Notes to Consolidated Financial Statements
August 31, 2016 and 2015
Note 1 - Description of Business and Summary of Significant Accounting Policies
The Company (fka/ Passport Arts, Inc.) was incorporated in the State of Nevada on December 2, 2008. On January 31, 2011, the Company reincorporated in Delaware and changed its name to Soupman, Inc.
The Company manufactures and sells a variety of soups to grocery chains and franchisees.
Fiscal Year
The Companys fiscal year-end is August 31.
Principles of Consolidation
The consolidated financial statements include the accounts of Soupman, Inc., its wholly owned subsidiary The Original Soupman, Inc. (OSM), OSMs wholly-owned subsidiary, International Gourmet Soups, Inc. (IGS), and IGSs 80%-owned subsidiary Kiosk Concepts, Inc. (Kiosk) (collectively Soupman or the Company.)
The Company reports the non-controlling interests in Kiosk on its statement of equity as a component separate from the Companys equity and on its statement of operations as a component separate from the Companys income.
All significant intercompany transactions and balances have been eliminated in consolidation.
Reclassification
The Company has reclassified certain prior year amounts to conform to the current years presentation. As part of these reclassifications, the Company combined its accounts payable & accrued liabilities related parties, which was made up only accrued amounts due to employees, with its accounts payable & accrued liabilities and reclassed certain accounts payable on the 2015 balance sheet to deferred revenue. In addition, the Company broke out it prior years total for stock issued for Series B shares on its statement of equity and statement of cash flow into two separate categories: stock issuance for cash and stock issuance for the exercise of warrants.
Uses 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 and inventory, estimated useful lives and potential impairment of property and equipment, estimates used in the valuation of intangible assets and potential impairment thereof, estimates of fair value of share based payments, estimates of fair value of warrants issued and recorded as debt discount, estimates of tax liabilities, estimates of the probability and potential magnitude of contingent liabilities and assumptions used to calculate volatility for the companys derivative 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 have since changed or could change in the near term due to one or more future non-conforming events. Accordingly, actual results could differ significantly from estimated results.
Risks and Uncertainties
The Companys 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. See Note 10 Going Concern.
The Company has experienced, and in the future expects to continue to experience, variability in its 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 sales.
21
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
Cash and Cash Equivalents
The Company minimizes credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution(s). The balance at times may exceed federally insured limits; at August 31, 2016 and 2015, respectively, the balances did not exceed the federally insured limit. The Company has no cash equivalents.
Accounts Receivable and 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.
Inventory
Inventory consists of finished goods - soups and is stated at the lower of cost or market using the FIFO method of accounting. The Company does not have any work in progress or raw materials.
Loss Contingencies
The Company is subject to the possibility of various losses arising from the ordinary course of business. Each quarter (
or whenever events or changes in circumstances indicate)
the Company considers the likelihood of a loss or impairment of an asset or the incurrence of a liability, as well as its ability to estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and is reviewed each quarter, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful live of the respective asset(s). Expenditures for maintenance and repairs are expensed as incurred.
Intangible Assets
Amortization of identifiable intangible assets is provided utilizing the straight-line method over the estimated useful life of the respective asset(s) and are reviewed quarterly for impairment or if an indicator(s) of a potential impairment exist. As of August 31, 2016, all intangible assets have been fully amortized.
Fair Value of Financial Instruments
The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels of inputs to measure fair value:
|
|
●
|
Level 1
–
Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
●
|
Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
●
|
Level 3
–
Unobservable inputs reflecting the Company
’
s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
22
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Derivative liabilities (balance)
|
|
$
|
3,311,580
|
|
|
$
|
239,748
|
|
The Level 3 valuation relates to derivative liabilities measured using management's estimates of fair value as well as other significant inputs, such as volatility and risk free interest rate, which may be unobservable. See Note 6.
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. The Company has determined that the carrying value of all financial instruments approximates fair value. The Company's financial instruments consist primarily of accounts receivable, inventory, prepaid expenses, accounts payable and accrued liabilities and debt. The carrying amounts of the Company's financial instruments generally approximated their fair values as of August 31, 2016 and 2015, respectively, due to the short-term nature of these instruments.
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 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.
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 a change in fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes pricing model.
Debt Issue Costs
The Company may record debt issue costs in connection with raising funds through the issuance of debt. These costs may be paid in the form of cash or warrants, the fair value of which is determined using the Black-Scholes pricing model.
Debt Discount
The Company records debt discounts in connection with raising funds through the issuance of debt. These costs are amortized over the original term of the debt and recorded as interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original Issue Discount
For certain convertible debts, the Company provides the debt holder with an original issue discount. The original issue discount is recorded as debt discount, reducing the face amount of the note and is amortized over the original term of the debt and recorded to interest expense.
Share-Based Payments
Generally, all forms of share-based payments, including stock option grants, warrants and restricted stock grants and stock appreciation rights issued to employees are accounted for under ASC 718 and are measured at their fair value on the awards grant date, based on estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are accounted for under ASC 505-50 and are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable.
23
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
Fair value of stock options and warrants, is generally determined using a Black-Scholes 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) the asset(s) are transferred to the customer without further obligation by the Company, (3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.
The Company recognizes soup revenue when the product(s) are received by the customer and the risk of ownership is transferred to the customer. Sales discounts and promotions, such as buy one, get one free, and slotting fees are netted against soup revenue. For the years ended August 31, 2016 and 2015, the Company recorded incentives of $3,000 and $522,013. The Company does not offer a right of return.
Revenues from individual franchise sales are recognized when substantially all significant services that are to be provided by the Company have been performed. Royalty fees are charged to the franchisee at 5% of the franchisee's gross sales and are recorded when charged.
The Company charges its franchisees an advertising fee equal to ½% of their sales revenue and initially carries this fee as a liability, which is included as a component of accounts payable and accrued liabilities. This advertising fee is expensed as advertising dollars are spent.
Deferred Revenue
Deferred franchise revenues result from payments received from new franchises prior to the Companys performance under the terms of the franchise agreements. Often these payments are made before stores locations have been identified.
Cost of Sales
Cost of sales represents costs directly related to the production and manufacturing of the Companys products.
Soup sold is typically shipped directly to the customer from the Companys third party manufacturer or warehouse and the associated costs are shown as a component of cost of sales.
Advertising
The Company expenses advertising costs when incurred. Advertising expense for the years ended August 31, 2016 and 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Advertising
|
|
$
|
30,341
|
|
|
$
|
11,117
|
|
Earnings (Loss) Per Share
Basic earnings/loss per share (EPS) is computed by dividing net loss attributable to the Company that is available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential of shares of common stock outstanding during the period including stock warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of warrants), and convertible debt, using the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive.
24
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
The Company has the following potential common stock equivalents at August 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Stock options
|
|
|
2,275,000
|
|
|
|
1,975,000
|
|
Warrants
|
|
|
6,286,050
|
|
|
|
7,496,140
|
|
Convertible Series A preferred shares (converted to common stock at 1:1 basis)
|
|
|
878,639
|
|
|
|
881,360
|
|
Convertible Series B preferred shares (converted to common stock at 1:10 basis)
|
|
|
104,315,160
|
|
|
|
181,410,510
|
|
Convertible Series C preferred shares (converted to common stock at 1:20 basis)
|
|
|
34,500,000
|
|
|
|
|
|
Convertible Series D preferred shares (converted to common stock at 1:50,000 basis)
|
|
|
33,600,000
|
|
|
|
|
|
Convertible debt - derivatives liabilities (exercise price $0.02 - $0.40/share)
|
|
|
169,175,000
|
|
|
|
4,147,963
|
|
Total common stock equivalents
|
|
|
351,029,849
|
|
|
|
195,910,973
|
|
At August 31, 2016, the total number of issued and outstanding shares plus the total common stock equivalents exceeded the number of authorized shares; as a result, all convertible debt and warrants were tainted. The number of common stock equivalents may change at each reporting period.
The Company reflected a net loss for the years ended August 31, 2016 and 2015; therefore, the effect of considering any common stock equivalents would have been anti-dilutive; consequently, a separate computation of diluted earnings (loss) per share is not presented.
Non-controlling Interest
In December 2009, OSM acquired 80% of Kiosk, which it reported the third partys 20% as a noncontrolling interest. As part of the Companys merger in December 2010 with OSM, the Company began to report this noncontrolling interest on its financial statements.
Concentrations
Accounts Receivable
The following table shows significant concentrations in our accounts receivable at August 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
A
|
|
|
0
|
%
|
|
|
19
|
%
|
B
|
|
|
29
|
%
|
|
|
0
|
%
|
C
|
|
|
29
|
%
|
|
|
3
|
%
|
D
|
|
|
14
|
%
|
|
|
32
|
%
|
E
|
|
|
0
|
%
|
|
|
10
|
%
|
F
|
|
|
0
|
%
|
|
|
10
|
%
|
Vendors
The following table shows significant concentrations in our purchases for the years ended August 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
A
|
|
|
66
|
%
|
|
|
51
|
%
|
B
|
|
|
26
|
%
|
|
|
11
|
%
|
C
|
|
|
5
|
%
|
|
|
18
|
%
|
25
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
Sales
The following table shows significant concentrations in our revenues for the years ended August 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
A
|
|
|
24
|
%
|
|
|
9
|
%
|
B
|
|
|
14
|
%
|
|
|
19
|
%
|
C
|
|
|
13
|
%
|
|
|
14
|
%
|
D
|
|
|
3
|
%
|
|
|
11
|
%
|
E
|
|
|
4
|
%
|
|
|
10
|
%
|
F
|
|
|
3
|
%
|
|
|
10
|
%
|
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740,
Income Taxes
, which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.
In addition, ASC Topic 740-20,
Income Taxes Intraperiod Tax Allocation
requires
management to assess the need to accrue or disclose uncertain tax positions for proposed potential adjustments from various federal and state authorities who regularly audit the Company in the normal course of business. In making these assessments, management must often analyze complex tax laws of multiple jurisdictions. The accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company records the related interest expense and penalties, if any, as tax expense in the tax provision.
Recent Accounting Pronouncements
In April 2015, the FASB issued ASU No. 2015-03, Interest Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires that debt issuance costs be presented as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as other assets, separate from the related debt liability. ASU 2015-03 does not change the recognition and measurement requirements for debt issuance costs. The standard was effective for fiscal years beginning after December 15, 2015 on a retrospective basis. The Company adopted this update retrospectively during the period ended August 31, 2016.
In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory" ("ASU 2015-11"). The previous standard required
entities to measure inventory at the lower of cost or market, with market defined as net realizable value or replacement cost. ASU 2015-11 requires entities to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016, including interim periods therein. The Company does not anticipate that adoption of this ASU it will have a material effect on its financial statements.
In March 2016, the FASB issued ASU 2016-09, "Stock Compensation," which is intended to simplify several aspects of the accounting for share-based payment award transactions, including adjustments to the timing of when excess tax benefits should be recorded and classification in the statement of cash flows. The guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those years. The Company does not anticipate that adoption of this ASU will materially affect its results of operations
26
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
Note 2 - Accounts Receivable / Accounts Receivable Related Parties
Accounts receivable consisted of the following at August 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Accounts receivable
|
|
$
|
321,347
|
|
|
$
|
431,384
|
|
Allowance for doubtful accounts (franchise receivables)
|
|
|
|
|
|
|
(250,618
|
)
|
Accounts receivable net
|
|
$
|
321,347
|
|
|
$
|
180,766
|
|
For the years ended August 31, 2016 and 2015, related party accounts receivables represented amounts owed to the Company by franchises for soup sold to locations owned or operated by directors of the Company. Related-parties receivable consisted of the following at August 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Accounts receivable
|
|
$
|
|
|
|
$
|
46,296
|
|
Allowance for doubtful accounts (franchise receivables)
|
|
|
|
|
|
|
(46,296
|
)
|
Accounts receivable net
|
|
$
|
|
|
|
$
|
|
|
For the year ended August 31, 2016, the Company recognized $26,417 bad debt recovery (included in general and administrative expense).At August 31, 2015, the Company took a 100% reserve against its accounts receivable franchisees nonrelated parties and a 100% reserve against its accounts receivable franchisees related parties, and recorded a total bad debt expense of $241,581, which included a direct write-off of $176,570.
The Companys accounts receivable reserves and the recordation of bad debt expense related solely to the Companys franchisees. These reserves were taken due to the age of the receivables; however, since the Company has personal guarantees from each of its franchisees, the Company fully intends on collecting these receivables, in which case they will record the payments as bad debt recovery (offset to general and administrative expense).
Note 3 - Prepaid Expenses
Prepaid expenses consist of the following at August 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Prepaid insurance
|
|
$
|
48,715
|
|
|
$
|
25,941
|
|
Prepaid freight
|
|
|
4,899
|
|
|
|
4,899
|
|
Prepaid Inventory
|
|
|
27,412
|
|
|
|
|
|
Prepaid other
|
|
|
27,667
|
|
|
|
16,666
|
|
Prepaid expenses net
|
|
$
|
108,693
|
|
|
$
|
47,506
|
|
Note 4 - Accounts Payable and Accrued Liabilities
For the year ended August 31, 2016, the Company recorded a loss of $39,037 on the settlement of certain accounts payable and accrued interest. For the year ended August 31, 2015, the Company recorded a net gain of $141,540 on the settlement of certain accounts payable and accrued interest.
27
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
Note 5 - Debt
Debt consists of the following at August 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
Description
|
|
2016
|
|
|
2015
|
|
A. Convertible debt derivative liabilities
|
|
$
|
3,491,000
|
|
|
$
|
1,296,597
|
|
Less : debt discount
|
|
|
(3,173,653
|
)
|
|
|
|
|
Convertible debt net
1
|
|
|
317,347
|
|
|
|
1,296,597
|
|
|
|
|
|
|
|
|
|
|
B. Convertible debt non-derivatives
|
|
|
|
|
|
|
|
|
Less : debt discount
|
|
|
|
|
|
|
|
|
Convertible debt net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Unsecured demand debt
|
|
|
1,816,227
|
|
|
|
382,563
|
|
Less : debt discount
|
|
|
(4,731
|
)
|
|
|
|
|
Unsecured demand debt net
2
|
|
|
1,811,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. Secured demand debt
3
|
|
|
1,890,000
|
|
|
|
2,700,000
|
|
|
|
|
|
|
|
|
|
|
Total debt - net
|
|
$
|
4,018,843
|
|
|
$
|
4,379,160
|
|
1.
Includes $130,680 of short-term debt and $186, 667 of long-term debt
2.
Includes $791,996 of short-term debt and $1,019,500 of long-term debt
3.
Includes $1,200,000 of short-term debt and $690,000 of long-term debt
During the years ended August 31, 2016 and 2015, the Company determined that all of its convertible debt and warrant instruments were tainted. See Note 6.
The Companys total debt is $7,197,227 and is due and payable over the next 4 fiscal years as set out below:
|
|
|
|
|
Year
|
|
Principle Repayment
|
|
Past Due
|
|
$
|
1,715,595
|
|
2017
|
|
|
412,132
|
|
2018
|
|
|
3,837,621
|
|
2019
|
|
|
620,231
|
|
2020
|
|
|
611,648
|
|
Total Debt
|
|
$
|
7,197,227
|
|
The corresponding debts above are more fully discussed below:
(A)
Convertible Debt - Derivative Liabilities
|
|
|
|
|
|
|
|
|
Description
|
|
2016
|
|
|
2015
|
|
Carry forward balance
|
|
$
|
1,296,597
|
|
|
$
|
1,533,154
|
|
Borrowings
1
|
|
|
3,480,000
|
|
|
|
300,000
|
|
Loss for additional debt brought about by debt settlements
|
|
|
45,147
|
|
|
|
|
|
Repayment of derivative debt
|
|
|
(25,000
|
)
|
|
|
(32,692
|
)
|
Conversion of derivative debt to common stock
|
|
|
(370,000
|
)
|
|
|
(790,712
|
)
|
Reclassification of convertible derivative debt to demand debt
|
|
|
(936,744
|
)
|
|
|
|
|
Gain on settlement of debt
|
|
|
(5,000
|
)
|
|
|
|
|
Reclassification of convertible debt to derivative debt due to tainting
|
|
|
6,000
|
|
|
|
286,847
|
|
Ending balance
|
|
$
|
3,491,000
|
|
|
$
|
1,296,597
|
|
1.
Includes net proceeds of $2,703,435, an original issue discount $360,000 and debt issue costs (recorded as debt discount) of $416,565
28
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
During the year ended August 31, 2016, the Company settled a lawsuit with certain investors, incurring a loss of $45,147, which was recorded as additional debt. The $45,147 loss is included in the gain (loss) on settlement of debt and accrued liabilities on the Income Statement.
During the years ended August 31, 2016, $370,000 of the Companys convertible debt along with $75,946 accrued interest was converted into shares of the Companys common stock and loss of $161,111 was recognized for the excess of fair market value of common stock over share issuance price to settle debt. The $161,111 loss is included in the gain (loss) on settlement of debt and accrued liabilities on the Income Statement.
During the years ended August 31, 2016, the Company repaid an investor $95,000 of the inventors $100,000 note and recorded as a gain of $5,000, which is included in the gain (loss) on settlement of debt and accrued liabilities on the Income Statement. As part of that same agreement, $43,654 of accrued interest was forgiven and was also recorded as a gain and included in the gain (loss) on settlement of debt and accrued liabilities on the Income Statement.
During the years ended August 31, 2016, $936,744 of the Companys derivative debt became demand debt: $630,000 due to a debt settlement that removed the conversion feature from the note; $219,244 upon the settlement of certain debts which lost their conversion feature due to a court order; and $87,500 due to an automatic conversion feature in certain notes (the Series 2 and Series 3 notes). Per these agreements, the principle and interest were to automatically convert upon the Company raising at least $2 million in equity financing. This condition was met during the fiscal year, but the notes were not converted. Therefore, the nature of these notes changed to demand notes; these notes will be converted in fiscal year 2017.
During the years ended August 31, 2016 and 2015, respectively, the Companys reclassed $6,000 and 286,847 of its convertible debt to derivative debt due to tainting.
During the years ended August 31, 2016 and 2015, the Company issued new derivative debt, the terms and amounts of which are set out below:
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Information
|
|
2016
|
|
|
2015
|
|
Interest Rate
|
|
|
|
|
8% - 10
|
%
|
|
|
10
|
%
|
Maturity Date(s)
|
|
|
|
Aug. 1, 2016 to April 1, 2018
|
|
|
Oct. 6, 2016
|
|
Series 10
|
|
10% per annum interest; 24-month term; convertible at $0.04 per share
|
|
|
|
|
|
|
300,000
|
|
Series 12
|
|
10% per annum interest; 2-month term; convertible at $0.04 per share
|
|
|
50,000
|
|
|
|
|
|
Series 13
|
|
8% per annum interest; 12-month terms; automatically converts at $0.02 per share, upon an increase in the number of authorized shares
|
|
|
70,000
|
|
|
|
|
|
Series 14
|
|
8% per annum interest; 20 month term; convertible at $0.02 per share only after the Company increases the number of authorized shares
|
|
|
3,360,000
|
|
|
|
|
|
29
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
Total derivative debt at August 31, 2016 and 2015 consists of the following.
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Information
|
|
2016
|
|
|
2015
|
|
Series 2
|
|
8% per annum interest; convertible at $1.00 per share; term expired
|
|
$
|
|
|
|
$
|
120,000
|
|
Series 3
|
|
8% per annum interest; convertible at $0.75 per share; term expired
|
|
|
|
|
|
|
72,500
|
|
Series 4
|
|
1% per month interest; convertible at $0.75 per share; term expired
|
|
|
|
|
|
|
724,097
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 7
|
|
1% per month interest; convertible at $0.60 per share; term expired
|
|
|
|
|
|
|
280,000
|
|
Series 8
|
|
8% per annum interest; convertible at $0.40 per share; term expired. Shown as derivative due to tainting
|
|
|
100,000
|
|
|
|
100,000
|
|
Series 12
|
|
10% per annum interest; 2-month term; convertible at $0.02 per share; term expired
|
|
|
25,000
|
|
|
|
|
|
Series 13
|
|
8% per annum interest; convertible at $0.02 per share; remaining term: 10 days
|
|
|
6,000
|
|
|
|
|
|
Series 14
|
|
8% per annum interest; convertible at $0.02 per share only after the Company increases the number of authorized shares; remaining term: 19 months
|
|
|
3,360,000
|
|
|
|
|
|
Total
|
|
|
|
$
|
3,491,000
|
|
|
$
|
1,296,597
|
|
During the year ended August 31, 2016, the Company entered into a secured agreement with a lender for $3,360,000, which included an original issue discount of $360,000 and debt issuance cost of $416,565 (recorded as debt discount, per ASU 2015-03). The total proceed to the company was $2,583,435. As part of the agreement, the Company issued 672 of its Series D preferred shares, having a relative fair value of $332,640, which was recorded as debt discount.
Holders of derivative debt have the option to convert all or part of the notes principal plus accrued interest into shares of the Companys common stock at the conversion price(s) and terms set out above.
During the year ended August 31, 2015, the Company converted the debt principal of $56,973 into 1,050,000 shares of its common stock. In addition, during the same year, the Company offered to lower the exercise price on convertible debt to $0.04 per share to induce holders of the Companys derivative debt to convert. This offer was conditioned on the Company raising at least $1 million and required a mandatory conversion if this and one other condition occurred. On June 18, 2015, all conditions were met, and the Company converted the debt principal of $783,739 into 23,313,730 shares of its Series B stock. Extinguishment accounting was applied; as a result, the Company reclassed $202,131 of derivative debt to additional paid in capital. See Note 6.
(B)
Convertible Debt Non-derivatives
|
|
|
|
|
|
|
|
|
Description
|
|
2016
|
|
|
2015
|
|
Carry forward balance
|
|
$
|
|
|
|
$
|
1,378,207
|
|
Borrowings
|
|
|
6,000
|
|
|
|
83,500
|
|
Repayment of convertible debt
|
|
|
|
|
|
|
(631,819
|
)
|
Conversion of convertible debt to stock
|
|
|
|
|
|
|
(844,250
|
)
|
Gain on debt settlement
|
|
|
|
|
|
|
(48,791
|
)
|
Reclassification of convertible debt to derivative due to tainting
|
|
|
(6,000
|
)
|
|
|
63,153
|
|
Ending balance
|
|
$
|
|
|
|
$
|
|
|
During the years ended August 31, 2016 and 2015, the Company incurred an expense of $0 and $204,313 in connection with the settlement of unsecured convertible debt.
30
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
During the years ended August 31, 2016 and 2015, the Company issued unsecured convertible debt (that was not recorded as a derivative liability), the terms and amounts of which are set out below:
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Information
|
|
2016
|
|
|
2015
|
|
Interest rate
|
|
|
|
|
8
|
%
|
|
|
8
|
%
|
Default interest rate
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Term
|
|
|
|
|
|
|
|
9 months
|
|
Maturity
|
|
|
|
Sept. 11, 2016
|
|
|
Sep. 5, 2014 to
Jun. 9, 2015
|
|
Series 9 debt
|
|
8% per annum interest; convertible after 180 days at $0.02 per share; 9-months term
|
|
$
|
|
|
|
$
|
83,500
|
|
Series 13 debt
|
|
8% interest; convertible after at $0.02 per share; 2-month term
|
|
$
|
6,000
|
|
|
$
|
|
|
Holders of convertible non-derivative debt have the option to convert all or part of the notes principal plus accrued interest into shares of the Companys common stock at the conversion price(s) and terms set out above.
During the year ended August 31, 2015, the Company modified certain debts, cancelling 523,000 warrants that were exercisable at $0.80 and issuing 826,500 3-year warrants exercisable at $0.35 cents. Extinguishment accounting was applied: as a result, the Company recorded a loss on debt extinguishment of $17,723.
(C) Unsecured Demand Debt
Unsecured demand notes consist of the following at August 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
Description
|
|
2016
|
|
|
2015
|
|
Carry forward balance
|
|
$
|
382,563
|
|
|
$
|
833,192
|
|
Borrowings
1
|
|
|
360,000
|
|
|
|
100,000
|
|
Loss on additional debt brought about by debt settlements
|
|
|
121,360
|
|
|
|
|
|
Repayments
|
|
|
(165,080
|
)
|
|
|
(150,629
|
)
|
Credit of note payable against franchise license agreement
|
|
|
(100,000
|
)
|
|
|
|
|
Rollup of accrued interest into debt
|
|
|
268,140
|
|
|
|
|
|
Rollup of accrued commissions to debt
|
|
|
12,500
|
|
|
|
|
|
Reclassification of derivative debt to demand debt
|
|
|
936,744
|
|
|
|
|
|
Conversion of demand debt to stock
|
|
|
|
|
|
|
(50,000
|
)
|
Reclassification to derivative debt due to tainting
|
|
|
|
|
|
|
(350,000
|
)
|
Ending balance
|
|
$
|
1,816,227
|
|
|
$
|
382,563
|
|
1.
Includes net proceeds of $353,455 and debt issue costs (recorded as debt discount) of $6,545.
During the year ended August 31, 2016, the Company borrowed $360,000 from two entities. The loans are based on the Companys cash flows and are paid back daily. The total repayment amount is $490,400, which includes interest of $130,400. The loans mature between February 7, 2017 and March 11, 2017.
During the year ended August 31, 2016, the Company entered into a Master Franchise License Agreement with one of its investors. As payment towards the licensing fee, the Company agreed to reclass the $100,000 debt owed the investors as a partial payment towards the licensing fee.
Unsecured demand notes consisted of the following at August 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Information
|
|
2016
|
|
|
2015
|
|
Represents all unsecured demand debt
|
|
8% to 12% per annum interest; maturity dates from past due to April 1, 2020
|
|
$
|
1,816,227
|
|
|
$
|
382,563
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
1,816,227
|
|
|
$
|
382,563
|
|
31
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
During the year ended August 31, 2016, the Company settled a debt dispute with a former marketing company for $50,000 plus 1,500,000 shares of common stock, having a fair value of $120,000; the Company recorded a loss in connection with the stock issuance,
which is included in the gain (loss) on settlement of debt and accrued liabilities.
The Company also recorded a reduction of accrued commissions of $9,472,
which is also included in the gain (loss) on settlement of debt and accrued liabilities. Previously accrued commissions totaling $12,500 was reclassed to debt.
During
the year ended August
31, 2016, the Company settled a debt dispute with an investor, increasing its debt and incurring a loss of $121,360 in connection with the settlement, which is included in the gain (loss) on settlement of debt and accrued liabilities. Previously accrued interest of $268,140 was reclassed to debt and a new note with interest at 12% was executed. Because the agreement calls for interest only payments for at least the next 12 months, the Company presents the balance owed as long-term debt.
(D)
Secured Demand Debt
|
|
|
|
|
|
|
|
|
Description
|
|
2016
|
|
|
2015
|
|
Carry forward balance
|
|
$
|
2,700,000
|
|
|
$
|
2,700,000
|
|
Borrowings
|
|
|
|
|
|
|
|
|
Loss on new debt brought about by debt settlement
|
|
|
155,242
|
|
|
|
|
|
Repayment of debt
|
|
|
(310,000
|
)
|
|
|
|
|
Conversion of debt to Series B preferred stock
|
|
|
(1,100,000
|
)
|
|
|
|
|
Reclassification of accrued interest to debt
|
|
|
444,758
|
|
|
|
|
|
Ending balance
|
|
$
|
1,890,000
|
|
|
$
|
2,700,000
|
|
Secured demand debt consisted of the following activity and terms for the years ended August 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
Information
|
|
2016
|
|
|
2015
|
|
Interest Rate
|
|
|
5
|
%
|
|
|
12.75
|
%
|
Maturity
|
|
Nov. 15, 2018
|
|
|
Aug. 28, 2014
|
|
Second security on the assets of OSM
|
|
$
|
1,890,000
|
|
|
$
|
2,700,000
|
|
During the year ended August 31, 2016, the Company entered into a debt settlement with one of its secured debt holders for $2,100,000, incurring a loss of $155,242,
which is also included in the gain (loss) on settlement of debt and accrued liabilities on the Income Statement. The settlement called for the Company to pay the debt holder $1,000,000 and the debt holder to accept $1,100,000 in Preferred Series B shares of the Company at $0.04 per share. The fair value of these shares was $1,952,100; therefore, the Company recorded an additional loss of $852,500, which is also included in the gain (loss) on settlement of debt and accrued liabilities on the Income Statement.
(E) Debt discount
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Total outstanding debt
|
|
$
|
7,197,227
|
|
|
$
|
4,379,160
|
|
Carry forward debt discount net
|
|
|
|
|
|
|
(335,318
|
)
|
Debt discount related to derivatives
|
|
|
(2,342,138
|
)
|
|
|
(316,102
|
)
|
Debt discount related to Series D preferred stock issued along with debt
|
|
|
(332,640
|
)
|
|
|
|
|
Debt discount related to original issue discounts
|
|
|
(360,000
|
)
|
|
|
|
|
Debt discount related to debt issue costs
|
|
|
(423,110
|
)
|
|
|
|
|
Debt discount related to beneficial conversion feature
|
|
|
(1,800
|
)
|
|
|
|
|
Amortization of debt discount
|
|
|
281,304
|
|
|
|
651,420
|
|
Debt net
|
|
$
|
4,018,843
|
|
|
$
|
4,379,160
|
|
32
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
Note 6- Derivative Liabilities
The Company identified conversion features embedded within convertible debt and/or warrants (see Note 5(A)).
At August 31, 2015, the Company reclassed all of its convertible debts and warrants to derivative debt due to tainting. On February 24, 2014, after the shareholders increased the number of authorized shares, tainting was removed. On July 28, 2016, the Company again tainted its convertible debts and warrants; said debts remain tainted at August 31, 2016.
The fair value of the Companys derivative liabilities at August 31, 2016 and 2015 is as follows.
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Carry forward balance
|
|
$
|
239,748
|
|
|
$
|
180,418
|
|
Fair value at the commitment date recorded as debt discount
|
|
|
2,342,138
|
|
|
|
353,282
|
|
Fair value at the commitment date recorded as derivative expense
|
|
|
2,231,865
|
|
|
|
527,270
|
|
Loss on debt extinguishment
|
|
|
|
|
|
|
198,132
|
|
Fair value mark-to-market adjustment
|
|
|
(1,509,401
|
)
|
|
|
(817,223
|
)
|
Tainting of derivatives of convertible notes and warrants
|
|
|
9,298
|
|
|
|
(202,131
|
)
|
Reclassification of derivative liabilities to equity
|
|
|
(2,068
|
)
|
|
|
|
|
Derivative liabilities (balance)
|
|
$
|
3,311,580
|
|
|
$
|
239,748
|
|
The Company records debt discount relating to its derivative debt to the extent of gross proceeds raised in its debt financing transactions, and immediately expenses as derivative expense the remaining value of the derivative if it exceeded the gross proceeds of the note. The Company recorded a derivative expense of $2,231,865 and $527,270 for the years ended August 31, 2016 and 2015, respectively, and includes this amount in the change in fair value of derivatives on its statements of operations cash flow.
The fair value at the commitment and re-measurement dates for convertible debt and warrants that are treated as derivative liabilities were based upon the following management assumptions for the years ended August 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
2016
|
|
Commitment
Date
|
|
|
Re-measurement
Date
|
|
Exercise price
|
|
|
$0.02 - $0.04
|
|
|
|
$0.02 - $0.04
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
149% -218
|
%
|
|
|
204%-232
|
%
|
Expected term: convertible debt and warrants
|
|
0.08 -2.0 years
|
|
|
0.25 to 1.58 years
|
|
Risk free interest rate
|
|
|
0.28%-0.70
|
%
|
|
|
0.33%-0.61
|
%
|
|
|
|
|
|
|
|
|
|
2015
|
|
Commitment
Date
|
|
|
Re-measurement
Date
|
|
Exercise price
|
|
|
$0.20
|
|
|
|
$0.20
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
176% -290
|
%
|
|
|
151%-211
|
%
|
Expected term: convertible debt and warrants
|
|
0.25 -5 years
|
|
|
0.25 to 4.61 years
|
|
Risk free interest rate
|
|
|
0.10%-0.98
|
%
|
|
|
0.01%-1.01
|
%
|
Modification of underlying debt
During the years ended August 31, 2015 the Company negotiated modifications to certain of its underlying unsecured notes, which had an embedded conversion feature. For each modification, the Company compared the value of both the old and new convertible debt as well as the fair value of any new warrants granted in the modification. For each debt, the Company determined whether the present value of the cash flows associated with the new debt exceeded the present value of the old debt by more than 10%, and if so, applied extinguishment accounting; for all other notes, modification accounting was applied. For the years ended August 31, 2016 and 2015, respectively, the Company recorded $0 and $0 as debt discount relating to its debt modifications and losses of $0 and $198,132, respectively.
33
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
Note 7 - Stockholders Deficit
(A) Series A Convertible Preferred Stock
Holders of the Companys Series A preferred shares have no voting rights and receive no dividends, but receive $1.00 per share in the case of liquidation of the Company. This series of shares convert on a 1:1 basis at par value ($0.001) into shares of the Companys common stock. In the event that shares are issued, the Company will evaluate for beneficial conversion features.
Series A convertible preferred stock consists of the following activity for the years ended August 31, 2016 and 2015:
|
|
|
|
|
Balance - August 31, 2014
|
|
$
|
931,360
|
|
Conversion to common stock
|
|
|
(50,000
|
)
|
Balance August 31, 2015
|
|
|
881,360
|
|
Conversion to common stock
|
|
|
(2,721
|
)
|
Balance August 31, 2016
|
|
$
|
878,639
|
|
No gain or loss was recorded in the conversion of preferred to common stock.
(B) Series B Convertible Preferred Stock
During the year ended August 31, 2016, the Company increased its authorized Series B shares from 20,000,000 to 45,000,000. Holders of the Companys Series B preferred shares receive no dividends, but have 10 votes per share. This series of shares convert on a 1:10 basis at par value ($0.001) into shares of the Companys common stock. In the event that shares are issued, the Company will evaluate for beneficial conversion features and recorded as deemed dividend. During the year ended August 31, 2016, the Company recorded a deemed dividend on the Series B preferred shares of $3,215,651.
Series B convertible preferred stock consists of the following activity for the years ended August 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of value
|
|
Type
|
|
Shares
|
|
|
Fair value
|
|
|
per share
|
|
Balance August 31, 2014
|
|
|
|
|
|
$
|
|
|
|
|
|
Shares issued for cash
|
|
|
10,223,750
|
|
|
|
1,899,749
|
|
|
$
|
0.16 - $0.20
|
|
Shares issued for warrants exercised
|
|
|
2,826,440
|
|
|
|
568,288
|
|
|
$
|
0.20
|
|
Shares issued for services
|
|
|
250,000
|
|
|
|
100,000
|
|
|
$
|
0.40
|
|
Shares issued for debt and accrued interest
|
|
|
4,840,861
|
|
|
|
1,936,345
|
|
|
$
|
0.40
|
|
Balance August 31, 2015
|
|
|
18,141,051
|
|
|
|
4,501,382
|
|
|
|
|
|
Shares issued for cash
|
|
|
1,200,000
|
|
|
|
240,000
|
|
|
$
|
0.20
|
|
Shares issued for warrants exercised
|
|
|
3,549,000
|
|
|
|
709,800
|
|
|
$
|
0.20
|
|
Shares issued for compensation
1
|
|
|
279,405
|
|
|
|
90,853
|
|
|
$
|
0.27 - $0.52
|
|
Shares issued for debt and accrued interest
|
|
|
2,750,000
|
|
|
|
1,952,500
|
|
|
$
|
0.71
|
|
Shares converted into common stock
|
|
|
(12,037,940
|
)
|
|
|
|
|
|
|
|
|
Shares converted into Series C preferred stock
|
|
|
(3,450,000
|
)
|
|
|
|
|
|
|
|
|
Balance August 31, 2016
|
|
|
10,431,516
|
|
|
|
|
|
|
|
|
|
1.
Total stock issued for compensation consists of both common shares and Series B preferred shares; see note 7D.
34
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
(C) Series C Convertible Preferred Stock
During the year ended August 31, 2016, the Company authorized 2,500,000 Series C preferred shares. Holders of the Companys Series C preferred shares receive no dividends, but have 20 votes per share. This series of shares convert on a 1:20 basis at par value ($0.001) into shares of the Companys common stock. The company analyzed both ASC 480 and ASR 268 and concluded that its Series C preferred shares are permanent equity. The Company also analyzed for a beneficial conversion feature under ASC 470 and determined there was no deemed dividend.
During the year ended August 31, 2016, the Company issued 1,725,000 of its Series C preferred shares for 3,450,000 of its Series B preferred shares.
(D) Series D Convertible Preferred Stock
During the year ended August 31, 2016, the Company authorized 672 Series D preferred shares. Holders of the Companys Series D preferred shares receive no dividends, and have no voting rights. This series of shares have a stated value of $1,000 per shares and convert into shares of the Companys common stock at $0.02. The Company analyzed both ASC 480 and ASR 268 and concluded that its Series D preferred shares are permanent equity. The Company also analyzed for a beneficial conversion feature under ASC 470 and determined there was no deemed dividend.
During the year ended August 31, 2016, the Company issued 672 of its Series D preferred shares, having a relative fair value of $332,640, which was recorded as debt discount. See note 5A.
(E) Common Stock
For the years ended August 31, 2016 and 2015, the Company issued the following shares of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
Range of value
|
|
|
2015
|
|
|
Range of value
|
|
Type
|
|
Shares
|
|
|
Fair value
|
|
|
per share
|
|
|
Shares
|
|
|
Fair value
|
|
|
per share
|
|
1. Stock issued for cash
|
|
|
1,031,250
|
|
|
$
|
41,250
|
|
$
|
0.04
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
2. Stock issued as compensation
1
|
|
|
6,243,502
|
|
|
|
409,592
|
|
|
|
0.030.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Stock issued for services
|
|
|
8,130,523
|
|
|
|
497,767
|
|
|
|
0.050.14
|
|
|
|
20,339,774
|
|
|
|
841,481
|
|
|
|
0.03.019
|
|
4. Stock issued in connection with convertible debt (see Note 5(B))
|
|
|
15,150,158
|
|
|
|
602,571
|
|
|
|
0.02.08
|
|
|
|
3,407,057
|
|
|
|
105,972
|
|
|
|
0.02.0.10
|
|
5. Conversion of Series A Preferred Stock to common stock
|
|
|
2,271
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
6. Conversion of Series B Preferred Stock to common stock
|
|
|
120,380,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
Total stock issued for compensation consists of both Series B preferred shares and common shares; see note 7B.
Unless otherwise indicated, fair value for the share issued was based upon the quoted closing trading price on the dates shares were issued.
The corresponding stock issuances above are more fully discussed below:
1 - No expenses were recorded in connection with shares issued
2 - Includes 5,000,000 shares issued to the Companys CEO for compensation in 2016
3 - Includes 404,866 shares issued for accrued payroll in 2015
35
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
4 - Includes $445,946 for the conversion of debt and accrued interest to common stock and $156,625 for the fair value of shares given to settle debt and AP in 2016; include $22,000 for the fair market value of shares given to settle debt in 2015, and $83,972 for the conversion of debt and accrued interest to common stock
5 - Shares issued on a one for one (1 for 1) basis in connection with the conversion of Series A preferred shares; no gain or loss incurred on conversion
6 - Shares issued on a one for ten (1 for 10) basis in connection with the conversion of Series B preferred shares; no gain or loss incurred on conversion
During the fiscal year ended August 31, 2015 and pursuant to ASC 718, the company reversed prior period compensation expenses of $562,434 and current period expenses of $45,305 relating to forfeited awards. There was no such reversal during fiscal 2016.
(D) Stock Options
The following is a summary of the Companys stock option activity for the years ended August 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance August 31, 2014
|
|
|
1,975,000
|
|
|
$
|
0.53
|
|
|
6.44 years
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance August 31, 2015
|
|
|
1,975,000
|
|
|
$
|
0.53
|
|
|
5.44 years
|
|
|
|
|
|
Exercisable August 31, 2015
|
|
|
1,975,000
|
|
|
$
|
0.53
|
|
|
5.44 years
|
|
|
|
|
|
Grant date fair value of options granted 2015
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value 2015
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance August 31, 2015
|
|
|
1,975,000
|
|
|
$
|
0.53
|
|
|
5.44 years
|
|
|
|
|
|
Granted
|
|
|
300,000
|
|
|
$
|
0.05
|
|
|
|
3 years
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance August 31, 2016
|
|
|
2,275,000
|
|
|
$
|
.46
|
|
|
4.16 years
|
|
|
|
|
|
Exercisable August 31, 2016
|
|
|
2,275,000
|
|
|
$
|
.46
|
|
|
4.16 years
|
|
|
|
|
|
Grant date fair value of options granted 2016
|
|
|
|
|
|
$
|
13,800
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value 2016
|
|
|
|
|
|
$
|
.046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options held by related parties (August 31, 2016)
|
|
|
1,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options held by related parties (August 31, 2016)
|
|
|
1,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
The following is a summary of the Companys unvested stock options at August 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
Un-vested
Stock Options
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Unvested August 31, 2014
|
|
|
100,000
|
|
|
$
|
0.75
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(100,000
|
)
|
|
|
|
|
Forfeited/Cancelled
|
|
|
|
|
|
|
|
|
Unvested August 31, 2015
|
|
|
|
|
|
|
|
|
Granted
|
|
|
300,000
|
|
|
$
|
0.05
|
|
Vested
|
|
|
(300,000
|
)
|
|
$
|
0.05
|
|
Forfeited/Cancelled
|
|
|
|
|
|
|
|
|
Unvested August 31, 2016
|
|
|
|
|
|
|
|
|
Weighted average remaining life for vesting
|
|
|
|
|
|
|
|
|
The Company incurred expenses related to vested options of $13,800 and $0 for the years ended August 31, 2016 and 2015.
(E) Stock Warrants
The following is a summary of the Companys stock warrant activity for the years ended August 31, 2016 and 2015; warrants that were not exercised during the term of the warrants are shown in the below table as forfeited:
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance at August 31, 2014
|
|
|
5,938,202
|
|
|
$
|
0.66
|
|
Granted (for debt)
|
|
|
951,500
|
|
|
$
|
.35
|
|
Granted (other)
|
|
|
1,975,000
|
|
|
$
|
.03
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,368,562
|
)
|
|
$
|
0.79
|
|
Balance at August 31, 2015
|
|
|
7,496,140
|
|
|
$
|
0.42
|
|
Granted (for debt)
|
|
|
|
|
|
|
|
|
Granted (other)
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,210,090
|
)
|
|
$
|
.95
|
|
Balance at August 31, 2016
|
|
|
6,286,050
|
|
|
$
|
.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$0.03 -$0.80
|
|
|
6,286,050
|
|
|
|
1.49
|
|
|
$
|
.33
|
|
|
|
6,286,050
|
|
|
$
|
.33
|
|
|
$
|
0
|
|
During the year ended August 31, 2015, the Company issued 8,750,000 warrants to purchase 8,750,000 of its Series B shares to an investor at $0.20 per warrant, of which 2,826,440 were exercised in 2015 with the Company receiving cash proceeds of $565,288. During the year ended August 31, 2016, the investor exercised an additional 3,549,000 warrants and the Company received cash proceeds of $709,800. The remaining 2,374,560 unexercised warrants expired in 2016.
37
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
Note 8 - Commitments and Contingencies
Commitments
The Company is obligated to pay the minority stockholder of Kiosk an amount equal to 3% of its gross soup sales on the first $50,000,000 in sales, 2% of sales between $50,000,000 and $75,000,000, and 1% of sales thereafter, in perpetuity. The Company was obligated to pay the minority stockholder a minimum against these sales of $225,000 per year through June 30, 2014 provided certain services to the Company were rendered. For the years ended August 31, 2016, and 2015, the Company recorded these payments as royalty expense.
Litigations, Claims and Assessments
Soupman, Inc. is a defendant in a lawsuit filed by Mark Hellner and four other plaintiffs in New York State Supreme Court (Case Index No. 6083/2014). The plaintiffs are holders of a series of notes issued by the Company and are seeking repayment of the notes with interest. The plaintiffs have prevailed in the action and on July 22, 2015 submitted a proposed judgment for $299,202. The entry of this judgment has been fully reserved by the Company.
Soupman, Inc. is a defendant in a case initiates by Brand Initiatives Group. LLC v. Soupman. Inc., Index No. 651647/2016. In March 2016, plaintiff initiated an action against the Company for the Company's alleged breach of a marketing contract. Plaintiff commenced this action in the Supreme Court of the State of New York, County of New York. Plaintiff asserted causes of action for breach of contract, conversion, account stated, and quasi-contract/unjust enrichment. The Company answered the complaint, and asserted affirmative defenses and counterclaims seeking damages for plaintiff's breach of contract and a declaratory judgment providing that plaintiff was not entitled to receive any consideration under the contract due to its breach of contract. Plaintiff served a reply to the Company's counterclaims and asserted affirmative defenses to those counterclaims. The parties have served discovery demands upon each other. Neither party has responded the other's discovery demands. There has been no motion practice and no conference with the court has been scheduled. The Company intends to vigorously contest plaintiff s allegations and prosecute the Company's counterclaims, and believes that the Company has meritorious defenses to plaintiff s claims in this action.
Note 9 - Income Taxes
There was no income tax expense for the years ended August 31, 2016 and 2015 due to the Companys net losses.
At August 31, 2016, the Company has a net operating loss carry-forward of approximately $30.9 million available to offset future taxable income, which partially expiring in 2032. The current tax effect should the entire NOL be used is approximately $11.9 million. Utilization of future net operating losses may be limited due to potential ownership changes under Section 382 of the Internal Revenue Code.
The Companys tax expense differs from the expected tax expense for the years ended August 31, 2016 and 2015, (computed by applying the Federal Corporate tax rate of 34% to loss before taxes and 7.1% for New York State Corporate Taxes, the blended rate used was 38.69%).
The valuation allowance at August 31, 2015 was approximately $10.8 million. The net change in valuation allowance during the year ended August 31, 2016 was an increase of approximately $1.1 million. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not, that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of August 31, 2016.
38
Soupman, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2016 and 2015
The effects of temporary differences that gave rise to significant portions of deferred tax assets at August 31, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
2016
|
|
|
2015
|
|
Net operating loss carry-forward
|
|
$
|
11,946,000
|
|
|
$
|
10,800,000
|
|
Total gross deferred tax assets
|
|
|
11,946,000
|
|
|
|
10,800,000
|
|
Less valuation allowance
|
|
|
(11,946,000
|
)
|
|
|
(10,800,000
|
)
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
At August 31, 2016 and 2015, respectively, the Company did not record any liabilities for uncertain tax positions and the Company does not anticipate that it is reasonably possible that unrecognized tax benefits as of August 31, 2016, will significantly change within the next 12 months.
Note 10 - Going Concern
As reflected in the accompanying financial statements, for the year ended August 31, 2016 the Company had a net loss of approximately $6.3 million, net cash used in operations of approximately $2.7 million, working capital deficit of approximately $7.4 million and a stockholders deficit of approximately $8.6 million. These factors raise substantial doubt about the Companys 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 Companys 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;
|
·
|
seeking to open new franchise locations; and
|
·
|
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 11 - Subsequent Events
Since August 31, 2016, the Company issued:
|
|
·
|
10,250,000 shares of its common stock for the conversion of 1,250,000 shares of Series B preferred.
|
|
|
·
|
10,600,000 shares of its common stock for services rendered.
|
|
|
·
|
15,000 shares of its Series B preferred stock for serviced rendered.
|
39