For the six months ended February 28, 2014, 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.
The Company issued no stock options during the six months ended February 28, 2014.
The following is a summary of the Company’s stock option activity for the six months ended February 28, 2014:
The following is a summary of the Company’s unvested stock options at February 28, 2014:
The Company expensed $6,151 during the six months ended February 28, 2014 related to options that vested.
The following is a summary of the Company’s stock warrant activity for the six months ended February 28, 2014:
For the six months ended February 28, 2014, the Company recorded royalty expense of $112,500 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.)
As reflected in the accompanying financial statements, the Company had a net loss of approximately $1.5 million and net cash used in operations of approximately $0.4 million for the six months ended February 28, 2014, and a working capital deficit of approximately $11 million and a stockholders’ deficit of approximately $10.8 million at February 28, 2014. 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.
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.
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 February 28, 2014 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 any of the 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 brand name “Original Soupman®”. Our soups are packaged in innovative Tetra Recart shelf stable cartons and are sold in the canned soup aisle of grocery stores, where most “heat & serve” retail soup purchases are made. The market size for our product in the US is approximately $6 billion annually.
We believe our sales will increase as soup consumers can now compare and choose Soupman’s famous soups over other typical inferior tasting canned soups. We also believe we will capture the health conscience consumers, aware of recent reports warning that canned products contain BPA, a known cancer-causing agent. Tetra Recart packaging is BPA free, sustainable and recyclable.
We also sell the Original Soupman soups in bulk 8 lb. frozen “heat ‘n serve” pouches to our franchised and licensed restaurants. We have franchised and licensed restaurants in specifically designated heavy traffic locations such as the Mohegan Sun Casino in Connecticut. Our newest Original Soupman Delicatessen & Restaurant opened this quarter at the Resorts Casino Hotel in Atlantic City.
We also sell Original SoupMan 8lb. bulk soups and other food products to the New York City Public school system, City University of New York, College of Staten Island and others. The products include vegetarian items, such a Mexicali Beans, Stewed Pinto Beans and Curried Chick Peas with Tomatillos, all of which are low-fat, low-sodium, and high in dietary fiber, and designed to taste great.
Results of Operations
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.
Six Months Ended February 28, 2014
The following table summarizes our operating results for the six months ended February 28, 2014 and 2013, respectively. All amounts have been rounded to the nearest thousandth.
| | | 2014 | | | 2013 | |
| Revenue | | $ | 1,873,000 | | | $ | 1,410,000 | |
| Cost of Sales | | | 1,621,000 | | | | 1,116,000 | |
| Gross Profit | | | 252,000 | | | | 294,000 | |
| Operating Expenses | | | 2,116,000 | | | | 2,173,000 | |
| Loss From Operations | | | (1,864,000 | ) | | | (1,879,000 | ) |
| Other Income (Expense) | | | 360,000 | | | | (635,000 | ) |
| Net Loss (including non-controlling interest) | | $ | (1,504,000 | ) | | $ | (2,514,000 | ) |
Revenue
Soup sales accounted for approximately 97% and 92% of overall revenue for the six months ended February 28, 2014 and 2013, respectively, while franchise revenues accounted for the remaining 3% and 7%, respectively. Our revenue increased approximately 33% for the six months ended February 28, 2014 as compared to the six months ended February 28, 2013, primarily due to the continued introduction of our new varieties to the Tetra Recart line of soups.
For the six months ended February 28, 2014, our Tetra Recart line of soups accounted for approximately $1,139,000 (61%) of total revenue. Soups sold to our franchisees and the New York City school system accounted for approximately $470,000 (25%) and $200,000 (11%), respectively, of total revenue. Our year-over-year soup sales increased approximately 40%, 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 our product placed on their shelves) and sales discounts (early payment discounts). Slotting fees for six months ended February 28, 2014 and 2013, respectively, were approximately $212,000 and $186,000, while sales discounts for the same periods were approximately $37,000 and $14,000.
Cost of Sales
Cost of sales, for the six months ended February 28, 2014 and 2013, included freight of approximately $119,000 and $69,000, respectively. Cost of sales represents costs associated with soup sales only; the Company had no cost of sales associated with franchise activities.
For the six months ended February 28, 2014 and 2013, cost of sales as a percent of soup sales increased approximately 4% (from 86% to 90%) due primarily to an increase in year-over-year slotting fees and higher cost of sales due to the production in Canada rather than the US of 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 cost of sales (specifically the cost of ingredients, packaging and freight) on all our products to decrease in 2014 as we transition to a United States based production facility.
Operating Expenses
Year -over-year operating expenses as a percentage of revenue decreased approximately 41% (from 154% to 113%) for the six months ended February 28, 2014 as compared to the six months ended February 28, 2013 primarily due to an increase in sales and a reduction in overhead. Major components of our operating expenses for the six months ended February 28, 2014 consisted of approximately $651,000 in stock based compensation and stock issued for services, $434,000 for payroll and payroll related expenses, $279,000 in professional fees, $115,000 in insurance expense, $112,000 in royalty fees and $94,000 for the promotion of our products.
Other Income (Expense)
For the six months ended February 28, 2013, other income was approximately $360,000 compared to other expenses of approximately $635,000. The year-over-year change from other expense to other income was approximately $995,000 and was primarily due to an approximately $950,000 increase in change in fair value of derivative liabilities and an approximately $291,000 settlement of debt, offset primarily by increases of approximately $165,000 for a forbearance agreement and $90,000 in interest expense.
Net Loss
Our net loss for the six months ended February 28, 2014 as compared to the six months ended February 28, 2013 decreased approximately $1,010,000 (or 40%) primarily due to factors discussed above regarding Revenue, Cost of Sales, Operating Expenses and Other Expenses. Net loss for the six months ended February 28, 2014 was approximately $1,504,000 or $0.04 per share (basic and diluted).
Three Months Ended February 28, 2014
The following table summarizes our operating results for the three months ended February 28, 2014 and 2013, respectively. All amounts have been rounded to the nearest thousandth.
| | | 2014 | | | 2013 | |
| Revenue | | $ | 772,000 | | | $ | 619,000 | |
| Cost of Sales | | | 655,000 | | | | 582,000 | |
| Gross Profit | | | 117,000 | | | | 37,000 | |
| Operating Expenses | | | 1,120,000 | | | | 997,000 | |
| Loss From Operations | | | (1,003,000 | ) | | | (960,000 | ) |
| Other Income (Expense) | | | 2,000 | | | | (356,000 | ) |
| Net Loss (including non-controlling interest) | | $ | (1,001,000 | ) | | $ | (1,296,000 | ) |
Revenue
Soup sales accounted for approximately 95% and 92% of overall revenue for the three months ended February 28, 2014 and 2013, respectively, while franchise revenues accounted for the remaining 5% and 8%, respectively. Our revenue increased approximately 25% for the three months ended February 28, 2014 as compared to the three months ended February 28, 2013, primarily due to the continued introduction of our new varieties to the Tetra Recart line of soups and an increase in our sales to the New York City school program, partially offset by a decrease in franchise revenues.
For the three months ended February 28, 2014, our Tetra Recart line of soups accounted for approximately $307,000 (40%) of total revenue. Soup sold to our franchisees and the New York City school system accounted for approximately $247,000 (32%) and $182,000 (24%), respectively. Our year-over-year soup sales increased approximately 30%, primarily attributable to an increase in New York City school system sales as we introduced two new items to the menu in January.
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 February 28, 2014 and 2013, respectively, were approximately $97,000 and $169,000, while sales discounts for the same periods were approximately $27,000 and $12,000.
Cost of Sales
Cost of sales, for the three months ended February 28, 2014 and 2013, included freight of approximately $72,000 and $33,000, 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 February 28, 2014 and 2013, cost of sales as a percent of soup sales decreased approximately 14% (from 103% to 89%) due primarily to a decrease in year-over-year slotting fees and higher cost of sales due to the production in Canada rather than the US of 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 cost of sales (specifically the cost of ingredients, packaging and freight) on all our products to decrease in 2014 as we transition to a United States based production facility.
Operating Expenses
Year -over-year operating expenses as a percentage of revenue decreased approximately 16% (from 161% to 145%) for the three months ended February 28, 2014 as compared to the three months ended February 28, 2013 primarily due to an increase in sales and a reduction in overhead. Major components of our operating expenses for the three months ended February 28, 2014 consisted primarily of approximately $402,000 in stock based compensation and stock issued for services, $185,000 for payroll and payroll related expenses, $158,000 in professional fees, $89,000 for the promotion of our products, $56,000 in royalty fees and $52,000 in insurance expense, .
Other Income (Expense)
For the three months ended February 28, 2013, other income was approximately $2,000 compared to other expenses of approximately $336,000. The year-over-year change was approximately $338,000 and was primarily due the settlement of debt of approximately $291,000, an approximately $125,000 increase in change in fair value of derivative liabilities, offset primarily by an increase of approximately, $72,000 in interest expense.
Net Loss
Our net loss for the three months ended February 28, 2014 as compared to the three months ended February 28, 2013 decreased approximately $295,000 (or 23%) primarily due to factors discussed above regarding Revenue, Cost of Sales, Operating Expenses and Other Expenses. Net loss for the three months ended February 28, 2014 was approximately $1,001,000 or $0.03 per share (basic and diluted).
Liquidity and Capital
The following table summarizes our working capital as of February 28, 2014 and August 31, 2013; all amounts have been rounded to the nearest thousandth.
| | | February 28, 2014 | | | August 31, 2013 | |
| Current assets | | $ | 823,000 | | | $ | 779,000 | |
| Current liabilities | | $ | 11,799,000 | | | $ | 11,564,000 | |
| Working capital (deficit) | | $ | (10,976,000 | ) | | $ | (10,785,000 | ) |
At February 28, 2014, we had cash of approximately $54,000 as compared to approximately $115,000 at August 31, 2013. Our working capital deficit increased approximately $191,000, primarily due to an increase in accounts payable and accrued liabilities of $1,281,000 and decreases of approximately $1,015,000 and $31,000 in derivative liabilities and debt, and increases in accounts receivable and inventory of approximately $119,000 and a decrease in cash of approximately $61,000.
For the six months ended February 28, 2014, net cash used in operating activities was approximately $429,000 as compared to approximately $619,000 for the six months ended February 28, 2013. For the six months ended February 28, 2014, our primary uses of net cash from operating activities were from losses sustained in normal operations of approximately $1,505,000, an increase in accounts payable – net of approximately $1,298,000, an increase in accounts receivable – net and inventory of approximately $99,000 and adjustments to reconcile net loss to net cash of approximately $136,000.
For the six months ended February 28, 2014, net cash used in investing activities was approximately $44,000 all related to advances to franchisees.
For the six months ended February 28, 2014, net cash provided by financing activities was approximately $412,000, which primarily included approximately $520,000 from the issuance of convertible notes, $366,000 from the sale of common stock offset by approximately $474,000 used for the repayment of debt.
Current and Future Financing Needs
We have incurred a stockholders’ deficit of approximately $10.8 million through February 28, 2014 and have incurred a net loss of approximately $1.5 million for the six months ended February 28, 2014. 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 February 28, 2014, we had a net short-term debt of approximately $6 million and a working capital deficit of approximately $11.0 million. These factors raise substantial doubt about our ability to continue as a going concern. During the six months ended February 28, 2014, we raised approximately $886,000 from the issuance of our common stock and notes and since then we have raised an additional $387,500 through the sale of stock. Our debt of approximately $6 million net includes a guarantee of Soup Kitchen International’s (“SKI”) debt of approximately $2.7 million, none 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 promotion of our new shelf stable Tetra Pak carton soups and our advertising and marketing campaigns. 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 a capital raise of $8 million. While we believe we will require approximately $8 million to implement our full business strategy, we believe that if we are able to raise no less than $1.5 million, it will be sufficient to support our operations for the next 12 months. If we are unable to raise the entire $8 million, we will be forced to reduce our marketing and promotion efforts unless current sales increase enough to support implementing our full business plan. We believe that at $5 million in sales, our operations would be self-sustaining and cash flow positive. We use co-packers to manufacture our products, have no bricks and mortar and rent inexpensive office space. Many of our fixed costs are minimal and will remain substantially unchanged regardless of how much money we are able to raise. If we are forced to reduce our marketing and promotion efforts because we are unable to raise the entire $8 million, 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.
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 The Original Soupman, Inc. (“OSM”), certain principals of OSM and other third parties, Case Index #1-10-44670 in U.S. Bankruptcy Court, Eastern District, New York. On February 28, 2014, by order of the court the settlement agreement entered into by the parties was approved, and on April 1, 2014, the action was settled for $950,000, of which $350,000 was paid by OSM and $600,000 was paid by the D&O insurance carrier. In connection with the settlement agreement, the Company was released from approximately $290,000 in secured debt which OSM had guaranteed in connection with its purchase of the assets of Soup Kitchen International (“SKI”); see Note 5(C) to our Financial Statements for the quarter ended February 28, 2014.
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 and mediation 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the quarter ended February 28, 2013, we issued 649,000 shares of common stock for services rendered, having an aggregate fair market value of $282,430 based upon the quoted closing trading prices on the issue date; 200,000 shares of restricted common stock to accredited investors at an issue price of between $0.25 per share for a fair value of $50,000; 531,560 shares of common stock upon the conversion of certain convertible debt, having an aggregate fair market value of $130,910 based upon the quoted closing trading prices on the issue dates; and 234,213 shares of common stock upon conversion of 234,213 shares of our Series A convertible preferred stock.
The securities issued upon conversion of the debt and the Series A convertible preferred stock were issued pursuant to an exemption provided by Section 3(a)(9) of the Securities Act. The securities issued for services rendered and sold to accredited investors as described above 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: April 14, 2014 | By: | /s/ Lloyd Sugarman |
| | | Lloyd Sugarman |
| | | Chief Executive Officer and Director (Principal Executive Officer) |
| | SOUPMAN, INC. |
| | | |
| Date: April 14, 2014 | By: | /s/ Robert Bertrand |
| | | Robert Bertrand |
| | | President & CFO (Principal Financial Officer) |
