UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K/A

Amendment No. 1

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the fiscal year ended August 31, 2012

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

     For the transition period from______________________ to____________________________

Commission File Number: 000-53943

SOUPMAN, INC.

(Name of small business issuer in its charter)

Delaware	61-1638630
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)
1110 South Avenue, Suite 100 Staten Island, NY	10314
(Address of principal executive offices)	(Zip Code)

(212) 768-7687

Registrant’s telephone number, including area code:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes o       No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes o     No x  

Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of issuer’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x     

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes xNo o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, a non-accelerated file, or a smaller reporting company.  See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o      No x

The aggregate market value of the issuer’s common stock held by non-affiliates of the registrant as of February 28, 2012, was approximately $16,121,159 based on $0.81, the price at which the registrant’s common stock was last sold on that date.

As of December 13, 2012, the issuer had 31,307,640 shares of common stock outstanding.

Documents incorporated by reference:  None

EXPLANATORY NOTE

We are filing this Amendment No. 1 on Form 10-K/A to (i) reflect the reclassification of allowances taken on notes and franchise receivables and gains on the sale of equipment and accounts payable, from other expenses to general and operating expenses, and to make changes in our MD&A resulting therefrom; (ii) describe the exact nature of any prior year reclassification(s); (iii) disclose the breakdown of cash and warrants issued as debt issue costs; (iv) describe each executive employment agreement and to include each such employment agreements as exhibits hereto;  (v) provide additional disclosure regarding two related party transactions;  and (vi) to add clarifying language to our Internal Controls and Procedures disclosure.

We have also updated the signature page, the certifications of our Chief Executive Officer and Chief Financial Officer in Exhibits 31.1, 31.2, 32.1 and 32.2, and our financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibits 101. No other sections were affected, but for the convenience of the reader, this report on Form 10-K/A restates in its entirety, as amended, our First Amended 10-K. This report on Form 10-K/A is presented as of the filing date of the Original Form 10-K and does not reflect events occurring after that date.

SOUPMAN, INC.

TABLE OF CONTENTS

		Page
	PART I.	1
Item 1.	Business	1
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	12
Item 2.	Properties	12
Item 3.	Legal Proceedings	12
Item 4.	Mine Safety Disclosure	12
	PART II.	13
Item 5.	Market for Registrant’s Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities	13
Item 6.	Selected Financial Data	15
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 8.	Financial Statements and Supplementary Data	19
Item 9.	Changes in and Discussions with Accountants on Accounting and Financial Disclosure	43
Item 9A.	Controls and Procedures	43
Item 9B.	Other Information	43
	PART III.	44
Item 10.	Directors, Executive Officers and Corporate Governance	44
Item 11.	Executive Compensation	46
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	47
Item 13.	Certain Relationships and Related Transactions, and Director Independence	47
Item 14.	Principal Accountant Fees and Services	48
	PART IV.	49
Item 15.	Exhibits and Financial Statement Schedules	49
SIGNATURES		50

 PART I

Forward-Looking Statements

Most of the matters discussed within this report include forward-looking statements on our current expectations and projections about future events. In some cases you can identify forward-looking statements by terminology such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These statements are based on our current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. We do not undertake any obligation to update any forward-looking statements. Unless the context requires otherwise, references to “we,” “us,” “our,” and “Soupman,” refer to Soupman, Inc.

Item 1.  Business

OUR COMPANY

On December 15, 2010, we entered into a Merger Agreement in which The Original Soupman, Inc. (“OSM”) was merged with and into OSM Merge, Inc., our subsidiary. All the outstanding shares of OSM were converted into an aggregate of 14,004,230 shares of our common stock and 1,987,783 shares of our preferred stock.  In addition, principal and interest of $4,830,254 of OSM’s convertible notes were converted into 4,830,254 shares of our common stock.

On January 31, 2011, we reincorporated in Delaware and changed our name from Passport Arts, Inc. to Soupman, Inc. Thereafter, our stock began trading on the over-the-counter market under the symbol SOUP.

We currently manufacture and sell soup to grocery chains, the New York City Public School System and other outlets and to our franchised restaurants under the brand name “The Original Soupman”. Our brand is well known throughout the industry and our Chicken Vegetable soup has been rated as the best chicken soup in America by Consumer Reports.  

OUR BUSINESS

Overview of our Operations

Our Company manufactures and sells soups under the “Original SoupMan” brand.  We sell our soups in a new innovative Tetra-Recart self stable packaging in the canned soup aisle where most “heat & serve” retail soup purchases are made.  We believe that with the new, shelf-stable, Tetra-Recart packaging that allows our soups to be displayed in the canned soup aisle, and 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 casinos, airports, and other travel destinations including 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.

Licensing Arrangement with Al Yeganeh

In July 2004, International Gourmet Soups licensed the exclusive rights to use, in perpetuity, the name, slogans, and recipes of Al Yeganeh, founder of the famous soup restaurant located in New York City on 8th Ave and 55Street, in manufacturing and marketing in North America, over 40 varieties of gourmet soups under the brand “Original SoupMan”.

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The quality of his soup was such that Mr. Yeganeh gained a devoted local following and long lines of loyal customers outside the store that extended around the block. This location had been closed since 2004 as Al developed the soups for us and was reopened in July of 2010 to the same huge fanfare that it has experienced since 1984. Mr. Yeganeh’s renowned soups abruptly went international in 1995 when they first aired the famous “soup” episode of the “Seinfeld” comedy television show, which featured a character based on Mr. Yeganeh. This episode is one of the best known and highest-rated of that phenomenally successful series, and it soon became common knowledge that the character of the irascible soup-restaurant proprietor was based—fairly or unfairly—on Mr. Yeganeh. Mr. Yeganeh was featured on “Late Night with David Letterman,” “The Oprah Winfrey Show,” “Good Day New York,” and “The Today Show,” CNN, CNBC’s “Squawk Box,” and “Your World with Neil Cavuto”, “Fox and Friends”, TIME Magazine, Consumer Reports and many other media venues.  Mr. Yeganeh was paid $150,000 upon execution of the license agreement, and the agreement further provides that he is to  receive a minimum royalty of $225,000 per year through June 30, 2014 based on a right to royalties of 3% on our gross sales (as such term is defined in the license agreement) 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 and 3% of our franchise fees (the latter amount to be donated to charities dedicated to relieving hunger).  He also receives 50% of the net profits from the sale of certain merchandise. Pursuant to the terms of the license agreement, Mr. Yeganeh received 20% of the outstanding stock of our subsidiary Kiosk Concepts, Inc., which manages our franchise operations. In the event of a bona fide sale of all of the stock or assets of the Company Mr. Yeganeh is to receive the lesser of 10% of the sale price less all outstanding liabilities or $10,000,000.  The license agreement with Mr. Yeganeh does not provide for any stated termination provisions.

Current Operations

We sell our soups in two distinct venues and packages.  In the grocery segment, we sell our soups in the Tetra Recart packaging that allows our soups to be displayed in the soup aisles of grocery stores rather than the frozen food aisles.  In the food service segment, we sell our soups in 8 lb. frozen boilable pouches to our franchised restaurants, licensed customers and NYC public school system.

The 8 lb. boilable pouches are slow cooked in small batches using his original recipes and flash frozen to seal in the maximum amount of flavor.  The Tetra Recart soups do not require any refrigeration and have no preservatives added. Our processes enable us to ship Mr. Yeganeh’s famous soups anywhere in the world.

Our subsidiary, The Original SoupMan Inc. markets our “Original SoupMan” soups. and Kiosk Concepts, Inc, an 80% owned subsidiaries of The Original SoupMan Inc., the remaining 20% of which is owned by Mr. Yeganeh, is the entity from which we conduct our franchising operations which collect franchise fees and royalties.

Original Soupman Packaged Soups

With our launching of the SoupMan brand shelf stable Tetra Recart soup in the grocery and supermarket in May 2012, we are now part of the $6 billion US grocery soup category and plan to be able to gain a meaningful portion of that business. The Tetra Cart packaging allows us to sell products in grocery stores that we previously could not sell such as our best selling soup in our restaurants, Lobster Bisque. We believe that many consumers had some difficulty finding our retail product in their local frozen foods section, but that with the shelf-stable, Tetra-Pak it is easy for a consumer to find our famous soups from Al Yeganeh. The elimination of the need for refrigeration also significantly reduces our production, shipping and storage costs. Tetra Recart soups are easier to ship, easier to stock and easier on the environment. Several thousand products around the world have shifted to Tetra Recart and/or Aseptic shelf stable packaging due to its environmentally friendly traits and its being BPA-FREE.

The ability to sell our soups where people look for them in the canned soup aisle, as opposed to the frozen foods section among varied other foods, enables us to offer the same quality, award winning taste and shelf life for less cost and maintain significant profit margins. We believe that this will be the catalyst and inflection point which will propel the SoupMan brand into the mainstream of the national soup retail industry.

Currently, our Tetra Recart packaged soups can be found in the soup aisles of upscale supermarkets and in retail grocery chains.  These 17.3 oz. cartons are a healthy, tasty, nutritious meal and are priced between $2.99 and $3.99. Our current customers include Safeway, HEB, Ingles, Weis, Pathmark, A & P and other major retail chains. 

We believe the supermarket industry is currently seeking new product concepts to drive incremental sales and profits in today’s economy.  The Original SoupMan’s marketing strategy is to exceed our customer’s expectations for premium soup products and healthy meat replacements.  Original Soupman targets consumers in the retail landscape that are educated, health and taste conscious, working and have limited time to cook and desire high quality meals for immediate consumption.  We have recently introduced gluten free soups and we plan to introduce an organic soup, lower-sodium soups and recipes for our customers to follow which help stretch the dollar by putting the soup over pasta, rice or potatoes. We plan to target all grocery chains as well as upscale customers such as Whole Foods, Wild Oats and Trader Joe’s as potential clients for those products.

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In addition, we plan to expand our branded offering to soup bases, ready to use broths and dry soup mixes to compete in these growing categories with Mr. Yeganeh’s famous recipes which we believe will make his broths and stocks sought after by customers. These products will be priced for grocery and discount stores such as Wal-Mart with significant operating margins for our company.

Franchising

Our entire line of over 40 varieties of “Original SoupMan” soups are sold directly to consumers in Original SoupMan restaurants by franchisees, to whom we sell the bulk soups. We currently have 11 franchise locations (which include five co-branded locations as described below).

Our flagship Original SoupMan delicatessen restaurant model opened in December 2009 at the Mohegan Sun Casino in Connecticut (www.mohegansun.com).  The franchisee of this restaurant is one of the founders of Johnny Rocket’s Hamburgers, Lloyd Sugarman (www.johnnyrockets.com), and a member of our Board of Advisors.Mr. Sugarman brings a wealth of restaurant experience into the Original SoupMan system and we believe he will help our franchise operations system grow efficiently in all aspects. This 650 sq. ft. food court model can experience sales of more than $1,400,000 annually. Mr. Sugarman intends to open his next Original SoupMan restaurant with this food court model at the Mohegan Sun in the Poconos, PA.  This location will put more emphasis on Al’s New York’s Delicatessen & Restaurant and while it will, of course, highlight Original SoupMan soups, we believe the prominent delicatessen signage will attract 24-hour food business.  There are also plans for full seating Al’s NY Delicatessen & Restaurants for casinos and airports with expected sales of up to $4 to $5 million annually.  We have signed an Area Development Agreement with Mr. Sugarman for all the casinos in the U.S. and Canada.

We have identified casinos, airports, theme parks and other tourist locals as our preferred locations for the continued expansion of our franchises, and plan to vigorously pursue marquee destinations for additional franchise store build-outs.

Co-Branded Franchising

We will continue to seek to identify quality partners with whom we can forge a synergistic relationship, whether in the United States and/or Canada, for the purpose of expanding our brand awareness and sales volume. Our co-brand model, where our soups are served together with other franchised food items, such as Tim Horton’s coffee products, is available to professional franchise operators who in the past four years have survived the worst economic climate in their lifetimes and see the urgency in adding consumer traffic and revenue while driving sales more consistently throughout the day. Our dedicated franchise partners agree with the synergy and benefits of co-branding with the Original SoupMan.  We currently have co-branded franchise agreements with the following organizations:

Tim Horton’s (http://www.timhortons.com)

Cold Stone Creamery, Inc. (http://www.coldstonecreamery.com)

Red Mango (http://www.redmangousa.com)

Ranch*1 (http://www.ranch1.com) 

Co-branding enables The Original SoupMan to expand more rapidly with existing operators, with less risk, offering our consumers a healthy lunch/dinner with more variety and brand recognition while offsetting the seasonality of our products.

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Original SoupMan Licensed Soup Program

We are testing adding our branded Original SoupMan soups as a product in large chains with substantial daily foot traffic and lunch business.  This would only require a License Agreement to purchase our soups but not require fees or royalties.  This program  is targeted towards select successful strategic chains such as Starbuck’s (www.starbucks.com).  We have had multiple meetings with Subway (www.Subway.com)  and Tim Horton’s restaurants (www.timhortons.com) regarding our branded Original Soupman program for their stores in the US and Canada.

In all instances we offer the power of our brand and world famous soups to strategic partners that have thousands of outlets, high traffic and proven success.  We anticipate our licensed soup initiative to become a formidable revenue source for the Company in the coming years, allowing us to take advantage of the scale these national chains provide, as well as providing a platform for which to leverage the strong and established brand awareness these potential partners have with our target consumers.

SoupMan NYC School Lunch Program

Recent studies have concluded that menus in many school lunch programs are too high in saturated fat and cholesterol and lacking in fiber, vegetables and other nutrient-rich foods. The reports show that major changes are needed to encourage the health of our nation’s youth, and to reverse the growing trends of childhood obesity, early-onset diabetes, and hypertension, among other chronic diseases, in children and teens. We have, in cooperation with the NYC Department of Education School Foods, developed a menu of low fat, low calorie menu items that are high in fiber, protein and vegetable nutritionals. We started shipping SoupMan Mexicali Beans in January 2012 as a lunch item to all NYC Schools, at elementary, middle and high school levels in the five boroughs of NYC. There are approximately 860,000 million meals served daily in the NYC School system. We fully anticipate the continued scaling of this program, and have begun discussions with additional school systems across the country including the States of Indiana, Tennessee and Mississippi.

Our Mexicali Bean school lunch is sold  ready to ‘heat n serve’  as a branded Original SoupMan product which is user friendly for the cafeteria employees (no mixing and cooking)and has been well received by the students who consider it a delicious and healthy alternative meal.. In addition, we believe there are many other meals, which we can prepare in a “heat-n-serve” format for schools across the country, and we are currently testing a variety of products and formulations to meet the requirements set forth by the Department of Education. The Company displayed its products at the School Nutrition Association conference www.schoolnutrition.org in July 2012, where Shaquille O’Neal was a featured speaker and Reggie Jackson held a private event for school food buyers from around the country.  In addition, Reggie introduced several new vegetarian items which conform to the new 2012-2013 USDA School Food guidelines including Curried Chick Peas and Stewed Pinto Beans.  Tim Gannon, master chef and co-founder of Outback Steakhouse and SoupMan Director of Culinary, developed these new recipes for the schools which are great tasting, low sodium, low fat and high in dietary fiber.  This conference, which was attended by 3,500 school nutritionist from around the United States, is expected to serve as a catalyst for other school systems to serve SoupMan products. SoupMan can provide more nutritional menu options for their respective students in a unique and fun way utilizing SHAQ, whom the children look up to.  SoupMan has created items including Shaq-A-Noodle soup, Shaq-A-Roni & Meatballs and have Shaq-A-Roni & Cheese in the works. 

In addition to Shaq’s efforts, we have established a formal relationship with the ‘nPLAY Foundation to act as one of our sales representative to the schools. ‘nPLAY which is led by professional athletes Grant Hill, Jennie Finch, Gary Player, Paul Pierce and a coalition of 37 professional athletes is dedicated to fight the childhood obesity epidemic in America. Its mission is to support schools across the country to meet the criteria of the Healthier US Schools Challenge (HUSSC).

The HUSSC, which is a USDA program, is a primary component of First Lady, Michelle Obama’s “Let’s Move” campaign. ‘nPLAY has an official partnership with the USDA-Food Nutrition Services to work with schools on their health and wellness so they can meet the criteria of the HUSSC. For every case of soup SoupMan sells to any school thru the sales efforts of ‘nPLAY, 3% of the proceeds will be donated to the ‘nPLAY foundation for its cause which includes buying new cooking equipment for schools that is conducive to healthy cooking.

We have contracted the manufacture and packaging of our bulk soups sold in our restaurants and to our food service accounts with a co-packer who has three facilities and has committed to produce up to 20 million pounds of our soup per year.  They recently completed a $30 Million plant expansion which will increase their capacity by 90 million pounds annually.

E-Commerce and On-Line Distribution

We are a legendary brand with extraordinary awareness. While our distribution channels continue to be built, we maintain an interactive website which allows our loyal SoupMan fans from around the world to purchase our 4 carton soup varieties Tetra Recart soups as well as our collection of licensed merchandise. Our four retail varieties are Lobster Bisque, Chicken Noodle, Lentil Soup and Tomato

High Profile Strategic Brand Champions

We have signed agreements with a trio of American Icons; Yankee great Reggie Jackson; Seinfeld star Jason Alexander; and NBA superstar Shaquille O’Neal.

Reggie Jackson, Mr. October, The Hall of Fame Great, has joined our management team in an advisory capacity to represent our brand in the media, with high profile customers and at trade shows.  Reggie’s high profile and business contracts enable SoupMan to gain high-level meetings with industry leaders.  He is a door opener for our brand and a world-class ambassador for The Original SoupMan.

Jason Alexander played George Costanza in the famous Seinfeld “Soup” episode that portrayed Al Yeganeh’s character.  We intend for him to be our spokesperson to drive sales and awareness and spearhead the marketing of the shelf stable SoupMan product launch.

Shaquille O’Neal is a future NBA Hall of Fame basketball player who is currently the most followed athlete on Twitter with over 4 million followers. This social media mastery is only part of what Shaq brings to the SoupMan team. His business acumen includes being an early investor in Google and Vitamin Water (bought out by Coca-Cola for $4 Billion) as well as starring in his own reality show and selling over a hundred million pair of ‘value-priced’ sneakers under the SHAQ brand in Wal-Mart and other retailers. In addition, Shaq is invested in several restaurant chains and has extensive relationships we believe will be fortuitous in gaining partnerships with national chains for The Original SoupMan in the near future.  We intend for him to lead our marketing campaigns for Tetra Recart as well as the school healthy foods programs.

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THE SOUP MARKET

The Food Marketing Institute estimates that U.S. retail sales of premium soup represent a $7.6 billion market in foodservice and restaurants (FMI Website March 11); our goal is to capture at least 2% of that market over the next five years, equivalent to $152 million in wholesale sales and the license strategy was developed to address this opportunity.

Supermarket Stores

The Supermarket industry consists of over 36,500 stores with 2011 total sales of $584.4 billion. (Food Marketing Institute 2012).  In addition, there are over 136,000 grocery stores with similar revenue.  According to Datamonitor, the US soup market is expected to continue to grow at a rate of 2.8% per year between 2009 and 2014.  It is our goal to capture a portion of this market.

Fast-Food Trends

Within the food service industry, fast food represents $182.0 billion of total restaurant sales in 2011. There are approximately 300,000 fast food stores in the U.S. (IBIS World 2010).  People are frequenting fast-food outlets more often and they are spending more money at fast-food outlets.

Health concerns are also forcing fast-food outlets to add healthier foods to their menus. With baby boomers worrying about cholesterol, and big chains being sued over high-fat content foods, it’s tempting to conclude that finally, health concerns are rewriting fast-food menus. Based upon the nutritional content of our soup, we feel our soups offer a healthy alternative to other foods sold at fast food outlets.

An important subset of the branded premium specialty operations is the growing popularity of upscale “quick-casual” fast-food concepts, as exemplified by restaurants such as those in the Panera Bread, Cosi, and Chipotle Mexican Grille chains. Our target customer has annual household income of $75,000 or more, educated and health conscious.  It is our opinion that quick-casual consumers are more health conscious and want lighter fare, all-natural products, and varied international or exotic ingredients. They have less time for lunch and dinner, and regard quality take-home foods as supplementing, or as an alternative to, home cooking.  These consumers are seeking “home meal replacement” choices and we believe that soup is the perfect home meal replacement.

We estimate that soup currently accounts for 4% of U.S. food-service sales. We believe that we can profit from each of the trends noted above—stores seeking to increase ticket sales, consumers seeking healthier fare, and the growing popularity of branded, comparatively upscale outlets- because they will lead to an increase in the soup component of food-service sales. In particular, to take advantage of these trends we have developed a “clip-on” Original Soupman branded concept of sub franchising and licensing, in which our soup products in certain outlets are one of several co-branded food concepts; providing an outlet a means of increasing ticket sales and offsetting the effects of seasonality.

Fast-Food Franchises

We are currently franchising fast-food “Original SoupMan” co-branded stores in high-traffic locations (including shopping malls, airports, casinos, travel plazas, tourist locations, and major city centers) throughout the U.S. We have franchise approvals in 47 U.S. states, and have submitted our franchise offering documents in the remaining states. Since October 2004, more than 8,500 applications from potential franchisees and have been received. Our focus will be on experienced multi-store operators and co-branding into existing successful operations.

Franchising Terms

Our franchise fee is generally $35,000 per unit (although in certain situations, where a franchisee agrees to open three or more stores, we charge a discounted fee), $20,000 for a co-branded store and we collect a 5% royalty on all sales of products sold by the franchisee, in addition to money received from the franchisee for the purchase of the soups. Each franchise is for a ten-year term, which is renewable if the franchisee is in compliance with our franchise requirements, which include meeting quality standards, following the procedures set forth in our operations manual, selling our soups exclusively and making prompt payments.

The Original SoupMan Delicatessen, our first of this model opened in the Mohegan Sun Casino in Connecticut in December 2009 is a 650 square foot restaurant with common seating.  A typical Original SoupMan Delicatessen could cost up to $200,000 or more depending on the size and location. This is relatively inexpensive compared to the average restaurant cost due to our simple equipment package. Our stores have no fat fryers or fire suppression systems. Consumers prefer to dine in a comfortable setting with seating and we will continue to refine this model while co-branding Original SoupMan which only requires approximately $60,000 in capital investment, throughout the United States and Canada with quality partners.

PRICING AND GROSS MARGINS

We sell our “Original SoupMan” franchisees products at an average price of approximately $35 per case which returns average margins of approximately 30%. Our franchisees have signed 20-year contracts with the Company. The 17.3oz Tetra Recart product sells in grocery stores for approximately $2.99-$3.99, depending on the variety of soup and retailer. Our tetra recart soups are competitively priced with the premium packaged soups and we believe taste far superior.

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Franchisees are free to set retail prices at their restaurants, and we expect that franchise outlets will sell a 12-ounce cup of hot soup for approximately $6 and more for Lobster bisque. We have also implemented a Daily Special in our restaurants for $6.95 which includes a cup of the Original SoupMan soup, ½ sandwich or salad and fresh brewed tea or lemonade to be competitively priced.  We have also implemented a pay one price strategy of $4.49 for a cup and $5.99 for a bowl in order to have our customers have a better price/value perception of Original SoupMan while returning a cost of goods sold of approximately 35% for our operators.

MARKETING

We are building on the fame of Mr. Yeganeh by investing strategically in people, packaging, advertising, promotions, and establishing a corporate identity. We have also invested sparingly in trade events including the Multi –Unit Operator Conference, the FMI (Food Marketing Institute) show, MUFSO conference, IFA conference, ARN conference and The Money Show conferences. We sample our soups and are able to meet potential restaurant operators, customers and strategic partners at these events.

We have signed on three brokerage firms to sell our new Tetra Recart soups in the grocery and club store industries.  Advantage Sales & Marketing (http://asmnet.com) represents us in all supermarkets nationally, Wal-Mart, Target stores as well as distributors, convenience stores and drug chains including CVS, Walgreen’s and Rite Aid.  Acosta Sales & Marketing (http://www.acosta.com) handles $1.4 billion in annual sales to Safeway stores and handles us product exclusively at Safeway.  Innovation Sales (http://www.foodmarketingcoop.com) works exclusively selling to Costco and has several full distribution “Kirkland signature” items.

In keeping with Mr. Yeganeh’s tradition of feeding the hungry and homeless, we have formed a charitable foundation called “Al Feeds the Hungry Foundation” from which we make donations to local organizations who help feed the hungry.  Our agreement with Mr. Yeganeh provides that 3% of the franchise fees payable to Mr. Yeganeh shall be paid to a charity named by Mr. Yeganeh which helps feed the hungry.  To date, we have donated over $50,000.

PRODUCTS AND OPERATIONS

Our “Original SoupMan” product line consists of all of Al Yeganeh’s soups, which to date is 40 different types, each featuring fresh ingredients and exotic flavors. Mr. Yeganeh and our team developed a proprietary cooking process, unique to the food manufacturing industry, enabling them to produce a line of packaged and frozen gourmet soups of the highest quality. We make all our products from raw materials, initially sautéing primary components, and then gradually adding complementary ingredients.  All of our soups are manufactured and packaged by us or our manufacturers at their facilities and shipped by common carrier or their trucks to the sale destination.

Products sold through our franchise program and our kettle soups are packed in 8-pound boilable poly bags (which have been designed to lock in flavor) and frozen. At the point of sale, the soup is heated in branded kettles that “finish” the soup and bring all flavors to their peak. No additional ingredients are required, except lobster and crab meats for our specialty soups. We add some fresh herbs as a garnish at our stores which include dill, cilantro and fresh basil.  Franchisees will offer toppings for the soups, such as sour cream, guacamole, cheese or onions, which add variety to each soup offering.

In May 2012 we began selling our “Original SoupMan” soups to consumers in grocery stores in the Tetra Recart cartons that allow them to be displayed for the first time on shelves in the canned soup aisle. Not only does the Tetra Recart packaging allow us to eliminate the need to refrigerate our soups and allow our soups to be displayed on the shelves in the soup aisles but soups packaged in Tetra Recart cartons are easier to ship, easier to stock and easier on the environment. We pack Lobster Bisque, Chicken Noodle, Lentil and Tomato Bisque in the Tetra Recart packaging.

COMPETITION

We compete directly with national and regional soup wholesalers, marketers of frozen packaged goods, and regional retail soup chains. In addition, we compete indirectly with many well-established food-service companies, including fast-food restaurants, delicatessens, take-out food service companies, supermarkets, and convenience stores.

Our competition includes the following companies.

Regional and National Wholesale Manufacturers (kettle programs)

1. Heinz—Chef Francisco

2. Campbell’s—Stockpot

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3. Kettle Cuisine

Branded Marketers (refrigerated, jarred, tetrapaks)

1. Campbell’s—Stockpot, GO Soups, Selects, Chunky and Kettle Soups

2.  Pacific

3.  Hain Food Group—Imagine Soups

4. Blount

5. Harry’s

6. .Wolfgang Puck

Fast Food Chains with Proprietary Soup Sourcing

1.  Hale & Hearty  (local NYC)

2.  Panera Bread (National)

3. Souper Salad (South West)

4. Zoup (Michigan Area)

Our franchise operations are subject to competition from every other franchise chain. There are many alternatives available to franchisees.  Many of the fast food chains are more established than us and have greater marketing and distribution resources than us, which permit them to implement extensive advertising programs and attract franchisees.  However, we feel that the quality of our product will help us attract franchisees.

Barriers to entry are moderate in this industry. The start-up costs for equipment, supplies, and establishing distribution are significant, and it is critical that one have access to industry expertise. Due to the size and complexity of their equipment and their existing production techniques, the larger soup companies are not equipped to produce higher-quality, all-natural gourmet soups. Regional producers of refrigerated gourmet soups are in general unable to freeze their product. This shortens its shelf life and therefore limits how widely the product can be distributed. In addition, there is little consumer awareness of regional brands, such as Hale & Hearty.  We have not experienced these barriers to entry as we are a low capital intense national retailer with the ability to ship frozen products nationally and even internationally, to Canada.

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EMPLOYEES

We currently have nine full time employees at our offices in Staten Island, New York. We have written employment agreements with our executive officers. However, all of our employees have signed non-disclosure agreements, protecting the disclosure of our confidential information.

Item 1A.  Risk Factors

RISKS RELATING TO OUR BUSINESS

The food service industry is subject to litigation and adverse publicity concerning food quality, health, and related issues. These could cause customers to avoid our products and could result in liabilities.

Food service businesses can be adversely affected by litigation and complaints from customers or government authorities relating to food quality, illness, injury, or other health concerns or operating issues stemming from one store or a limited number of stores, including stores operated by our franchisees, or stemming from our products. Adverse publicity about any such allegations may negatively affect our Company and our franchisees, regardless of whether the allegations are true, by discouraging customers from buying our products. Because one of our competitive strengths is the premium quality of our soups, adverse publicity relating to food quality or other similar concerns could affect us more than it would food-service businesses that compete primarily on other factors. We could also incur significant liabilities if a lawsuit or claim results in a decision against us, and we could incur significant litigation costs regardless of the result.

We maintain insurance relating to personal injury and product liability in amounts that we consider adequate for the retail food-service industry. While we have been able to obtain insurance in the past, we can give no assurances that we will be able to do so in the future, or if we are able to, whether that insurance will provide adequate coverage. Any successful claim against us in an amount materially exceeding our coverage could adversely affect our operating results.

Our operating results are subject to seasonal fluctuations.

We currently experience seasonal fluctuations in our operating results, as soup is a product that sells more in the fall and winter. In addition, we expect that sales and income from franchisees’ stores based in malls, airports, casinos and comparable locations will mirror customer traffic flow, which tends to increase significantly during the fourth quarter. Due to these factors, the operating results for any three-month period are not necessarily indicative of the results for any subsequent fiscal quarter or for a full fiscal year.

Our success depends on our ability to compete with many food service businesses.

We compete directly with national and regional soup wholesalers, marketers of packaged goods, and regional retail soup chains. In addition, we compete indirectly with many well-established food-service companies, including fast-food restaurants, delicatessens, take-out food service companies, supermarkets, and convenience stores.

Aggressive pricing by our competitors or the entrance of new competitors into our market could reduce our sales and profit margins. Moreover, many of our competitors offer consumers a wider range of products. And many of our competitors or potential competitors have substantially greater financial and other resources than we do, which may allow them to react to changes in pricing and marketing better than we can.

Our franchisees may not be successful in developing and operating stores.

Our growth will depend in part on our ability to attract and retain qualified franchisees and the ability of our franchisees to maximize penetration of their designated markets and to operate their stores successfully. Although we have established criteria to evaluate prospective franchisees, there can be no assurance that our franchisees will have the business abilities or access to financial resources necessary to open our stores or that they will successfully develop or operate these stores in their franchise areas in a manner consistent with our standards.  Financial difficulties of franchisees may also from time to time require us to establish reserves with respect to amounts due. 

We might be prevented from using our trademarks.

We believe that our trademarks have significant value and are important in the marketing of our restaurants. Our ability to compete effectively depends, to a significant extent, on our ability to maintain the proprietary nature of our owned and licensed intellectual property. Although our trademarks are currently registered with the United States Patent and Trademark Office and are registered in certain foreign jurisdictions, there can be no assurance that our trademarks cannot be circumvented, that they do not or will not violate the proprietary rights of others, or that we would not be prevented from using our trademarks if challenged.

Our operating results are subject to fluctuation in the price of ingredients and other expenses.

Our operating results will be affected by fluctuation in the price of ingredients for our products, for instance due to bad weather adversely affecting the harvest of a given vegetable. In addition, our business can be affected by fluctuation in other costs.

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RISKS RELATING TO OUR COMPANY

We may not be able to continue as a going concern.

The opinion of our independent registered accounting firm for our fiscal years ended August 31, 2012 and August 31, 2011 is qualified subject to substantial doubt as to our ability to continue as a going concern. See “Report of Independent Registered Public Accounting Firm” and the notes to our Financial Statements contained in our Annual Report on Form 10-K for the year ended August 31, 2012.  The Company had a net loss of $6,329,747 and net cash used in operations of $1,604,572 for the year ended August 31, 2012; and has a working capital deficit of $7,874,123 and a stockholders’ deficit of $7,565,912 at August 31, 2012.  These factors raise substantial doubt about the Company’s ability to continuing as a going concern.

Our Company has not yet generated any net income.

Neither our Company nor the company from which we acquired our assets has ever generated any net income. SKI, the company from which we acquired our assets, generated net losses of over $20 million during its five years of operations.  Although we are operating under a much different business model for packaged soups and restaurants than SKI, there can be no assurance that our business model will be able to generate net income.

We have a limited operating history which provides limited reference for you to evaluate our ability to achieve our business objectives.

We were incorporated on December 2, 2008 under the name Passport Arts Inc. On December 15, 2010 we changed our primary focus to the sale of The Original Soupman® soups.  Our company has a limited public operating history, is subject to the risks and uncertainties associated with early stage companies and has historically operated at a loss.  Accordingly, you will have a limited basis on which to evaluate our ability to achieve our business objectives.

We could incur expenses in connection with certain SKI legacy issues.

There can be no assurance that we will not incur expenses involved with any Soup Kitchen International, Inc. (“SKI”) legacy issues, despite the fact that we only acquired the assets and not the equity of Soup Kitchen International, Inc.  As part of the purchase price we guaranteed approximately $3,600,000 of secured debts owed by Soup Kitchen International, Inc. and those assets are still subject to liens on the Soup Kitchen International notes. On May 2, 2011, a proceeding was brought against the Company, certain principals of the Company and other third parties by the bankruptcy trustee for SKI seeking to avoid and/or recover the value of assets of SKI, re-alleging various claims made in the October 26, 2010 action. The Company intends to vigorously defend this action believing them to be wholly without merit, especially in the light of the fact that an independent appraisal was performed prior to the asset transfer to OSM which completely supported the fairness of the asset transfer to OSM in which OSM paid $100,000 in cash, guaranteed secured debt in the amount of $3,670,000, and has since paid $352,907 in respect of SKI payables (including $256,205 owed to Al Yeganeh).  Moreover, an additional independent appraisal was performed by BDO in May of 2012 which showed SKI had no value at the time of the transaction. There was also SKI shareholder approval obtained in connection with the transaction. No assurance, however, can be given as to the ultimate outcome of these actions or their effect on the Company.  If the Company is not successful in its defense of these actions it could have a material adverse effect on its business and operations.

We need to raise additional capital.

Because we have not yet generated net income and have negative cash flow from operations since inception, with a net loss of $6,329,747 for the year ended August, 31 2012 and a stockholders’ deficit of $7,565,912 as of August, 31, 2012, we need to secure additional capital to enable us to implement our planned marketing, advertising and merchandising strategies. 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 recart packaging, 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.  In addition, if our anticipated sales for the next few months do not meet our expectations, our capital resources may not be sufficient to meet our cash flow requirements. To secure additional financing, we may need to borrow money or sell more securities, which may dilute the value of our shares. We may also be unable to secure such additional financing on favorable terms or at all.

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We are dependent upon our relationship with Mr. Yeganeh.

We have the exclusive license to use the names, likeness, slogans and recipes of Al Yeganeh in the manufacture and sale of our soups.  We believe that our success is dependent upon the association of our soups with Mr. Yeganeh and expect that our brands will remain closely associated with Mr. Yeganeh.  In fact, the foundation of our marketing efforts has been consumer awareness of our product under the name “Original SoupMan”, which is based upon the fame of Mr. Yeganeh.   Therefore, any negative publicity about Mr. Yeganeh, his soups or his restaurant or his failure to be associated with the Company could have a negative impact on our sales.

The success of our business will depend upon our ability to create brand awareness.

The soup market is already highly competitive, with many well-known brands leading the industry.  Our ability to compete effectively and increase our revenue will be based upon our ability to create awareness of our products distinct from those of our competitors.  We believe that our soups are superior to those of our competitors based upon taste and nutritional value.  Our success will be dependent upon our ability to convey this to consumers.

Our business is dependent upon the active involvement of our executive officers, the loss of which would be difficult to replace.

We are dependent upon the personal efforts and skills of our executive officers, in particular Mr. Casale, Mr. Bertrand, Mr. Rubano and Mr. Rametta.  We have not obtained "keyman" life insurance on any of the lives of our employees.

We have the authority to issue additional shares of stock, which could negatively impact the rights of shareholders.

Our certificate of incorporation authorizes us to issue 75,000,000 shares of common stock and 25,000,000 shares of preferred stock.  Our board of directors has the power to issue shares of preferred stock upon redemption or conversion of the outstanding shares and  to issue new shares of preferred stock that are within our authorized amount but have not yet been issued, without shareholder approval, with such rights, powers, qualifications, limitations, restrictions and preferences as the directors shall determine. 

Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock, with dividend, liquidation, conversion, voting or other rights, which could adversely affect the voting power or rights of our other shareholders and thereby reduce the value of their shares.  In addition, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control. Based upon our current financial position, we do not anticipate that we will be able to pay any cash dividends.

We are subject to regulations regarding the operation of a franchise, which could limit the way we operate our franchise business and cause us to incur costs.

We are currently subject to state regulation with regard to the operation of our franchise business.  Many states have stringent requirements with regard to the operation of franchises that may limit the way we operate our franchise business.  In addition, many states, such as Illinois, require that the franchisor obtain the states approval, prior to operating a franchise business. Often, such approval can only be obtained after incurring the cost of preparing and filing various applications and forms and paying fees.  Therefore, our franchise expansion plans can be delayed or even prevented, if a state should postpone or decline approval of our franchise.

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A limited trading market currently exists for our securities and we cannot assure you that an active market will ever develop, or if developed, will be sustained.

There is currently a limited trading market for our securities on the over-the-counter-market. Consequently, we cannot assure you when and if an active-trading market in our shares will be established, or whether any such market will be sustained or sufficiently liquid to enable holders of shares of our common stock to liquidate their investment in our company. If an active public market should develop in the future, the sale of unregistered and restricted securities by current shareholders may have a substantial impact on any such market.

There may be future dilution of our common stock and current shareholders will experience immediate dilution.

If we sell additional equity or convertible debt securities, those sales could result in additional dilution to our shareholders.

Our lack of an independent audit committee and audit committee financial expert at this time may hinder  our board of directors’ effectiveness in fulfilling the functions of the audit committee without undue influence from management and until we establish such committee will prevent us from obtaining a listing on a national securities exchange.

Although our common stock is not listed on any national securities exchange, for purposes of independence we use the definition of independence applied by NASDAQ. Currently, we have no independent audit committee nor do we have an audit committee financial expert at this time. Our full board of directors functions as our audit committee and is comprised of two directors, neither of which is considered to be "independent" in accordance with the requirements set forth in NASDAQ Listing Rule 5605(a)(2). An independent audit committee plays a crucial role in the corporate governance process, assessing a company's processes relating to their risks and control environment, overseeing financial reporting, and evaluating internal and independent audit processes. The lack of an independent audit committee may prevent the board of directors from being independent from management in its judgments and decisions and its ability to pursue the responsibilities of an audit committee without undue influence. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified, independent directors, the management of our business could be compromised. In addition, no director on our board of directors is considered to be a “financial expert”. An independent audit committee is required for listing on any national securities exchange, therefore until such time as we have an independent audit committee we will be ineligible for listing on any national securities exchange.

Our board of directors acts as our compensation committee, which presents the risk that compensation and benefits paid to those executive officers who are board members and other officers may not be commensurate with our financial performance.

A compensation committee consisting of independent directors is a safeguard against self-dealing by company executives. Our board of directors acts as the compensation committee and determines the compensation and benefits of our executive officers, administers our employee stock and benefit plans, and reviews policies relating to the compensation and benefits of our employees. Our lack of an independent compensation committee presents the risk that our executive officer on the board may have influence over his personal compensation and benefits levels that may not be commensurate with our financial performance.

Because our shares are deemed “penny stock,” you may have difficulty selling them in the secondary trading market.

The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price (as therein defined) of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions.  Additionally, if the equity security is not registered or authorized on a national securities exchange that makes certain reports available, the equity security may also constitute a “penny stock.”  As our common stock comes within the definition of penny stock, these regulations require the delivery by the broker-dealer, prior to any transaction involving our common stock, of a risk disclosure schedule explaining the penny stock market and the risks associated with it. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account.  In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.  These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock. The ability of broker-dealers to sell our common stock and the ability of shareholders to sell our common stock in the secondary market would be limited.  As a result, the market liquidity for our common stock would be severely and adversely affected. We can provide no assurance that trading in our common stock will not be subject to these or other regulations in the future, which would negatively affect the market for our common stock.

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Our stock price has been volatile and subject to various market conditions.     

The trading price of our common stock has been subject to wide fluctuations. The price of our common stock may fluctuate in the future in response to quarter-to-quarter variations in operating results, material announcements by us or our competitors, governmental regulatory action, conditions in the nutritional supplement industry, negative publicity, or other events or factors, many of which are beyond our control. In addition, the stock market has historically experienced significant price and volume fluctuations, which have particularly affected the market prices of many dietary and nutritional supplement companies and which have, in certain cases, not had a strong correlation to the operating performance of these companies. Our operating results in future quarters may be below the expectations of securities analysts and investors. If that were to occur, the price of our common stock would likely decline, perhaps substantially

Item 1B.  Unresolved Staff Comments

Not applicable.

Item 2.  Properties

Our primary offices are located at 1110 South Avenue, Staten Island, New York 10314. We currently rent approximately 400 square feet of office space in Staten Island, New York for monthly rent of $3,120. We believe our current offices will be adequate for the foreseeable future.

Item 3.  Legal Proceedings

On September 21, 2009, Penny Fern Hart, a former Chairman of the Board of Soup Kitchen International, Inc. (“SKI”), as successor to the Commerce Bank loan to SKI, commenced an action in N.Y. State Supreme Court, Case Index # 602538/09, against John Bello, Maj-Britt Rosenbaum and William McCreery (the “Defendants”) to enforce certain guarantees given by the Defendants to Commerce Bank regarding SKI’s defaulted loan.  On October 26, 2010, a third party action was filed in this case by the Defendants against OSM, certain principals of OSM and other third parties.  The action seeks, among other things, to invalidate OSM’s purchase of assets from SKI. On May 2, 2011, a proceeding was brought against the Company, certain principals of the Company and other third parties by the bankruptcy trustee for SKI seeking to avoid and/or recover the value of assets of SKI, re-alleging various claims made in the October 26, 2010 action. On October 22, 2011, the presiding judge in the bankruptcy action stayed the remaining third-party claims, in the Penny Fern Hart matter, and ordered all the parties to confer and submit a discovery schedule for the bankruptcy action. The Company intends to vigorously defend these actions believing them to be wholly without merit, especially in the light of the fact that an independent appraisal was performed prior to the asset transfer to OSM which completely supported the fairness of the asset transfer to OSM in which OSM paid $100,000 in cash, guaranteed secured debt in the amount of $3,670,000, and has since paid $ 352,907 in respect of SKI payables (including $ 256,205 owed to Al Yeganeh. In addition, there was SKI  shareholder  approval obtained in connection with the transaction.  No assurance, however, can be given as to the ultimate outcome of these actions or their effect on the Company.  If the Company is not successful in its defense of these actions it could have a material adverse effect on its business and operations.

 Soupman, Inc. is one of several defendants in a lawsuit filed by Gourmet Sales and Marketing, LLC (“GSM”) in July 2011.  GSM claims that it is owed 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 they denied the allegations of the complaint with respect to the claims of liability and asserted numerous defenses and affirmative defenses.  The matter is now in the discovery phase of litigation.  In Company 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, and the Company believes that punitive damages are without basis.

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 of this action it could have a material adverse effect on its business, as well as current and expected future operations.

Item 4.  Not Applicable

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PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities

Our common stock has traded on the over the counter market under the symbol “SOUP” since February 1, 2011. The following table states the range of the high and low sales prices of our common stock for each of the calendar quarters during the years ended August 31, 2012 and August 31, 2011. These quotations represent inter-dealer prices, without retail mark-up, markdown, or commission, and may not represent actual transactions. The last price of our common stock as reported by OTC Markets on December 13, 2012 was $0.49 per share. As of December, 2012, there were approximately 450 stockholders of record of our common stock. This number does not include beneficial owners from whom shares are held by nominees in street name.

	High		Low
YEAR ENDED AUGUST 31, 2012
Fourth quarter	$	1.00		.69
Third quarter	$	.94		.63
Second quarter	$	1.05		.75
First quarter	$	1.65		.95
YEAR ENDED AUGUST 31, 2011
Fourth quarter	$	2.10.		1.25
Third quarter	$	2.60		2.05
Second quarter	$	2.60		2.25
First quarter	$	.25		.25

Dividend Policy

We have never paid any cash dividends on our common stock to date, and do not anticipate paying such cash dividends in the foreseeable future. Whether we declare and pay dividends is determined by our board of directors at their discretion, subject to certain limitations imposed under Delaware corporate law. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our board of directors.

Equity Compensation Plan

The following table sets forth information about the securities authorized for issuance under our equity compensation plans for the fiscal year ended August 31, 2012.

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Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options		Weighted-Average Exercise Price of Outstanding Options		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by stockholders:
2010 Stock Incentive Plan		2,050,000		.50		950,000
			$
Equity compensation plans not approved by stockholder		N/A		N/A		N/A
Total		2,050,000		.50		950,000

Recent Sales of Unregistered Securities

For the three months ended November 30, 2011, we issued 250,000 shares of common stock at $1.65 per share for services rendered by two individuals having a fair value of $412,500, based upon the quoted trading price on the date issued. We also issued 10,000 shares of common stock and 1,000 two year warrants exercisable at $1,25/share for $10,000 ($1/unit) to one individual. We also issued 200,000 common shares to one individual upon the exercise of stock options @ $0.50 per share. These securities were issued pursuant to Section 4(2) of the Securities Act and Regulation D promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.

For the three months ended February 29, 2012, we also issued 97,000 shares of common stock at prices from $0.75 - $1.00 per share to five individuals for services rendered, having a fair value of $78,250 based upon the quoted trading price on the date the shares were issued.  These securities were issued pursuant to Section 4(2) of the Securities Act and Regulation D promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.

For the three months ended May 31, 2012, we also issued 82,500 shares of common stock at prices from $0.65 - $0.80 per share to four individuals for services rendered having a fair value of $55,500. based upon the quoted trading price on the date the shares were issued. These securities were issued pursuant to Section 4(2) of the Securities Act and Regulation D promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.

For the three months ended August 31, 2012, we also issued 1,340,689 shares of common stock at prices from $0.70 - $0.85 per share for services rendered, having a fair value of $1,137,383, based upon the quoted closing trading price on the date the shares were issued. The Company also issued 260,000 shares of common stock at prices from $0.70 - $0.90 having a fair value of $210,000 as part of a debt issuance, based upon the quoted closing trading price on the date the shares were issued.  These were treated as a debt discount and are amortized over the life of the loans.  The Company also issued 550,000 shares of common stock with a fair value of $396,000 based on the price of $0.72 per share on the date issued in connection with the Forbearance Agreement entered into in August with Penny hart.  The Company also issued 500,000 shares of common stock for the settlement of debt.  These shares were issued at $0.85 per share which was the quoted trading price on the date issued and had a fair value of $425,000.  All these securities were issued pursuant to Section 4(2) of the Securities Act. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.

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Item 6.  Selected Financial Data

Not applicable because the Company is a smaller reporting company.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the audited financial statements and notes thereto for the year ended August 31, 2012  found in this report. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Where possible, we have tried to identify these forward looking statements by using words such as “anticipate,” “believe,” “intends,” or similar expressions. Our actual results could differ materially from those anticipated by the forward-looking statements due to important factors and risks.

Cautionary Note Regarding Forward-Looking Statements

This report and other documents that we file with the Securities and Exchange Commission contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions.  Statements that are not historical facts are forward-looking statements, including forward-looking information concerning pharmacy sales trends, prescription margins, number and location of new store openings, outcomes of litigation, and the level of capital expenditures, industry trends, demographic trends, growth strategies, financial results, cost reduction initiatives, acquisition synergies, regulatory approvals, and competitive strengths.  Words such as “expect,” “outlook,” “forecast,” “would,” “could,” “should,” “project,” “intend,” “plan,” “continue,” “sustain”, “on track”, “believe,” “seek,” “estimate,” “anticipate,” “may,” “assume,” and variations of such words and similar expressions are often used to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are not guarantees of future performance and involve risks, assumptions and uncertainties, including, but not limited to, those described in our reports that we file or furnish with the Securities and Exchange Commission.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements.  Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made.  Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statements after the date they are made, whether as a result of new information, future events, changes in assumptions or otherwise.

General

The following analysis of our consolidated financial condition and results of operations for the year ended August 31, 2012 should be read in conjunction with the consolidated financial statements, including footnotes, and other information presented elsewhere in this Report on Form 10-K and the risk factors and the financial statements  and the other information set forth in our Current Reports filed with the Securities and Exchange Commission.

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.

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Overview

On December 15, 2010, we entered into a Merger Agreement in which The Original Soupman, Inc. (“OSM”) was merged with and into OSM Merge, Inc. our subsidiary. All the outstanding shares of OSM were converted into an aggregate of 14,004,230 shares of our common stock and 1,987,783 shares of our preferred stock.  In addition, principal and interest on $4,830,254 of OSM’s convertible notes were converted into 4,830,256 shares of our common stock.

On January 31, 2011, we reincorporated in Delaware and changed our name from Passport Arts, Inc. to Soupman, Inc. Thereafter, our stock began trading on the over the counter market under the symbol SOUP.

We currently manufacture and sell soup to grocery chains, the New York City Public School System and other outlets and to our franchised restaurants under the brand name “The Original Soupman”.

Results of Operations - Year ended August 31, 2012

The following table summarizes our operating results for the years ended August 31, 2012 and August 31, 2011.

	August 31, 2012			August 31, 2011
Revenue	$	1,897,711		$	969,945
Cost of Sales		1,502,268			686,745
Gross Profit		395,443			283,200
Operating Expenses		5,472,213			6,376,403
Loss From Operations		(5,076,770	)		(6,093,203	)
Other Income (Expense)		(1,252,977	)		(107,376	)
Loss from Discontinued Operations		-			(14,317	)
Net Loss	$	(6,329,747	)	$	(6,214,896)	)

Revenue

Soup sales accounted for approximately 90% and 86% of our overall revenue for the years ended August 31, 2012 and 2011, respectively, while franchise royalties accounted for the remaining approximate 10% and 14%, respectively. Actual soup sales for the same periods were approximately $1,700,000 and $831,000, a year-over-year increase of approximately 104%. This increase was primarily attributable to a 20% increase in sales to franchisees (which accounted for approximately $167,000 of the increase), the introduction of our new Tetra Recart line of soups (which accounted for approximately $490,000 of the increase) and the introduction of our soups into the New York City School System, (which accounted for an approximate $212,000 of the increase.)

Reported revenues are net of slotting fees (a fee charged by supermarketsin order to have a product placed on their shelves). Slotting fees for the years ended August 31, 2012 and 2011 were approximately $139,000 and $85,000, respectively, had they not existed, reported revenues would have been approximately $2,037,000 and $1,055,000 for the same periods, respectively.

Cost of Sales

Cost of sales for the year ended August 31, 2012 included a onetime write-off of approximately $22,000 in obsolete inventory,  aggregate early payment discounts of approximately $28,000 and freight and other costs of approximately $111,000. Cost of sales represents costs associated with soup sales only; the Company has no cost of sales associated with franchise royalties.

Cost of sales as a percentage of soup revenue was 88% and 83% for the years ended August 31, 2012 and 2011, respectively; however, this percentage was negatively impacted by slotting fees, which lower reportable revenue and therefore increase our cost of sales percentage. Cost of sales as a percentage of soup revenue increased approximately 5% year-over-year primarily due to the increase in slotting fees, freight costs and the different mix of products sold.

Operating Expenses

Operating expenses for the year ended August 31, 2012, were approximately $5,247,000, which include approximately $1,991,000 in expenses related to the issuance of shares and stock options, approximately $1,102,000 in payroll related expenses, approximately $735,000 in professional fees (which include legal, accounting, strategic planning, public relations and branding and marketing), allowances taken for the possible non-collection of notes receivable and franchise advances of approximately $635,000, promotional expenses (exclusive of slotting fees) of approximately $270,000,  a royalty payment of $225,000, travel expenses of approximately $138,000 and insurance expenses of approximately $100,000.

16

Operating expenses for the year ended August 31, 2012 as compared to the year ended August 31, 2011 decreased approximately $960,000 primarily due to an approximate $1,978,000 decrease in expenses related to stock based compensation primarily offset by allowances taken for the possible non-collection of notes receivable and franchise advances of approximately $635,000 and slight increases in payroll, promotions, royalties, and insurance expenses.

Other Expense

Other expense increased approximately $1,146,000 for the year ended August 31, 2012 as compared to the year ended August 31, 2011, up from approximately $107,000 to approximately $1, 253,000.  This increase was primarily due to one-time charges (relating to a loan forbearance agreement, a debt prepayment penalty and certain debt extinguishments) of approximately $786,000, and increase in interest expense of approximately $676,000, offset by approximately $366,000 in the change in fair value of derivative instruments.

Net Loss

Net loss for the year ended August 31, 2012 as compared to the year ended August 31, 2011 increased approximately $115,000 or approximately 2%   primarily due to the many factors discussed above under Revenue, Cost of Sales, Operating Expenses and Other Expenses. Net loss for the year ended August 31, 2012 was approximately $6,330,000 or $0.22 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 or as otherwise described in our Annual Report in Part I — Item 1A — Risk Factors.

Liquidity and Capital

	As of August 31, 2012			As of August 31, 2011
Current assets	$	480,661		$	541,070
Current liabilities	$	8,354,784		$	6,015,960
Working capital (deficit)	$	(7,874,123	)	$	(5,474,890	)

At August 31, 2012, we had cash and cash equivalents of $174,315 as compared to $343,927 at August 31, 2011.  Since August 31, 2012, we have raised additional capital of $569,000 through the issuance of  notes.  The working capital deficit at August 31, 2012 of $7,874,123 and as of August 31, 2011 of $5,474,890 is an increase of $2,399,233. The increase is attributable to an increase in accounts payable and accrued liabilities of $920,861, an increase in net debt of $904,470 and an increase in derivative liabilities associated with the convertible notes payable and warrants of $513,493.It should also be noted that included in the current liabilities as at August 31, 2012 and 2011 are the current liabilities of Soup Kitchen International, Inc. as that company is included in the Soupman, Inc. statements (see note 1 Variable Interest Entities to the Soupman, Inc. and subsidiaries and Soup Kitchen International, Inc. Financial Statements). Those current liabilities include notes payables (guaranteed by Soupman, Inc.) in the amount of $3,242,613 accounts payable of $1,139,281 and accrued liabilities of $54,843. Without the current liabilities of Soup Kitchen International, Inc., the working capital deficit as of August 31, 2012 would be $3,436,385.

For the year ended August 31, 2012 cash used in operating activities was $1,604,572 as compared to $2,112,394 for the year ended August 31, 2011.  Our primary uses  of cash from operating activities for the year ended August 31, 2012 were losses from operations offset by increases in share based payments, stock issued for services, allowances taken on notes receivable , charges from derivative liabilities and stock issued for the forbearance agreement.

Net cash used in investing activities for the year ended August 31, 2012 was $4,869, predominantly from the purchase of property and equipment.  This compares with net cash provided by investing activities of $482,151 for the year ended August 31, 2011 which was from the cash acquired in the merger.

Net cash provided by financing activities for year ended August 31, 2012 was $1,439,829 which included $1,861,249 from the issuance of convertible notes offset by $465,420 used for the repayment of debt.

Current and Future Financing Needs

We have incurred a stockholders’ deficit of $7,565,912 through August 31, 2012 and have incurred a net loss of $6,329,747 for the year ended August 31, 2012.   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 August 31, 2012, we had short term debt of $4,608,775 and a working capital deficit of $7,565,912.   These factors raise substantial doubt about our ability to continue as a going concern. . The opinion of our independent registered accounting firm for the fiscal year ended August 31, 2012 is unqualified, however the opinion does state that there is substantial doubt as to our ability to continue as a going concern. During the year ended August 31, 2012, we raised $1,971,249 (net of expenses) from the issuance of our common stock, warrants, options and the issuance of notes and since then we have raised an additional $569,000 from the issuance of notes..  Our debt in the amount of $4,608,775 includes a guarantee of Soup Kitchen International Inc’s debt in the amount of $3,242,613 part of which is past due.  We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including 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. Our current negative cash flow rate is approximately $100,000 per month.  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, 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.

17

Critical Accounting Policies

The information required by this section is incorporated herein by reference to the information set forth under the caption “Summary of Significant Accounting Policies” in Note 1 of the Notes to the Consolidated Financial Statements included in “Item 1 — Financial Statements” and is incorporated herein by reference.

Off-Balance Sheet Arrangements

We do not have any unconsolidated special purpose entities and, we do not have significant exposure to any off-balance sheet arrangements. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

Cautionary Note Regarding Forward-Looking Statements

This report and other documents that we file with the Securities and Exchange Commission contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions.  Statements that are not historical facts are forward-looking statements, including forward-looking information concerning pharmacy sales trends, prescription margins, number and location of new store openings, outcomes of litigation, and the level of capital expenditures, industry trends, demographic trends, growth strategies, financial results, cost reduction initiatives, acquisition synergies, regulatory approvals, and competitive strengths.  Words such as “expect,” “outlook,” “forecast,” “would,” “could,” “should,” “project,” “intend,” “plan,” “continue,” “sustain”, “on track”, “believe,” “seek,” “estimate,” “anticipate,” “may,” “assume,” and variations of such words and similar expressions are often used to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are not guarantees of future performance and involve risks, assumptions and uncertainties, including, but not limited to, those described in our reports that we file or furnish with the Securities and Exchange Commission.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements.  Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made.  Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statements after the date they are made, whether as a result of new information, future events, changes in assumptions or otherwise.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

Not applicable because the Company is a smaller reporting company.

18

Item 8.  Financial Statements and Supplemental Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors:

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.

We have audited the accompanying consolidated balance sheets of Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc., (the “Company”) as of August 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of August 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 16 to the consolidated financial statements, the Company has a net loss of $6,329,747 and net cash used in operations of $1,604,572 for the year ended August 31, 2012; and has a working capital deficit of $7,874,123, and a stockholders’ deficit of $7,565,912 at August 31, 2012. These factors raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plan in regards to these matters is also described in Note 16.

Berman & Company, P.A.

Boca Raton, Florida

December 14, 2012

551 NW 77th Street Suite 201 ● Boca Raton, FL 33487

Phone: (561) 864-4444 ● Fax: (561) 892-3715

www.bermancpas.com ● info@bermancpas.com

Registered with the PCAOB ● Member AICPA Center for Audit Quality

Member American Institute of Certified Public Accountants

Member Florida Institute of Certified Public Accountants

19

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Consolidated Balance Sheets
	August 31, 2012			August 31, 2011
Assets
Current Assets
Cash	$	174,315		$	343,927
Accounts receivable - net		279,872			134,242
Prepaid expenses and other		26,474			56,901
Note receivable - other		-			6,000
Total Current Assets		480,661			541,070
Property and equipment  - net		27,355			33,418
Other Assets
Accounts receivable - related parties - net		2,799			18,614
Notes receivable - franchisees - related parties		-			662,141
Due from franchisee		5,742			5,742
Debt issue costs		191,358			-
Intangible assets - net		48,769			67,690
Other assets		32,188			4,800
Total Other Assets		280,856			758,987
Total Assets	$	788,872		$	1,333,475
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable and accrued liabilities	$	2,889,330		$	2,072,726
Accounts payable and accrued liabilities - related parties		224,436			120,179
Debt - net		4,608,775			3,704,305
Deferred franchise revenue		118,750			118,750
Derivative liabilities		513,493			-
Total Current Liabilities		8,354,784			6,015,960
Equity
Series A convertible preferred stock, par value $0.001; 2,500,000 shares authorized; 1,200,266 and 1,523,033 issued and outstanding (liquidation preference of $1)		1,200			1,523
Common stock, par value $0.001; 75,000,000 shares authorized; 30,904,790 and 27,291,834 issued and outstanding		30,905			27,292
Additional paid in capital		5,053,684			1,610,654
Accumulated deficit		(12,079,451	)		(5,870,418	)
Total stockholders' deficit		(6,993,662	)		(4,230,949	)
Noncontrolling interests		(572,250	)		(451,536	)
Total deficit		(7,565,912	)		(4,682,485	)
Total Liabilities and Stockholders' Deficit	$	788,872		$	1,333,475

See accompanying notes to consolidated financial statements

20

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Consolidated Statements of Operations
	Year Ended August 31,
	2012			2011
Sales
Soup sales - net	$	1,700,058		$	831,354
Franchise royalties		197,653			138,591
Total sales		1,897,711			969,945
Cost of sales		1,502,268			686,745
Gross profit		395,443			283,200
Operating expenses:
General and administrative		5,247,213			6,207,653
Royalty		225,000			168,750
Total operating expenses		5,472,213			6,376,403
Loss from operations		(5,076,770	)		(6,093,203	)
Other income (expense)
Interest income		36,183			-
Other income		14,875			88,639
Interest expense		(872,210	)		(196,015	)
Loss on debt extinguishment		(340,927	)		-
Prepayment of debt penalty		(49,250	)		-
Forbearance agreement		(396,000	)		-
Derivative expense		(11,715	)		-
Change in fair value of derivative liabilities		366,067			-
Total other income (expense)  - net		(1,252,977	)		(107,376	)
Loss from continuing operations		(6,329,747	)		(6,200,579	)
Loss from discontinued operations		-			(14,317	)
Net loss including nocontrolling interest	$	(6,329,747	)	$	(6,214,896	)
Less: net loss attributable to noncontrolling interest		(120,714	)		(94,693	)
Net loss attributable to Soupman		(6,209,033	)		(6,120,203	)
Basic and diluted loss per common share:
Continuing operations	$	(0.22	)	$	(0.33	)
Discontinued operations	$	-		$	(0.00	)
Weighted average number of common shares outstanding during the period - basic and diluted		28,357,988			18,552,350

See accompanying notes to consolidated financial statements

21

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Consolidated Statement of Stockholders 'Deficit
Years Ended August 31, 2012 and 2011
	Preferred Stock						Common Stock				Additional									Total
	$0.001 Par Value						$0.001 Par Value				Paid-in			Accumulated			Noncontrolling			Stockholders'
	Shares			Amount			Shares		Amount		Capital			Deficit			Interest			Deficit
Balance, August 31, 2010		-		$	-			3,893,600	$	3,894	$	11,131		$	249,785		$	(356,843	)	$	(92,033	)
Issuance of preferred and common stock in merger		1,987,783			1,988			14,004,230		14,004		(15,992	)		-			-			-
Issuance of common stock for convertible debt and accrued interest in merger		-			-			4,830,254		4,830		4,825,424			-			-			4,830,254
Debt forgiveness - related party - in merger		-			-			-		-		106,698			-			-			106,698
Net equity of subsidiaries acquired in merger		-			-			-		-		(9,337,629	)		-			-			(9,337,629	)
Issuance of common stock and warrants for cash ($1/share)		-			-			2,319,000		2,319		2,316,681			-			-			2,319,000
Cash paid as direct offering cost		-			-			-		-		(120,000	)		-			-			(120,000	)
Issuance of common stock for services ($1.25 - $2.25/share)		-			-			1,780,000		1,780		3,351,720			-			-			3,353,500
Conversion of preferred stock to common stock		(464,750	)		(465	)		464,750		465		-			-			-			-
Stock based compensation		-			-			-		-		472,621			-			-			472,621
Net loss		-			-			-		-		-			(6,120,203	)		(94,693	)		(6,214,896	)
Balance, August 31, 2011		1,523,033			1,523			27,291,834		27,292		1,610,654			(5,870,418	)		(451,536	)		(4,682,485	)
Conversion of preferred stock to common stock		(322,767	)		(323	)		322,767		323		-			-			-			-
Stock based compensation		-			-			-		-		306,663			-			-			306,663
Stock options exercised for cash ($0.50/share)		-			-			200,000		200		99,800			-			-			100,000
Issuance of common stock for services rendered and reduction of accrued payroll - related parties ($0.65 - 1.65/share)		-			-			1,770,189		1,770		1,681,863			-			-			1,683,633
Issuance of common stock for forbearance agreement ($0.72/share)		-			-			550,000		550		395,450			-			-			396,000
Issuance of common stock for settlement of debt ($0.85/share)		-			-			500,000		500		424,500			-			-			425,000
Issuance of common stock on notes payable ($0.70 - $0.90/share)		-			-			260,000		260		209,740			-			-			210,000
Issuance of common stock and warrants for cash ($1/share)		-			-			10,000		10		9,990			-			-			10,000
Warrants issued as debt issue costs		-			-			-		-		126,346			-			-			126,346
Debt discount - beneficial conversion feature		-			-			-		-		71,333			-			-			71,333
Reclassification of derivative liability to additional paid in capital		-			-			-		-		117,345			-			-			117,345
Net loss		-			-			-		-		-			(6,209,033	)		(120,714	)		(6,329,747	)
Balance, August 31, 2012		1,200,266		$	1,200			30,904,790	$	30,905	$	5,053,684		$	(12,079,451	)	$	(572,250	)	$	(7,565,912	)

See accompanying notes to consolidated financial statements

22

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.
Consolidated Statements of Cash Flows
	Year Ended August 31,
	2012			2011
Cash Flows From Operating Activities:
Net loss	$	(6,329,747	)	$	(6,200,579	)
Net loss from discontinued operations		-			(14,317	)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense		78,887			89,945
Bad debt expense - related party		28,792			-
Depreciation		10,745			26,375
Amortization of intangibles		18,921			13,478
Amortization of debt discount		521,508			-
Amortization of debt issue cost		12,988			-
Allowance taken on notes receivable franchisee		70,084			-
Allowance taken on notes receivable franchisees - related parties		485,772			-
Allowance taken on franchisee receivable - related party		78,990			-
Stock issued for services		1,541,400			3,353,500
Loss on debt extinguishment		340,927			-
Prepayment of debt penalty		49,250
Stock issued for forbearance agreement		396,000			-
Derivative expense		11,715			-
Change in fair market value of derivative liabilities		(366,067	)		-
Gain on write-off of accounts payable		(26,514	)		-
Gain on sale of equipment		-			(12,000	)
Stock based compensation		306,663			472,621
Changes in operating assets and liabilities:
Discontinued operations		-			551
(Increase) Decrease in:
Accounts receivable		(224,517	)		233,139
Accounts receivable - related party		(12,977	)		(18,614	)
Other assets		(27,388	)		-
Prepaid expenses		30,427			(56,901	)
Increase (Decrease) in:
Accounts payable and accrued liabilities		1,295,312			(119,771	)
Accounts payable and accrued liabilities - related parties		104,257			120,179
Net Cash Used in Operating Activities		(1,604,572	)		(2,112,394	)
Cash Flows From Investing Activities:
Cash acquired in merger		-			581,796
Proceeds from notes receivable - franchisees		192,582			-
Proceeds from note receivable - other		6,000			-
Proceeds from sale of equipment		-			6,000
Advances to franchisees		(198,769	)		(77,242	)
Purchase of property and equipment		(4,682	)		(28,403	)
Net Cash (Used in) Provided by Investing Activities		(4,869	)		482,151
Cash Flows From Financing Activities:
Proceeds from issuance of notes		1,861,249			-
Repayment of debt		(465,420	)		(224,830	)
Proceeds from exercise of stock options		100,000			-
Proceeds from issuance of common stock and warrants		10,000			2,319,000
Cash paid for direct offering costs of convertible notes payable and issuance of common stock		(66,000	)		(120,000	)
Net Cash Provided by Financing Activities		1,439,829			1,974,170
Net increase (decrease) in cash		(169,612	)		343,927
Cash at beginning of period		343,927			-
Cash at end of period	$	174,315		$	343,927
Supplemental disclosures of cash flow information:
Cash paid for interest	$	269,546		$	150,067
Cash paid for taxes	$	-		$	-
Supplemental disclosures of non-cash investing and financing activities:
Reduction of accrued payroll - related party and related reduction of due from franchise - related party	$	33,482		$	-
Reduction of accrued payroll  through issuance of common stock - related parties	$	142,233		$	-
Reclassification of derivative liability to additional paid in capital	$	117,345		$	-
Debt discount recorded on convertible debt	$	715,596		$	-
Common stock issued to settle debt	$	425,000		$	-
Common stock issued in connection with debt financing - treated as debt discount	$	210,000		$	-
Warrants issued and treated as debt issuance cost	$	126,346		$	-
Accrued direct offering costs	$	12,000		$	-
Exchange of convertible debt and accrued interest into common stock	$	-		$	4,830,254
Issuance of preferred stock and common stock in merger	$	-		$	15,992
Forgiveness of debt - related party	$	-		$	106,698
Conversion of preferred stock to common stock	$	323		$	465
Note receivable on sale of equipment	$	-		$	6,000

See accompanying notes to consolidated financial statements

23

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.

Notes to Consolidated Financial Statements

August 31, 2012 and 2011

Note 1 Description of Business

Passport Arts, Inc. (“PPOR” or the “Company”) was incorporated in the State of Nevada on December 2, 2008 and sold art from an on-line gallery. On January 31, 2011, PPOR reincorporated in Delaware, and changed its name to Soupman, Inc.

On December 15, 2010, the Company ceased its art sales business; as a result, for the year ended August 31, 2011, the Company reported its net income from this business as discontinued operations.

On December 15, 2010, PPOR acquired The Original Soupman, Inc. (“OSM”) and OSM’s wholly-owned subsidiary, International Gourmet Soups, Inc. (“IGS”) which owns 80% of Kiosk Concepts, Inc. (“Kiosk”), collectively “the Company”.

The Company manufactures and sells a variety of soups to grocery chains and franchisees.

Fiscal Year

The Company’s fiscal year-end is August 31.

Note 2 Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Soupman, Inc. and its wholly owned subsidiaries and subsidiaries in which it has a controlling interest. The Company reports non-controlling interests in one of its subsidiaries as a component of equity separate from the Company’s equity. 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 year’s presentation. As part of these reclassifications, the Company changed the 2011 equity section of its financial statements to break out non-controlling interests, which was not properly classified for the year ended August 31, 2011. The Company also reclassified a 2011 gain on the sale of equipment from other expense to operating expense. These reclassifications had no material effect on the financial position, results of operations or cash flows for the years presented.

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, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share based payments and derivative liabilities, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.

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

Risks and Uncertainties

The Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business failure.  These conditions may limit our access to capital. See Note 16 – 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.

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Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.

Notes to Consolidated Financial Statements

August 31, 2012 and 2011

Cash

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, 2012 and 2011, respectively, the balances exceeded the federally insured limit by $9,183 and $0, respectively. 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.

Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred.

Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful lives of the respective assets as follows:

Asset	Life
Vehicles	5 years
Equipment	5-7 years
Furniture and fixtures	5 years

Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  There were no impairment charges taken during the years ended August, 31, 2012 and 2011, respectively.

Intangible Assets

Amortization of identifiable intangible assets is provided utilizing the straight-line method over the estimated useful lives of the respective assets.

Intangible assets are reviewed quarterly for impairment or if indicators of potential impairment exist.  There were no impairment charges taken during the years ended August 31, 2012 and 2011, respectively.

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.

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Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.

Notes to Consolidated Financial Statements

August 31, 2012 and 2011

The following are the major categories of liabilities measured at fair value on a recurring basis as of August 31, 2012 and 2011, using quoted prices in active markets for identical liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):

	2012		2011
Derivative Liabilities (Level 3)	$	513,493	$	-

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 9.

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, 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, 2012 and 2011, 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.

Beneficial Conversion Feature

For conventional convertible debt where the rate of conversion is below market value, the Company records a "beneficial conversion feature" ("BCF") and related debt discount.

When the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument. The discount is amortized to interest expense over the life of the debt.

Debt Issue Costs and Debt Discount

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

Original Issue Discount

For certain convertible debt issued, the Company provides the debt holder with an original issue discount.  The original issue discount is recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.

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Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.

Notes to Consolidated Financial Statements

August 31, 2012 and 2011

Share-based payments

Generally, all forms of share-based payments, including stock option grants, warrants and restricted stock grants and stock appreciation rights 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 recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable.

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) asset is transferred to the customer without further obligation, (3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.

The Company recognizes sales when products are received by the customer and the risk of ownership is transferred. The Company does not maintain inventory.

Revenues from individual franchise sales are recognized when substantially all significant services to be provided by the Company have been performed.  There were no franchise sales during the years ended August 31, 2012 and 2011.

Royalty fees are charged to the franchisee at 5% of the franchisee's gross sales and recorded when charged.

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

The Company does not offer a right of return.

The Company charges its franchisees an advertising fee equal to ½% of their sales revenue and initially carries this fee as a liability (deferred income), which is included as a component of accounts payable and accrued liabilities. This advertising fee is included in revenue once the Company performs by completing the respective advertisement(s).

Cost of Sales

Cost of sales represents costs directly related to the production and third party manufacturing of the Company’s products.

Shipping and Handling

Soup sold is typically shipped directly to the customer from the third party manufacturer; costs associated with shipping and handling is shown as a component of cost of sales. 

Advertising

The Company expenses advertising costs when incurred.

Advertising expensed for the years ended August 31, 2012 and 2011 is as follows:

	2012		2011
Advertising	$	23,377	$	698

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.

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Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.

Notes to Consolidated Financial Statements

August 31, 2012 and 2011

The Company has the following potential common stock equivalents at August 31, 2012 and 2011:

	2012	2011
Stock options (exercise price - $0.50 - $0.75/share)	1,975,000		2,035,000
Warrants (exercise price $0.80- $1.25/share)	1,952,135		785,740
Convertible Series A preferred shares  (exercise price $0.001/share)	1,200,266		1,523,033
Convertible debt - derivatives liabilities (exercise price $0.41 - $1/share)	2,556,016		-
Total common stock equivalents	7,683,417		4,343,773

Certain of the outstanding convertible debt and warrants contain ratchet provisions that would cause variability in the exercise price at the balance sheet date.  As a result, common stock equivalents may change at each reporting period.

The Company reflected a net loss for the years ended August 31, 2012 and 2011; 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.

Segments

The Company operates in only one segment.

Variable Interest Entities

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

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

On December 29, 2009, OSM purchased all of the assets of Soup Kitchen International, Inc. and its subsidiaries (“Soup Kitchen”) for $100,000 and guaranteed $3,670,000 of Soup Kitchen’s secured debt.  In addition, OSM agreed to pay Soup Kitchen royalties of 1% of all of OSM sales for five years (through 2014), which will represent substantively all of Soup Kitchen’s revenue. See Note 8(C) regarding amounts still under guarantee.

The guaranty of the secured debt was a significant part of the Acquisition, because the assets acquired by OSM comprised substantially all of the income producing assets of Soup Kitchen, creating an obligation on the part of OSM that is almost certain to occur. In addition, the assets securing the debt were the assets obtained in the acquisition.

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

Non-controlling Interest

In December 2009, OSM acquired 80% of Kiosk, which it reported the third party’s 20% as a noncontrolling interest. As part of the Company’s 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, 2012 and 2011.
 

	2012			2011
A		17	%		1	%
B		11	%		-
C		10	%		-
D		10	%		-
E		7	%		37	%

28

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.

Notes to Consolidated Financial Statements

August 31, 2012 and 2011

Vendors

The following table shows significant concentrations in our purchases for the years ended August 31, 2012 and 2011.

	2012			2011
A		73	%		99	%
B		27	%		-

Sales

The following table shows significant concentrations in our revenues for the years ended August 31, 2102 and 2011.

	2012			2011
A		41	%		55	%
B		15	%		-
C		-			19	%

Recent Accounting Pronouncements

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

Note 3 Accounts Receivable / Accounts Receivable - Franchisee – Related Parties

In connection with certain debt financings, all accounts receivables serve as collateral; see Note 8(C).

Accounts receivable consisted of the following at August 31, 2012 and 2011.

	2012			2011
Accounts receivable	$	298,659		$	198,385
Allowance for doubtful accounts		(18,787	)		(64,143	)
Accounts receivable – net	$	279,872		$	134,242

Related-parties accounts receivable consisted of the following at August 31, 2012 and 2011.

	2012			2011
Accounts receivable	$	31,591		$	18,614
Allowance for doubtful accounts		(28,792	)		-
Accounts receivable – net	$	2,799		$	18,614

At August 31, 2012, the Company took an allowance against its related-party accounts receivable of $28,792 for accounts over 90 days.

At August 31, 2012, the Company has a franchise receivable from a related party of $78,990; however due to the uncertainty of collectability, namely continuing losses and poor cash flows from franchise locations, the Company also placed a reserve of $78,990 against this amount, leaving a net franchise receivable of $0.

Note 4 Prepaid Expenses

Prepaid expenses consist of the following as of August 31, 2012 and 2011.

	2012		2011
Prepaid insurance	$	25,359	$	46,756
Prepaid other		1,115		1,000
Prepaid public relations		-		9.145
Prepaid expenses – net	$	26,474	$	56,901

29

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.

Notes to Consolidated Financial Statements

August 31, 2012 and 2011

Note 5 Property and Equipment

Property and equipment consist of the following at August 31, 2012 and 2011.

	2012			2011
Vehicles	$	11,843		$	18,219
Equipment		21,843			17,161
Furniture and fixtures		12,410			12,410
Total		46,096			47,790
Less: accumulated depreciation		(18,741	)		(14,372	)
Property and equipment – net	$	27,355		$	33,418

Note 6 Notes Receivable – Franchisees – Related Parties

The Company has advanced funds to certain related-party franchisees to complete renovations and help with operating expenses in better performing locations. Related parties who own these franchisees are the Senior VP of Franchise Development and a family member of one of the Company’s subsidiaries executive officers. On November 1, 2011, the Company executed 7% notes receivable with these franchisees for $485,772, maturing on October 31, 2018.   

Monthly interest only payments from the franchisees are approximately $4,100, until November 1, 2012, when the franchisees will begin to pay principal and interest. The aggregate monthly principal and interest payments will be approximately $12,000, unless the location is closed or sold, at which time, the note will become due.

All franchisees are current with their interest only payments and no principle payments are due as of August 31, 2012.

On November 18, 2011, one location was sold to a third party. A payment of $143,482 was received and a 5% note receivable for $73,333 was executed with the purchaser of that franchise. The note matures on November 18, 2016; the balance as of August 31, 2012 was $70,084.

The company has recorded a $555,856 reserve against these notes in their entirety as of August 31, 2012 due to the uncertainty of future collections based on the poor performance and poor cash flows generated at franchise locations; however, the Company still plan on pursuing collections of this amount.

The following is a summary of amounts due from franchisees to the Company at August 31, 2012 and 2011.

	2012			2011
Total notes receivable – franchisees – related parties	$	485,772		$	662,141
Less:  Allowance for uncollectibility		(485,772	)		-
Notes receivable – franchisees – related parties		-			662,141
Notes receivable – franchise		70,084			-
Less: Allowance for uncollectibility		(70,084	)		-
Total notes receivable franchisee	$	-		$	-

Note 7 – Intangible Assets

Intangible assets consist of the following at August 31, 2012 and 2011.

	2012			2011
Soup formulas	$	27,418		$	27,418
Recipes		53,750			53,750
Total		81,168			81,168
Less: accumulated amortization		(32,399	)		(13,478	)
Intangible assets-net	$	48,769		$	67,690

30

Soupman, Inc. and Subsidiaries and Soup Kitchen International, Inc.

Notes to Consolidated Financial Statements

August 31, 2012 and 2011

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

Intangible Asset	Life
Soup formulas	5 years
Recipes	4 years

The estimated future amortization expense of intangible assets for the years ended August 31 is as follows:

Fiscal Year ended August 31,	Amount
2013	$	18,921
2014		18,921
2014		9,344
2015		1,583
Total	$	48,769

Note 8 – Debt

Debt consists of the following at August 31, 2012 and 2011:

	2012			2011
A. Convertible debt – Unsecured – Derivative Liabilities	$	570,250		$	-
Less : debt discount		(140,822	)
Convertible debt - net		429,428
B. Convertible debt – Unsecured		650,000			-
Less : debt discount		(263,266	)
Convertible debt - net		386,734
C. Notes - Secured		3,242,613			3,641,922
D. Notes – Unsecured		550,000			62,383
Total debt	$	4,608,775		$	3,704,305

Debt in default consists of secured and unsecured notes totaling $1,646,768 and $1,384,268 at August 31, 2012 and 2011, respectively.

The corresponding debts above are more fully discussed below:

(A)           Convertible Debt – Unsecured – Derivative Liabilities

During the year ended August 31, 2012, the Company issued convertible unsecured debt and warrants that had an embedded conversion feature; there was no such convertible debt for the year ended August 31, 2011. The convertible debt includes the following terms: 

		August 31, 2012
Interest Rate				8	%
Default interest rate				N/A
Maturity	August 3, 2012 to February 14, 2013
Conversion terms 1	58% of the average of the lowest 3 trading days prior to the conversion date		$	199,000
Conversion terms 2	Fixed conversion price of $1.00			732,250
			$	931,250

The debt holders are entitled, at their option, to convert all or part of the principal and accrued interest into shares of the Company’s common stock at the conversion prices and terms discussed above. In addition the Company issued 183,063 3-year warrants in connection with these convertible notes.