Soupman, Inc. and Subsidiaries
Notes to Consolidation Financial Statements
November 30, 2013
(Unaudited)
(E) Debt discount
Below is a summary of the Company’s debt discount at November 30, 2013 and August 31, 2013:
| | | November 30, 2013 | | | August 31, 2013 |
| Total outstanding debt | | $ | 6,483,249 | | | $ | 6,585,432 | |
| Carry forward debt discount – net | | | (584,768 | ) | | | (404,088 | ) |
| Debt discount | | | (10,500 | ) | | | (994,214 | ) |
| Amortization of debt discount | | | 225,029 | | | | 813,534 | |
| Debt – net | | $ | 6,113,010 | | | $ | 6,000,664 | |
The Company’s remaining debt discount of $370,240 will be fully amortized during fiscal year 2014.
Note 6 – Derivative Liabilities
The Company did not identify any conversion features embedded within convertible debt and warrants issued during the years ended August 31, 2013 (see note 5(A)); therefore, no derivatives were recorded during the three months ended November 30, 2013.
The fair value of the Company’s derivative liabilities at November 30, 2013 and August 31, 2013 is as follows:
| | | November 30, 2013 | | | August 31, 2013 | |
| Carry forward balance | | $ | 1,895,630 | | | $ | 513,493 | |
| Fair value at the commitment date for convertible notes | | | - | | | | 527,796 | |
| Fair value at the commitment date for warrants issued | | | - | | | | 78,777 | |
| Loss on debt extinguishment | | | - | | | | 338,507 | |
| Fair value mark-to-market adjustment | | | (960,181 | ) | | | 437,057 | |
| Derivative liabilities (balance) | | $ | 935,449 | | | $ | 1,895,630 | |
The fair values at the re-measurement dates for convertible debt and warrants that are treated as derivative liabilities were based upon the following estimations/assumptions made by management for the three months ended November 30, 2013:
| Three months ended | | Re-measurement Date |
| Exercise price | | $0.80 - $1.00 |
| Expected dividends | | 0% |
| Expected volatility | | 111 - 134% |
| Expected term: convertible debt and warrants | | 1 months – 2.48 years |
| Risk free interest rate | | 0.05% - 0.56% |
Soupman, Inc. and Subsidiaries
Notes to Consolidation Financial Statements
November 30, 2013
(Unaudited)
Note 7 Stockholders’ Deficit
(A) Series A – Convertible Preferred Stock
No Series A stock was issued or converted to common stock during the three months ended November 30, 2013.
(B) Common Stock
For the three months ended November 30, 2013 the Company issued the following shares of common stock; fair value for the share issued was based upon the quoted closing trading price on the dates shares were issued:
| Type | | Shares | | | Fair value | | | Range of value per share | |
| 1. Stock issued for cash | | | 790,000 | | | $ | 316,000 | | | $ | $0.40 | |
| 2. Stock issued in connection with forbearance | | | 275,000 | | | $ | 165,000 | | | $ | $0.60 | |
| 3. Stock issued for services | | | 200,000 | | | $ | 122,000 | | | $ | 0.44 - $0.69 | |
| 4. Stock cancelled | | | (200,000 | ) | | $ | - | | | $ | - | |
The corresponding stock issuances above are more fully discussed below:
3 - Includes 140,000 and 60,000 shares having a fair value of $88,000 and $33,740, respectively, issued during the three months ended November 30, 2013 to consultants and to board and board of advisors' members.
4 - Shares previously issued in error for services.
(C) Stock Options
The Company granted no stock options during the three months ended November 30, 2013.
The following is a summary of the Company’s stock option activity for the three months ended November 30, 2013:
| | | Options | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value | |
| Balance – August 31, 2013 | | | 1,975,000 | | | $ | 0.53 | | 7.44 years | | | 408,250 |
| Granted | | | - | | | | - | | | | | | |
| Exercised | | | - | | | | - | | | | | | |
| Forfeited | | | - | | | | - | | | | | | |
| Balance – November 30, 2013 | | | 1,975,000 | | | $ | 0.51 | | 6.95 years | | | 17,750 | |
| Outstanding options held by related parties (November 30, 2013) | | | 1,450,000 | | | | | | | | | | |
| Exercisable options held by related parties (November 30, 2013) | | | 1,450,000 | | | | | | | | | | |
| Exercisable options held by third parties (November 30, 2013) | | | 375,000 | | | | | | | | | | |
Soupman, Inc. and Subsidiaries
Notes to Consolidation Financial Statements
November 30, 2013
(Unaudited)
The following is a summary of the Company’s unvested stock options at November 30, 2013:
| | | Un-vested Stock Options | | Weighted Average Grant Date Fair Value | |
| Unvested – August 31, 2013 | | 100,000 | | $ | 0.75 | |
| Granted | | - | | | - | |
| Vested/Exercised | | - | | | - | |
| Forfeited/Cancelled | | - | | | - | |
| Unvested – November 30, 2013 | | 100,000 | | $ | - | |
| Weighted average remaining life for vesting | | 6.71 years | | | | |
The Company expensed $4,612 during the three months ended November 30, 2013 related to options that vested.
(D) Stock Warrants
The following is a summary of the Company’s stock warrant activity for the three months ended November 30, 2013:
| | | Number of Warrants | | | Weighted Average Exercise Price | |
| Balance at August 31, 2013 | | | 5,792,702 | | | $ | .67 | |
| Granted | | | - | | | | .- | |
| Exercised | | | - | | | | - | |
| Forfeited/Cancelled | | | (334,500 | ) | | | 1.25 | |
| Balance at November 30, 2013 | | | 5,458,202 | | | $ | .65 | |
| Warrants Outstanding | | | Warrants Exercisable | |
Range of exercise price | | Number Outstanding | | | Weighted Average Remaining Contractual Life (in years) | | | Weighted Average Exercise Price | | | Number Exercisable | | | Weighted Average Exercise Price | | | Intrinsic Value | |
| $ 0.40 -$1.25 | | | 5,458,202 | | | | 3.22 | | | $ | 0.65 | | | | 5,458,202 | | | $ | 0 .67 | | | | 276,500 | |
Soupman, Inc. and Subsidiaries
Notes to Consolidation Financial Statements
November 30, 2013
(Unaudited)
Note 8 Commitments and Contingencies
Commitments
For the three months ended November 30, 2013, the Company recorded a royalty expense of $56,250 in connection with a royalty agreement (as further described in the Company’s Annual Report filed on Form 10-K for the year ended August 31, 2013.)
During the three months ended November 30, 2013, the Company recorded compensation cost of $95,277 and $3,499, respectively, in connection with a June 2013 and a December 2012 agreement, respectively (as further described in the Company’s Annual Report filed on Form 10-K for the year ended August 31, 2013.)
During the three months ended November 30, 2013, the Company recorded compensation cost of $23,994 in connection with a January 2013 agreement (as further described in the Company’s Annual Report filed on Form 10-K for the year ended August 31, 2013.)
Litigations, Claims and Assessments
On October 26, 2010, a third party action was filed against OSM, certain principals of OSM and other third parties, Case Index #1-10-44670. The action in U.S. Bankruptcy Court, Eastern District, New York, sought, among other things, to invalidate OSM’s purchase of assets from SKI., which was subject to a bankruptcy petition. The Company has always considered the action to be wholly without merit, because, among other things: (1) an independent appraisal was performed prior to the asset transfer; (2) an additional independent appraisal was performed by a third party in May of 2012, which showed SKI had no value; (3) OSM paid $100,000 in cash and guaranteed secured debt in the amount of approximately $3,670,000; and (4) shareholder approval was obtained. Following mediation, the parties to the action, including the trustee in bankruptcy for SKI, have entered into a settlement agreement, in which the parties have agreed to settle the action against OSM for $950,000, of which $350,000 is payable by OSM and $600,000 is payable by the Company’s D&O insurance carrier. In connection with the settlement agreement, the Company will also be released from approximately $300,000 in secured debt which OSM had guaranteed in connection with its purchase of the assets of SKI; se Note 8(C). As a result, the expense of the settlement to the Company will not be significant; however, its effect on the Company’s immediate cash position, once paid, is expected to be significant. No assurance can be given what effect any failure to make the payment may have on the settlement agreement or ultimate resolution of the matter given the Company’s current cash position. The settlement agreement is subject to court approval which is pending.
Soupman, Inc. is one of several defendants in a lawsuit filed by Gourmet Sales and Marketing, LLC (“GSM”) in July 2011. GSM claims that it is owed $37,500 in sales commissions based upon an August 2009 sales and marketing agreement. Aside from the claim for an accounting, 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 it denied the allegations of the complaint with respect to the claims of liability and asserted numerous defenses and affirmative defenses. In November 2013, the Company served various counter-claims against GSM and its principals. The matter is still in the discovery phase of litigation. In the Company and its counsel’s opinion, the complaint lacks merit as the agreement that forms the basis of GSM’s claims may be invalid and unenforceable, GSM is not owed any money in relation to this agreement, and the Company believes that punitive damages are without basis and therefore has made no accrual for probable losses.
No assurance can be given as to the ultimate outcome of these actions or its effect on the Company. If the Company is not successful in its defense (or settlement) of these actions it could have a material adverse effect on its business, as well as current and expected future operations.
Soupman, Inc. and Subsidiaries
Notes to Consolidation Financial Statements
November 30, 2013
(Unaudited)
Note 9 Going Concern
As reflected in the accompanying financial statements, the Company had a net loss of approximately $500,000 and net cash used in operations of approximately $180,000 for the three months ended November 30, 2013, and a working capital deficit of approximately $10.6 million and a stockholders’ deficit of approximately $10.4 million at November 30, 2013. 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, 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 will 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 convertible debt financing |
| ● | seeking to increase sales and distribution of Tetra Pak products; and |
| ● | seeking to open new franchise locations; |
| ● | allocating sufficient resources to continue advertising and marketing efforts |
The accompanying consolidated 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 10 Subsequent Events
A) Debt
Since November 30, 2013, the Company issued $179,500 in convertible notes.
B) Equity
Since November 30, 2013, the Company has issued 329,000 shares of its common stock for services rendered, having in aggregate a fair market value of $152,930. Share prices ranged from $0.45 to $0.50 and were based upon the quoted closing trading prices on the dates issued.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following analysis of our consolidated financial condition and results of operations for the quarter ended November 30, 2013 should be read in conjunction with the consolidated financial statements, including footnotes, and other information presented elsewhere in this Quarterly Report on Form 10-Q and the risk factors and the financial statements and the other information set forth in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 14, 2013.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition.
Cautionary Note Regarding Forward-Looking Statements
This report and other documents that we file with the Securities and Exchange Commission contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions. Statements that are not historical facts are forward-looking statements. Words such as “expect,” “outlook,” “forecast,” “would,” “could,” “should,” “project,” “intend,” “plan,” “continue,” “sustain”, “on track”, “believe,” “seek,” “estimate,” “anticipate,” “may,” “assume,” and variations of such words and similar expressions are often used to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance and involve risks, assumptions and uncertainties, including, but not limited to, those described in our reports that we file or furnish with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statements after the date they are made, whether as a result of new information, future events, changes in assumptions or otherwise.
Overview
Our Company manufactures and sells soups under the “Original Soupman®” brand. We sell our soups in new innovative Tetra Recart shelf stable cartons in the canned soup aisle where most “heat & serve” retail soup purchases are made (approximately $6 billion in the US each year.) We believe that with our new shelf-stable Tetra Recart packaging, which allows our soups to be displayed in the canned soup aisle, many consumers will choose the Soupman’s famous soups from Al Yeganeh over the other typical inferior tasting canned soups. We believe we will capture the health conscientious consumers who are aware that recent reports have warned consumers that canned products contain BPA, a known cancer causing agent. Tetra Recart packaging is BPA free and recyclable.
We also have franchised and licensed restaurants in specifically designated heavy traffic locations, such as the Mohegan Sun Casino in Connecticut. We sell the Original Soupman soups in bulk 8 lb. frozen “heat ‘n serve” pouches to our franchised and licensed restaurants. The bulk 8 lb. pouches are also used for the Original Soupman soups and products which we sell to the New York City Public school system.
Results of Operations – Three Months Ended November 30, 2013
The following table summarizes our operating results for the three months ended November 30, 2013 and 2012, respectively. All amounts have been rounded to the nearest thousandth.
| | | 2013 | | | 2012 | |
| Revenue | | $ | 1,102,000 | | | $ | 790,000 | |
| Cost of Sales | | | 967,000 | | | | 533,000 | |
| Gross Profit | | | 135,000 | | | | 257,000 | |
| Operating Expenses | | | 996,000 | | | | 1,176,000 | |
| Loss From Operations | | | (861,000 | ) | | | (919,000 | ) |
| Other Income (Expense) | | | 358,000 | | | | (307,000 | ) |
| Net Loss (including non-controlling interest) | | $ | (503,000 | ) | | $ | (1,226,000 | ) |
Revenue
Soup sales accounted for approximately 97% and 92% of overall revenue for the three months ended November 30, 2013 and 2012, respectively, while franchise revenues accounted for the remaining 3% and 8%, respectively. Our quarter-over-quarter revenues increase of approximately 39% was primarily attributable to the continued introduction of our new Tetra Recart line of soups.
For the three months ended November 30, 2013, our Tetra Recart line of soups accounted for approximately $833,000 (78%) of total revenue. The balance of soup sales of approximately $239,000 (22%) of total revenue were sold to our franchisees and the New York City school system. Our year-over-year soup sales increased 48%, primarily attributable to an increase in Tetra Recart sales.
Reported revenues are net of slotting fees (a fee charged by supermarkets in order to have the product placed on their shelves) and sales discounts (early payment discounts). Slotting fees for three months ended November 30, 2013 and 2012, respectively, were approximately $114,000 and $17,000, while sales discounts for the same periods were approximately $20,000 and $11,000.
Cost of Sales
Costs of sales, for the three months ended November 30, 2013 and 2012, included freight of approximately $49,000 and $38,000, respectively. Cost of sales represents costs associated with soup sales only; the Company had no cost of sales associated with franchise activities.
For the three months ended November 30, 2013 and 2012, cost of sales as a percent of soup sales increased approximately 16% (from 74% to 90%) due primarily to an increase in year-over-year slotting fees and higher cost of sales on our newest line of Tetra Recart soups. Cost of sales as a percent of soup sales is negatively impacted by slotting fees and sales discounts, which lower the reportable revenue, thus increasing the percentage
We expect our costs of sales (specifically the cost of ingredients, packaging and freight) on all our products to decrease in 2014 as we transition to a Maryland based packer.
Operating Expenses
Year –over-year operating expenses as a percentage of revenue decreased approximately 59% (from 149% to 90%) for the three months ended November 30, 2013 as compared to the three months ended November 20, 2012. Major components of our operating expenses for the three months ended November 30, 2013 consisted primarily of approximately 249,000 in stock based compensation and stock issued for services, $219,000 for payroll and payroll related expenses, $180,000 in professional fees, $64,000 in insurance expense, $56,000 in royalty fees and $49,000 for the promotion of our products.
Other Income (Expense)
Other income for the three months ended November 30, 2013 was approximately $358,000 compared to other expenses of approximately $307,000 for the three months ended November 30, 2012. The year-over-year change from other expense to other income was approximately $665,000 and was primarily due to an approximately $826,000 increase in change in fair value of derivative liabilities and a decrease of approximately $48,000 in stock related expenses, offset primarily by increases of approximately $165,000 for a forbearance agreement, $30,000 in debt penalty payments and $26,000 in interest expense.
Net Loss
Our net loss for the three months ended November 30, 2013 as compared to the three months ended November 30, 2012 decreased approximately $723,000 (or 59%) primarily due to factors discussed above regarding Revenue, Cost of Sales, Operating Expenses and Other Expenses. Net loss for the three months ended November 30, 2013 was approximately $386,000 or $0.01 per share (basic and diluted).
There were no unusual or infrequent events or transactions, or significant economic changes that materially affected the amount of reported income or expenses from operations and nor is the Company aware of any known uncertainties that it reasonably expects will have a material impact income or expenses from operations, other than in the normal course of business such as seasonality.
Liquidity and Capital
The following table summarizes our working capital as of November 30, 2013 and August 31, 2013; all amounts have been rounded to the nearest thousandth.
| | | As of November 30, 2013 | | | As of August 31, 2013 | |
| Current assets | | $ | 845,000 | | | $ | 779,000 | |
| Current liabilities | | $ | 11,396,000 | | | $ | 11,564,000 | |
| Working capital (deficit) | | $ | (10,551,000 | ) | | $ | (10,785,000 | ) |
At November 30, 2013, we had cash of approximately $104,000 as compared to approximately $115,000 at August 31, 2013. Our working capital deficit decreased approximately $234,000, primarily due to a decrease in derivative liabilities of approximately $960,000 and an increase in accounts receivable and inventory of approximately $82,000 offset by an increase in accounts payable and accrued liabilities of approximately $678,000 and an increase in net debt of $80,000.
For the three months ended November 30, 2013 net cash used in operating activities was approximately $180,000 as compared to approximately $421,000 for the three months ended November 30, 2012. Our primary uses of net cash from operating activities for the three months ended November 30, 2013 were losses from operations of approximately $503,000, an increase in accounts payable – net of approximately $680,000 and a non-cash adjustment to reconcile net loss to net cash of approximately $960,000 relating to the change in fair value of derivative liabilities, offset in aggregate by non-cash adjustments to reconcile net loss to net cash of expenses relating to stock issued for compensation and services – net of approximately $249,000, amortization of approximately $236,000 and stock issued for forbearance of $165,000.
Net cash used in investing activities for the three months ended November 30, 2013 was approximately $31,000; approximately $16,000 from advances to franchisees, $8,000 in advances to related party franchisees and $7,000 for the purchase of fixed assets.
Net cash provided by financing activities for the three months ended November 30, 2013 was approximately $200,000, which primarily included approximately $270,000 – net from the issuance of convertible notes and $316,000 from the sale of common stock offset by approximately $383,000 used for the repayment of debt.
Current and Future Financing Needs
We have incurred a stockholders’ deficit of approximately $10.4 million through November 30, 2013 and have incurred a net loss of approximately $500,000 for the three months ended November 30, 2013. We have incurred negative cash flow from operations since inception and have primarily financed our operations through the sale of stock and the issuance of notes. At November 30, 2013, we had a net short term debt of approximately $6,113,000 and a working capital deficit of approximately $10.5 million. These factors raise substantial doubt about our ability to continue as a going concern. During the three months ended November 30, 2013, we raised approximately $597,000 (net of expenses) from the issuance of our common stock and the issuance of notes and since then we have raised an additional $179,500 from the issuance of notes and approximately $153,000 through the sale of stock. Our debt of approximately $6,081,000 net includes a guarantee of SKI's debt in the amount of approximately $2,991,000; however none of it is past due. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including the promotion of our new shelf stable Tetra Pak, our advertising and marketing campaign, and fees in connection with regulatory compliance and corporate governance. The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. We do not have sufficient cash to operate our business at the current level for the next twelve months and insufficient cash to achieve our business goals. If our anticipated sales for the next few months do not meet our expectations, our existing resources will not be sufficient to meet our cash flow requirements. Furthermore, if our expenses exceed our anticipations or our sales revenue is insufficient we will need additional funds to implement our business plan. We will not be able to fully establish our business if we do not have adequate working capital so we will need to raise additional funds, whether through a stock offering or otherwise.
We are currently seeking additional funding from investors as well as an investment bank for an operating line of credit secured by receivables and inventory. While we believe we will require approximately $6,000,000 to implement our full business strategy, we believe that if we are able to raise no less than $1,500,000, it will be sufficient to support our operations for the next 12 months. If we are unable to raise the entire $6,000,000, we will be forced to reduce our marketing and promotion efforts and potentially the size of our operations as well, unless current sales increase enough to support implementing our full business plan. We believe that at $6,000,000 in sales, our operations would be self-sustaining and cash flow positive. Due to the fact that we use co-packers to manufacture our products, have no bricks and mortar, rent very modest space and only have 8 full time employees, many of our fixed costs are minimal and will remain unchanged regardless of how much money we are able to raise. If we are forced to reduce our marketing and promotion efforts and/or size of our operations because we are unable to raise the entire $6,000,000 and current sales do not increase enough to support implementing our full business plan, our revenues will likely be less than had we been able to implement our full program, and as a direct result our income may suffer, and may not be sufficient to cover our negative cash flow, negatively affecting our liquidity
We are obligated to pay the minority stockholder of Kiosk a royalty equal to 3% of the gross sales of all of its soup on the first $50,000,000 of gross sales, 2% on gross sales between $50,000,000 and $75,000,000, and 1% on gross sales thereafter. We are required to pay a minimum of $225,000 per year if the gross sales threshold is not met. Payments are due quarterly for ongoing services through June 30, 2014.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On October 26, 2010, a third party action was filed against OSM, certain principals of OSM and other third parties, Case Index #1-10-44670. The action in U.S. Bankruptcy Court, Eastern District, New York, sought, among other things, to invalidate OSM’s purchase of assets from SKI., which was subject to a bankruptcy petition. The Company has always considered the action to be wholly without merit, because, among other things: (1) an independent appraisal was performed prior to the asset transfer; (2) an additional independent appraisal was performed by a third party in May of 2012, which showed SKI had no value; (3) OSM paid $100,000 in cash and guaranteed secured debt in the amount of approximately $3,670,000; and (4) shareholder approval was obtained. Following mediation, the parties to the action, including the trustee in bankruptcy for SKI, have entered into a settlement agreement, in which the parties have agreed to settle the action against OSM for $950,000, of which $350,000 is payable by OSM and $600,000 is payable by the Company’s D&O insurance carrier. In connection with the settlement agreement, the Company will also be released from approximately $300,000 in secured debt which OSM had guaranteed in connection with its purchase of the assets of SKI; se Note 8(C). As a result, the expense of the settlement to the Company will not be significant; however, its effect on the Company’s immediate cash position, once paid, is expected to be significant. No assurance can be given what effect any failure to make the payment may have on the settlement agreement or ultimate resolution of the matter given the Company’s current cash position. The settlement agreement is subject to court approval which is pending.
Soupman, Inc. is one of several defendants in a lawsuit filed by Gourmet Sales and Marketing, LLC (“GSM”) in July 2011. GSM claims that it is owed $37,500 in sales commissions based upon an August 2009 sales and marketing agreement. Aside from the claim for an accounting, 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 it denied the allegations of the complaint with respect to the claims of liability and asserted numerous defenses and affirmative defenses. In November 2013, the Company served various counter-claims against GSM and its principals. The matter is still in the discovery phase of litigation. In the Company and its counsel’s opinion, the complaint lacks merit as the agreement that forms the basis of GSM’s claims may be invalid and unenforceable, GSM is not owed any money in relation to this agreement, and the Company believes that punitive damages are without basis and therefore has made no accrual for probable losses.
No assurance can be given as to the ultimate outcome of these actions or its effect on the Company. If the Company is not successful in its defense (or settlement) of these actions it could have a material adverse effect on its business, as well as current and expected future operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended November 30, 2013, we issued 275,000 shares of common stock for a forbearance agreement, having an aggregate fair market value of $165,000 based upon the quoted closing trading prices on the issue date; 200,000 shares of common stock for services rendered, having an aggregate fair market value of $122,000 based upon the quoted closing trading prices on the issue date; 790,000 shares of common stock to accredited investors at an issue price of $.40 per share for a fair value of $316,000, and cancelled 200,000 shares that were previously issued for services. These securities were issued pursuant to Section 4(a)(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.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosure
Not Applicable
Item 5. Other Information.
None.
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 electronically |
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: January 14, 2014 | By: | /s/ Lloyd Sugarman |
| | | Lloyd Sugarman |
| | | Chief Executive Officer and Director (Principal Executive Officer) |
| | SOUPMAN, INC. |
| | | |
| Date: January 14, 2014 | By: | /s/ Robert Bertrand |
| | | Robert Bertrand |
| | | President & CFO (Principal Financial Officer) |
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