaining life for all outstanding warrants at February 29, 2012 is 1.63 years. The intrinsic value at February 29, 2012 and August 31, 2011 is $1,785 and $351,439, respectively.

Note 11 Commitments and Contingencies
 
Commitments

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

Years Ending August 31,
 
2012 (remaining 6 months)
 
$
112,500
 
2013
   
225,000
 
2014
   
187,500
 
Total
 
$
525,000
 

For the three and six months ended February 29, 2012, the Company recorded a royalty expense of $56,250 and $112,500, respectively.

Litigations, Claims and Assessments

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

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

On May 31, 2010, Soup Kitchen filed for bankruptcy.
 
On October 26, 2010, a third party action was filed in this case by the Defendants against the Company, certain principals of the Company and other third parties. The action seeks, among other things, to invalidate the Company's purchase of assets from Soup Kitchen. The Company is defending this action believing it to be without merit, especially in the light of the facts that (1) an independent appraisal was performed prior to the asset transfer (2) the Company paid $100,000 in cash and guaranteed secured debt in the amount of approximately $3,670,000; and (3) shareholder approval was obtained.
  
 
20

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012
 
Soupman, Inc. is one of several defendants in a lawsuit filed by plaintiff Gourmet Sales and Marketing, LLC (“GSM”) on or about July 18, 2011.  GSM claims that it is owed sales commissions based upon an August 2009 sales and marketing agreement.  The complaint contains five causes of action.  Aside from the claim for an accounting, a material amount of compensatory damages and/or punitive damages are demanded with respect to the other claims.  The Company served its answer to the complaint in October 2011, in which they denied the allegations of the complaint with respect to the claims of liability and asserted numerous defenses and affirmative defenses. The matter is now in discovery phase of litigation. In Company counsel’s opinion the complaint lacks merit as the agreement that forms the basis of GSM’s claims is invalid and unenforceable, GSM is not owed any money, and the Company believes that punitive damages are without basis. It is anticipated the matter will be resolved by means of motion practice at the appropriate time.  
 
No assurance, however, can be given as to the ultimate outcome of these actions or their effect on the Company. If the Company is not successful in its defense of these actions it could have a material adverse effect on its business, as well as current and expected future operations.
  
Note 12 Going Concern
 
As reflected in the accompanying financial statements, the Company had a net loss of $1,987,360 and net cash used in operations of $793,684 for the six months ended February 29, 2012; and a working capital deficit of $6,519,018 and a stockholders’ deficit of $5,877,234, respectively, at February 29, 2012. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The ability of the Company to continue its operations is dependent on Management's plans, which may include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, 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.

 
21

 
 
Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Notes to Consolidated Financial Statements
February 29, 2012
 
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,
opening new franchise locations; 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 13 Subsequent Events

During March 2012, the Company issued $184,250 of 8%, six month convertible notes with 32,812, three year warrants, exercisable at $1.00. The Company identified conversion features embedded within these convertible notes and warrants. The Company has determined that the features associated with the embedded conversion options and warrants will be accounted for at fair value as a derivative liability.
 
 
22

 
 
ITEM 2. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited financial statements and notes thereto for the quarter ended February 29, 2012 found in this report. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Where possible, we have tried to identify these forward looking statements by using words such as “anticipate,” “believe,” “intends,” or similar expressions. Our actual results could differ materially from those anticipated by the forward-looking statements due to important factors and risks.
 
Cautionary Note Regarding Forward-Looking Statements
 
This report and other documents that we file with the Securities and Exchange Commission contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions.  Statements that are not historical facts are forward-looking statements.  Words such as “expect,” “outlook,” “forecast,” “would,” “could,” “should,” “project,” “intend,” “plan,” “continue,” “sustain”, “on track”, “believe,” “seek,” “estimate,” “anticipate,” “may,” “assume,” and variations of such words and similar expressions are often used to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are not guarantees of future performance and involve risks, assumptions and uncertainties, including, but not limited to, those described in our reports that we file or furnish with the Securities and Exchange Commission.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements.  Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made.  Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statements after the date they are made, whether as a result of new information, future events, changes in assumptions or otherwise.

General
 
The following analysis of our consolidated financial condition and results of operations for the quarter ended February 29, 2012 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 10K filed with the Securities and Exchange Commission filed on December 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 4,830,256 shares of our common stock.
 
On January 31, 2011, we reincorporated in Delaware and changed our name from Passport Arts, Inc. to Soupman, Inc. Thereafter, our stock began trading on the OTC-Bulletin Board under the symbol SOUP.
 
We currently manufacture and sell soup to grocery chains and other outlets and to our franchised restaurants under the brand name “The Original Soupman”.
 
Our brand is well known throughout the industry and our Chicken Vegetable soup has been rated as the best chicken soup in America by Consumer Reports.  We are focusing on selling our soups in our new shelf stable tetra pak cartons that will be located in the soup aisles in grocery and club stores nationally.  We believe this will be a “game changer” for our business in regards to increased sales and margins with a lower price to point for customers.   This product will begin to ship in May 2012.  Currently our soups can be found frozen in the frozen food aisle which business we will exit and it will be replaced by the shelf stable carton. 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.  
 
 
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Results of Operations – Six Months ended February 29, 2012
 
The following table summarizes our operating results for the six months ended February 29, 2012 and February, 28, 2011:
 
   
February 29, 2012
   
February 28, 2011
 
Revenue
  $ 943,310     $ 383,400  
Cost of Sales
    696,093       190,399  
Gross Profit
    247,217       193,001  
Operating Expenses
    2,124,690       2,613,945  
Other Income (Expense)
    (109,887 )     (57,357 )
Loss From Continuing Operations
    (1,987,360 )     (2,478,301 )
Loss From Discontinued Operations
    -       (14,317 )
Net Loss
  $ (1,987,360 )   $ (2,492,618 )

For the six months ended February 29, 2012 soup sales accounted for 89% of overall revenues, and franchise revenues accounted for the remaining 11%.
 
Net loss for the six months ended February 29, 2011 was $1,987,360 or $0.07 per share (basic and diluted).  The net loss decrease of $505,258 from the six months ended February 28, 2011 was attributable to the increase in revenue and the reduction of operating expenses.
 
Cost of Sales as a percent of soup revenues was 83% for the six months ended February 29, 2012.  This includes the disposition of obsolete packaging of $21,527 as we move from the frozen food aisle to the soup aisle in the new tetra recart cartons and some discounted selling prices as we burn through the remaining frozen soup inventory.  This percentage is also affected by sales promotional items of $16,506 which has been netted against soup revenues.
 
Operating expenses for the six months ended February 29, 2012 were $2,124,690 and as a percentage of total revenue was 225% for the period. This is a decrease in operating expenses of 19%. We continue to work at cost reductions. These operating expenses for the six months ended February 29, 2012 includes $683,611 of expenses for the issuance of shares and stock options; $512,551 for payroll, payroll taxes and benefits; $889,438 in professional fees which include legal, accounting, strategic planning, public relations and branding and marketing; $112,500 for royalties; $91,980 for promotion and $65,416 for insurance.
 
Results of Operations – Three Months ended February 29, 2012
 
The following table summarizes our operating results for the three months ended February 29, 2012 and February, 28, 2011:
 
   
February 29, 2012
   
February 28, 2011
 
Revenue
  $ 559,367     $ 383,400  
Cost of Sales
    396,447       190,399  
Gross Profit
    162,920       193,001  
Operating Expenses
    860,156       2,599,628  
Other Income (Expense)
    (43,931 )     (57,357 )
Loss From Continuing Operations
    (741,167 )     (2,463,984 )
Loss From Discontinued Operations
    -       (14,317 )
Net Loss
  $ (741,167 )   $ (2,478,301 )
 
 
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For the three months ended February 29, 2012 soup sales accounted for 90% of overall revenues, and franchise revenues accounted for the remaining 10%.
 
Net loss for the three months ended February 29, 2011 was $741,167 or $0.03 per share (basic and diluted).  The net loss decrease of $1,737,134 from the three months ended February 28, 2011 was primarily attributable to the reduction of operating expenses which included expenses for issuances of shares and stock options of $1,599,696 in 2011 compared to $78,223 in 2012.
 
Cost of Sales as a percent of soup revenues was 78% for the three months ended February 29, 2012.  This includes some discounted selling prices as we burn through the remaining frozen soup inventory while moving to the tetra recart which will be sold in the soup aisle.  This percentage is also affected by sales promotional items of $8,761 which has been netted against soup revenues.
 
Operating expenses for the three months ended February 29, 2012 were $860,156 and as a percentage of total revenue was 154% for the period. These operating expenses for the three months ended February 29, 2012 includes $78,223 of expenses for the issuance of shares and stock options; $252,664 for payroll, payroll taxes and benefits; $279,776 in professional fees which include legal, accounting, strategic planning, public relations and branding and marketing;  $56,250 for royalties; $63,490 for promotion and $32,811 for insurance.
 
Liquidity and Capital Resources
 
   
February 29, 2012
   
August 31, 2011
 
Current assets
  $ 660,844     $ 565,426  
Current liabilities
  $ 7,179,862     $ 6,015,960  
Working capital (deficit)
  $ (6,518,978 )   $ (5,450,534 )

At February 29, 2012, we had cash and cash equivalents of $295,075 as compared to $343,927 at August 31, 2011.  The working capital deficit at February 29, 2012 of $6,518,978 and as of August 31, 2011 of $5,450,534 is an increase of $1,068,444 which is attributable to an increase in accounts payable and accrued expenses and convertible notes, partially offset by an increase in accounts receivable. It should also be noted that included in the current liabilities as at February 29, 2012 are the current liabilities of Soup Kitchen International, Inc. (which is not part of our company) in the amount of $4,681,381 which accounts for that amount of the total working capital deficit as that company has no assets and is included in the Soupman, Inc. statements (see note 3 Variable Interest Entities to the Soupman, Inc. and subsidiaries and Soup Kitchen International, Inc. Financial Statements).
 
For the six months ended February 29, 2012 cash used in operating activities was $793,684 as compared to $680,889 for the six months ended February 29, 2011.  Our primary uses of cash from operating activities for the six months ended February 29, 2012 were losses from operations offset by increases in share based payments, stock issued for services, and increases in accounts payable and accrued expenses.
 
Net cash provided by investing activities for the six months ended February 29, 2012 was $74,716, predominantly from the cash repaid by franchisees.
 
Net cash provided by financing activities for six months ended February 29, 2012 was $670,116 which includes proceeds from notes of $641,100 and $100,000 from the exercise of stock options..
 
Current and Future Financing Needs
 
We have incurred a stockholders’ deficit of $5,877,234 through February 29, 2012 and have incurred a net loss of $1,987,360 for the six months ended February 29, 2012.   We have incurred negative cash flow from operations since inception and have primarily financed our operations through the sale of stock. At February 29, 2012, we had short term debt of $4,093,382 and a working capital deficit of $6,519,018.   Our debt in the amount of $4,093,382 includes a guarantee of Soup Kitchen International Inc’s debt in the amount of $3,653,675 all of which is past due.  We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including the launch of our new shelf stable tetra cartons, 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.
 
 
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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.
 
Item 4. 
Controls and Procedures.
 
Disclosure Controls and Procedures
 
The Company has adopted and maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Form 10-Q, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. As required under Exchange Act Rule 13a-15, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended February 29, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
26

 
 
PART II - OTHER INFORMATION
  
Item 1. 
Legal Proceedings.
 
On September 21, 2009, Penny Fern Hart, a former Chairman of the Board of Soup Kitchen International, Inc. (“SKI”), as successor to the Commerce Bank loan to SKI, commenced an action in N.Y. State Supreme Court, Case Index # 602538/09, against John Bello, Maj-Britt Rosenbaum and William McCreery (the “Defendants”) to enforce certain guarantees given by the Defendants to Commerce Bank regarding SKI’s defaulted loan.  On October 26, 2010, a third party action was filed in this case by the Defendants against OSM, certain principals of OSM and other third parties.  The action seeks, among other things, to invalidate OSM’s purchase of assets from SKI. On May 2, 2011, a proceeding was brought against the Company, certain principals of the Company and other third parties by the bankruptcy trustee for SKI seeking to avoid and/or recover the value of assets of SKI, re-alleging various claims made in the October 26, 2010 action. On October 22, 2011, the presiding judge in the bankruptcy action stayed the remaining third-party claims, in the Penny Fern Hart matter, and ordered all the parties to confer and submit a discovery schedule for the bankruptcy action. The Company intends to vigorously defend these actions believing them to be wholly without merit, especially in the light of the fact that an independent appraisal was performed prior to the asset transfer to OSM which completely supported the fairness of the asset transfer to OSM in which OSM paid $100,000 in cash, guaranteed secured debt in the amount of $3,670,000, and has since paid $ 352,907 in respect of SKI payables (including $ 256,205 owed to Al Yeganeh. In addition, there was SKI shareholder approval obtained in connection with the transaction.  No assurance, however, can be given as to the ultimate outcome of these actions or their effect on the Company.  If the Company is not successful in its defense of these actions it could have a material adverse effect on its business and operations.
 
Soupman, Inc. is one of several defendants in a lawsuit filed by plaintiff Gourmet Sales and Marketing, LLC (“GSM”) in the Supreme Court of the State of New York, County of New York on or about July 18, 2011.  Plaintiff GSM claims that it is owed sales commissions based upon an August 2009 sales and marketing agreement.  The complaint contains five causes of action.  Aside from the claim for an accounting, a material amount of compensatory damages and/or punitive damages are demanded with respect to the other claims.  Defendants served their answer to the complaint on or about October 31, 2011, in which they denied the allegations of the complaint with respect to the claims of liability and asserted numerous defenses and affirmative defenses.  The matter is now in discovery phase of litigation.  In counsel’s opinion the complaint lacks merit as the agreement that forms the basis of plaintiff’s claims is invalid and unenforceable, plaintiff is not owed any money, and there is absolutely no basis for a finding of willful conduct that is necessary to assess punitive damages.  It is anticipated the matter will be resolved by means of motion practice at the appropriate time. If the Company is not successful in its defense of this action it could have a material adverse effect on its business and operations.
 
Item 2. 
Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended February 29, 2012, the Company issued 45,092 shares of common stock in connection with the conversion of 45,092 shares of preferred stock.  The securities were issued pursuant to Section 3 (a)(9) of the Securities Act.

During the three months ended February 29, 2012, we issued 97,000 shares of common stock for services rendered, having an aggregate fair market value of $78,250 based upon the quoted closing trading prices on the issue dates. These securities were issued pursuant to Section 4(2) of the Securities Act. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The holders were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.

During the three months ended February 29, 2012, we issued 8% convertible notes together with a three year warrant exercisable for 349,125 shares of common stock at a per share price of  $0.80 -$1.00 for aggregate proceeds of $532,500. These securities were issued pursuant to Section 4(2) of the Securities Act of 1933 (the “Securities Act”) promulgated thereunder and are convertible under certain circumstances into the next equity round of financing effected by the Company at the price offered in that round. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.
 
On February 7, 2012, we entered into a Securities Purchase Agreement with an accredited investor for the sale of a promissory note in the aggregate principal amount of $98,500 (the “Note”). The February Note bears interest at the rate of 8% per annum, matures on November 9, 2012 and  is convertible into shares of our common stock beginning 180 days from the date of its issue at a conversion price of 58% of the average of the lowest three trading prices of our common stock during the ten trading days on the OTCBB proceeding the conversion date. The number of shares issuable upon conversion shall be proportionally adjusted to reflect any stock dividend, split or similar event. We are entitled to prepay the Note:  (i) from the date of the Note until 30 days thereafter at 120% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Note; (ii) 31 days from the date of the Note until 60 days after the issue date at 125% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Note; (iii) 61 days from the date of the Note until 90 days after the issue date at 130% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Notes; (iv) 91 days from the date of the Note until 120 days after the issue date at 135% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Note; (v) 121 days from the date of the Note until 150 days after the issue date at 140% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Note; and (vi) 151 days from the date of the Note until 180 days after the issue date at 150% of the outstanding principal balance, accrued and unpaid interest, default interest, and other amounts required under the Note. We have no right to prepay the Note after 180 days from the issue date of the Note. Unless waived in writing by the holder of the Note, we are prohibited from effecting the conversion of the Note to the extent that as a result of such conversion the holder would beneficially own more than 4.99% in the aggregate of our issued and outstanding common stock immediately after giving effect to the issuance of common stock upon conversion. While the Note is outstanding, the holder is entitled to a reduction in the conversion price if we issue any securities for a per share price less than the conversion price in effect available to the holder.  The Note holder also has a right of first refusal on any offerings with similar terms in amounts under $100,000.
 
 
27

 
 
Item 3. 
Defaults upon Senior Securities.
 
None.
 
Item 4. 
(Removed and Reserved).
 
Item 5. 
Other Information.
 
 
28

 
  
Item 6. 
Exhibits.
 
Exhibit
   
Number
 
Description
     
31.1*
 
Certification of the Principal Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*
 
Certification of the Principal Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*
 
Certification of the Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
     
32.2*
 
Certification of the Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
 
101.INS**
XBRL Instance
   
101.XSD**
XBRL Schema
   
101.PRE**
XBRL Presentation
   
101.CAL**
XBRL Calculation
   
101.DEF**
XBRL Definition
   
101.LAB**
XBRL Label
 


*       Filed herewith
**     Filed herewith electronically
 
 
29

 
 
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: April 16, 2012
By:
/s/  Arnold Casale
   
Arnold Casale
   
Chief Executive Officer and Director
(Principal Executive Officer)
 
 
30