UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended October 1, 2017

 

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

 

Commission files number 000-53948

 

GIGGLES N HUGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		20-1681362
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

3222 Galleria Way, Glendale, CA		91210
(Address of principal executive offices)		(Zip Code)

 

(818) 956-4847

(Registrant’s telephone number, including area code)

 

Copies of Communications to:

Libertas Law Group, Inc.

225 Santa Monica Blvd., 11th Floor

Santa Monica, CA 90401

 

Indicate by check mark whether the issuer (1) 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 [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 [X] No [  ]

 

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

 

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

 

The number of shares of Common Stock, $0.001 par value, outstanding on November 15, 2017 was 146,102,251 shares.

 

 

 

GIGGLES N’ HUGS, INC.

TWENTY-SIX WEEKS ENDED OCTOBER 1, 2017

 

Index to Report on Form 10-Q

 

		Page No.
	PART I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)	F-1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	12
Item 4.	Controls and Procedures	12
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	13
Item 1A.	Risk Factors	13
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 3.	Defaults Upon Senior Securities	13
Item 4.	Mine Safety Disclosure	13
Item 5.	Other Information	13
Item 6.	Exhibits	14
	Signature	15

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

GIGGLES N’ HUGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		October 1, 2017				January 1, 2017
			(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	104,135			$	144,520
Inventory			25,284				20,331
Prepaid expenses, other			19,206				13,806
Total current assets			148,625				178,657
Fixed assets:
Total fixed assets, net			801,786				994,128
Other assets			2,620				2,620
Total assets		$	953,031			$	1,175,405
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable		$	587,982			$	610,925
Incentive from lessor – current portion			98,450				87,420
Note payable from lessor,  current portion net of discount of $273,607 and $35,094, respectively			63,605				21,544
Accrued expenses			410,906				328,952
Deferred revenue			14,075				24,159
Promissory note payable and accrued interest			-				193,340
Convertible note payable and accrued interest,			50,000				151,383
Derivative liability			-				357,411
Total current liabilities			1,225,018				1,775,134
Long-term liabilities:
Incentive from lessor – long-term			577,376				653,008
Note payable - lessor			358,756				411,173
Deferred gain			418,458				429,115
Total long-term liabilities			1,354,590				1,493,296
Total liabilities			2,579,608				3,268,430
Stockholders’ deficit:
Common stock, $0.001 par value, 1,125,000,000 shares authorized, 144,777,251 and 67,934,205 shares issued and outstanding  as of October 1, 2017 and January 1, 2017, respectively			144,777				67,933
Common stock issuable (1,397,619 and 405,556 shares as of October 1, 2017 and January 1, 2017, respectively)			293,535				218,535
Additional paid-in capital			9,859,260				8,229,747
Accumulated deficit			(11,924,149	)			(10,609,240	)
Total stockholders’ deficit			(1,626,577	)			(2,093,025	)
Total liabilities and stockholders’ deficit		$	953,031			$	1,175,405

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

GIGGLES N’ HUGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Thirteen Weeks Ended				Thirteen Weeks Ended				Thirty -Nine Weeks Ended				Thirty -Nine Weeks Ended
		October 1, 2017				September 25, 2016				October 1, 2017				September 25, 2016
Revenue
Net sales		$	652,977			$	628,357			$	1,890,505			$	2,338,755
Costs and operating expenses
Cost of operations			485,308				510,097				1,418,263				2,014,766
General and administrative expenses			277,841				247,981				1,463,397				892,098
Depreciation and amortization			64,205				64,069				192,342				241,950
Total operating expenses			827,354				822,147				3,074,002				3,148,814
Loss from Operations			(174,377	)			(193,790	)			(1,183,497	)			(810,059	)
Other income (expenses):
Finance and interest expense			(12,876	)			(251,021	)			(76,919	)			(424,352	)
Change in fair value of derivatives			-				(205,128	)			(50,629	)			(205,128	)
Gain on extinguishment of derivatives			-				-				185,604				-
Loss on extinguishment of debt			-				-				(186,818	)			-
Gain on sale of asset			-				-				-				5,971
Gain on lease termination			-				-				-				214,111
Loss before provision for income taxes			(187,253	)			(649,939	)			(1,312,259	)			(1,219,457	)
Provision for income taxes			-				(800	)			(2,650	)			616
Net loss		$	(187,253	)		$	(650,739	)		$	(1,314,909	)		$	(1,218,841	)
Net loss per share – basic and diluted		$	-			$	(0.01	)		$	(0.01	)		$	(0.03	)
Weighted average number of common shares outstanding – basic and diluted			144,102,251				46,145,034				125,101,775				43,661,733

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

GIGGLES N’ HUGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 

		Common Stock								Additional				Common								Total
										Paid in				Stock				Accumulated				Stockholders'
		Shares				Amount				Capital				Issuable				Deficit				Deficit
Balance January 1, 2017			67,934,205			$	67,933			$	8,229,747			$	218,535			$	(10,609,240	)		$	(2,093,025	)
Shares issued for employees compensation			10,170,000				10,170				18,300												28,470
Shares issued to settle accounts payable			2,384,226				2,384				263,512												265,896
Shares issued for convertible notes and settlement			62,018,046				62,019				663,828												725,847
Shares issued for cash as part of settlement agreement			1,100,000				1,100				108,900												110,000
Cash received for stock issuable															75,000								75,000
Shares issued for professional services			1,170,774				1,171				43,973												45,144
Fair value of warrants granted for services											531,000												531,000
Net loss																			(1,314,909	)			(1,314,909	)
Balance July 2, 2017			144,777,251			$	144,777			$	9,859,260			$	293,535			$	(11,924,149	)		$	(1,626,577	)

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

GIGGLES N’ HUGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Thirty-Nine Weeks ended				Thirty-Nine Weeks ended
		October 1, 2017				September 25, 2016
Cash flows from operating activities
Net loss		$	(1,314,909	)		$	(1,218,841	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			192,342				241,950
Amortization of debt discount			-				189,316
Gain on sales of fixed assets			-				(5,971	)
Gain on lease termination			-				(214,111	)
Stock-based compensation			28,470				-
Loss on stock issuance for payable settlement			109,096				-
Warrants vested for services			531,000				31,000
Interest and fees included in note payable			15,318				-
Shares issued for services			45,144				37,770
Gain on extinguishment of derivative liability			(185,604	)			-
Change in fair value of derivative liability			50,629				367,904
Promissory note payable			-				26,500
Promissory note settlement			186,818				-
Deferred gain			-				(10,472	)
Changes in operating assets and liabilities:
Increase in prepaid expenses and deposits			(5,400	)			7,215
Decrease in security deposits, other			-				30,000
(Increase) decrease in inventory			(4,953	)			9,772
Increase in accounts payable			133,857				212,554
Decrease in lease incentive liability			(64,602	)			(79,552	)
Increase (decrease) in accrued expenses			89,648				(234,770	)
Increase (decrease) in accrued interest			-				14,180
(Decrease) increase in deferred revenue			(10,084	)			17,054
Amortization of deferred gain			(10,657	)			-
Net cash used in operating activities			(213,887	)			(578,502	)
Cash flows from investing activities
Provided from lease termination			-				350,000
Provided from sales or purchase of fixed assets			-				10,500
Net cash provided by investing activities			-				360,500
Cash flows from financing activities
Payments on note payable-lessor			-				(6,498	)
Payments on promissory note payable			(11,498	)			(8,875	)
Proceeds received from sale of stock upon note settlement			110,000				-
Proceeds from common stock issuable			75,000				-
Net cash provided by (used in) financing activities			173,502				(15,373	)
NET INCREASE (DECREASE) IN CASH			(40,385	)			(233,375	)
CASH AT BEGINNING OF PERIOD			144,520				334,191
CASH AT END OF PERIOD		$	104,135			$	100,816
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid		$	-			$	17,279
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Shares issued to settle convertible notes payable		$	835,847			$	107,499
Reclass of notes payable to accrued interest			3,125				-
Shares issued to settle payable		$	136,904			$	31,500

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

GIGGLES N’ HUGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirty-Nine Weeks ended October 1, 2017 and September 25, 2016

(Unaudited)

 

NOTE 1 – HISTORY AND ORGANIZATION

 

Giggles N’ Hugs, Inc. (“GIGL Inc.” or the “Company”) was originally organized on September 17, 2004 under the laws of the State of Nevada, as Teacher’s Pet, Inc. GIGL Inc. was organized to sell teaching supplies and learning tools. On August 20, 2010, GIGL Inc. filed an amendment to its articles of incorporation to change its name to Giggles N’ Hugs, Inc.

 

On December 30, 2011, GIGL Inc. completed the acquisition of all the issued and outstanding shares of GNH, Inc. (“GNH”), a Nevada corporation, pursuant to a Stock Exchange Agreement. For accounting purposes, the acquisition of GNH by GIGL Inc. has been recorded as a reverse merger. Giggles N Hugs restaurant concept brings together high-end, organic food with the play elements and entertainment for children. Giggles N Hugs offers an upscale, family-friendly atmosphere with a play area dedicated to children ages 10 and younger with nightly entertainment, such as magic shows, concerts, puppet shows, as well as activities and games which include face painting, dance parties, karaoke, and arts and crafts,

 

The Company adopted a 52/53 week fiscal year ending on the Sunday closest to December 31^st for financial reporting purposes. Fiscal year 2017 and 2016 consists of a year ending December 31, 2017 and January 1, 2017.

 

NOTE 2 – BASIS OF PRESENTATION

 

The interim financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US Dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with US generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

 

These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with the financial statements of the Company for the year ended January 1, 2017 and notes thereto included in the Company’s annual report on Form 10-K. The Company follows the same accounting policies in the preparation of interim reports. The condensed consolidated balance sheet as of January 1, 2017 included herein was derived from the audited consolidated financial statements as of that date, but does not included all disclosures, including notes, required by GAAP.

 

Results of operations for the interim periods may not be indicative of annual results.

 

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Going concern

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, during the thirty-nine weeks ended October 1, 2017, the Company incurred a net loss of $1,314,909, used cash in operations of $213,887, and had a stockholders’ deficit of $1,626,577 as of that date. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. In addition, the Company’s independent registered public accounting firm in its report on the January 1, 2017 financial statements has raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

The Company had cash on hand in the amount of $104,135 as of October 1, 2017. Management estimates that the current funds on hand will be sufficient to continue operations through December 2017. Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company can obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case or equity financing.

 

Principles of consolidation

 

The condensed consolidated financial statements include the accounts of Giggles N Hugs, Inc., GNH, Inc., GNH CC, Inc. for restaurant operations in Westfield Mall in Century City, California (which was closed June 30, 2016 due to a complete remodel of the Mall), GNH Topanga, Inc. for restaurant operations in Westfield Topanga Shopping Center in Woodland Hills, California, and Glendale Giggles N Hugs, Inc. for restaurant operations in Glendale Galleria in Glendale, California. Intercompany balances and transactions have been eliminated. Giggles N Hugs, Inc., GNH, Inc., GNH CC, Inc., GNH Topanga, Inc., and Glendale Giggles N Hugs, Inc. will be collectively referred herein to as the “Company”.

 

Use of estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions used by management including assumptions made in impairment analysis of fixed assets, accruals of potential liabilities, valuation of derivative liability and equity securities issued for services and realization of deferred tax assets. Actual results could differ from those estimates.

 

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Derivative Financial Instruments

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

The Company uses Level 2 inputs for its valuation methodology for the warrant derivative liabilities as their fair values were determined by using a probability weighted average Black-Scholes-Merton pricing model based on various assumptions. The Company’s derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives.

 

Loss per common share

 

Net loss per share is provided in accordance with ASC Subtopic 260-10. We present basic loss per share (“EPS”) and diluted EPS on the face of statements of operations. Basic EPS is computed by dividing reported losses by the weighted average shares outstanding. Except where the result would be anti-dilutive to income from continuing operations, diluted earnings per share has been computed assuming the conversion of the convertible long-term debt and the elimination of the related interest expense, and the exercise of stock options and warrants. Loss per common share has been computed using the weighted average number of common shares outstanding during the year. For the period ended October 1, 2017 and September 25, 2016, the assumed conversion of convertible notes payable and the exercise of stock warrants are anti-dilutive due to the Company’s net losses and are excluded in determining diluted loss per share.

 

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recent Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

 

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures. The Company anticipates that this will add significant liabilities to the balance sheet.

 

In July 2017, the FASB issued Accounting Standards Update No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered, and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 can be applied using a full or modified retrospective approach. The adoption of ASU 2017-11 is not expected to have any impact on the Company’s financial statement presentation or disclosures.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

 

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at:

 

		October 1, 2017				January 1, 2017
Leasehold improvements		$	1,889,027			$	1,889,027
Fixtures and equipment			60,310				60,310
Computer software and equipment			264,890				264,890
Property and equipment, total			2,214,227				2,214,227
Less: accumulated depreciation			(1,412,441	)			(1,220,099	)
Property and equipment, net		$	801,786			$	994,128

 

Depreciation and amortization expense for the thirteen weeks and thirty-nine weeks ended October 1, 2017 were $64,205 and $192,342, respectively, and for the thirteen weeks and thirty-nine weeks ended September 25, 2016 were $64,069 and $241,950, respectively. Repair and maintenance expense for the thirteen weeks and thirty-nine weeks ended October 1, 2017 were $15,071 and $48,851, respectively, and for thirteen weeks and thirty-nine weeks ended September 25, 2016 were $18,447 and $70,273, respectively.

 

 

NOTE 5 – NOTE PAYABLE, LESSOR

 

On February 12, 2013, the Company entered into a $700,000 Promissory Note Payable Agreement with GGP Limited Partnership (“Lender”) to be used by the Company for a portion of the construction work to be performed by the Company under the lease by and between the Company and Glendale II Mall Associates, LLC. The Note Payable accrued interest at a rate of 10% through October 15, 2015, 12% through October 31, 2017, and 15% through October 31, 2023 and matures on October 31, 2023.

 

On March 1, 2015, the Company and the lender renegotiated the terms of the Promissory Note and agreed to a new note with a principal balance due of $683,316. As part of the new agreement, the Lender waived principal and interest payments for two years beginning March 1, 2015.

 

On August 12, 2016 the Company entered into a third amendment on its lease at The Glendale Galleria. The amendment covered several areas, including adjustment to percentage rent payable, reduced the minimum rent payable, along with the payment and principal of Promissory Note. The Promissory Note was adjusted to a balance due of $763,261 from $683,316, with no interest, payable in equal monthly instalments of $5,300 through maturity of Note on May 31, 2028. The Company imputed interest using a discount rate of 10% to determine a fair value of the note of $443,521, resulting in a valuation discount of $319,740. As of October 1, 2017, the balance of note payable was $695,968, and unamortized note discount was $273,607, with a net balance due of $422,361.

 

The exchange of the notes in fiscal 2016 was treated as a debt extinguishment as the change in terms constituted more than a 10% change in the fair value of the original note, and the difference between the fair value of the new note and the old note (including eliminating all remaining unamortized discount) of $220,668 was treated as a gain on debt extinguishment. The Company determined that since the GGP Promissory Note and the related revision of the lease were agreed to at the same time, that the change in the lease payment terms and the reduced rent, and the issuance of the new note are directly related. As such the gain on the termination of the note of $220,668 was deferred, and is being amortized over the remaining life of the lease as an adjustment to rent expense.

 

The lender under the Note is GGP Limited Partnership (GGP). GGP is an affiliate of Glendale II Mall Associates, the lessor of the Company’s Glendale Mall restaurant location. In accordance with the note agreement, an event of default would occur if the Borrower defaults under the lease between the Company and Glendale II Mall Associates. Upon the occurrence of an event of default, the entire balance of the Note payable and accrued interest would become due and payable, and the balance due becomes subject to a default interest rate (which is 5% higher than the defined interest rate). As of October 1, 2017, the Company was delinquent in its payments to GGP under the note, but has subsequently brought the note current.

 

 

NOTE 6 – CONVERTIBLE NOTE PAYABLE

 

A summary of convertible debentures payable as of October 1, 2017 and January 1, 2017 is as follows:

 

		October 1, 2017				January 1, 2017
Iconic Holdings, LLC		$	-			$	84,191
J&N Invest LLC			50,000				50,000
Accrued interest			-				17,192
Total Convertible Notes			50,000				151,383
Net Covertible Notes		$	50,000			$	151,383

 

Iconic Holdings, LLC - On December 21, 2015, the Company issued an 8% unsecured convertible promissory note in favor of Iconic Holdings, LLC, in the principal sum of $161,250. The note was subject to an original issue discount of $11,250, plus another $11,250 retained by the lender for fees and costs, resulting in net proceeds to the Company of $138,500. The note carried a guaranteed 10% interest rate per annum, matured on December 21, 2016 and was subject to pre-payment penalties. The note may be converted, in whole or in part, at any time at the option of the holder into the Registrant’s common stock at a price per share equal to 65% of the lowest volume weighted average price of the Company’s common stock during the 10 consecutive trading days prior to the date on which Holder elects to convert all or part of the note. The conversion floor price was set at $0.08 per share.

 

On July 11, 2016, the Company modified the conversion feature of the Iconic note eliminating the conversion floor. The Company determined that since the conversion floor had been eliminated, that the Company could no longer determine if it had enough authorized shares to fulfil the conversion obligation. As such, the Company determined that the conversion feature created a derivative liability (see Note 9).

 

During the thirty-nine weeks ended October 1, 2017, the Company converted the remaining balance of the principal of $81,491 and accrued interest of $39,741into 38,457,435 shares of common stock at average conversion price $0.00259 per share. Upon extinguishment of note, the derivative of $118,873 was eliminated.

 

J&N Invest LLC - On August 24, 2015, the Company entered into an unsecured Note Payable Agreement with an investor for which the Company issued a $50,000 Convertible Note Payable, which accrues interest at a rate of 5% per annum and matured on August 31, 2016. The Lender may also convert all or a portion of the Note Payable at any time into shares of common stock at a price of $0.10 per share. As the market price of the stock on the date of issuance was $0.23, the Company recognized a debt discount at the date of issuance in the amount of $50,000 related to the fair value of the beneficial conversion feature. The discount was fully amortized as of January 1, 2017.

 

 

NOTE 7 – PROMISSORY NOTE

 

On December 18, 2015, the Company issued a six-month unsecured promissory note in the principal sum of $265,000 in favor of St. George Investments, LLC, pursuant to the terms of a securities purchase agreement of the same date. The Note went into default when the Company failed to make payment on the due date. Consequently, on July 8, 2016, the Company entered into an Exchange Agreement with St. George Investments, LLC, to replace the original Promissory Note with a new Convertible Promissory Note (“Note”). The Note carries a Conversion clause that allows the Holder to have a cashless conversion into shares of Common Stock for all or part of the principal, at a price equal to the average market price for 20 days prior to the conversion. The company determined that since the conversion floor had no limit to the conversion price, that the company could no longer determine if it had enough authorized shares to fulfil the conversion obligation. As such, the Company determined that the conversion feature created a derivative at the date of the modification.

 

As of January 1, 2017, the amount due under the promissory note was $193,450. During January and February of 2017. the Holder converted $48,914 of its debt into 15,660,611 shares of Common Stock with a fair value of $48,914. In addition, the Company paid $7,517 of the principal balance. On March 23, 2017, St. George Investments, LLC (“St. George”) served an arbitration demand and summons claiming that the Company had breached its obligations under a convertible note by preventing St. George from converting the remaining balance of the note to common stock. The parties disagreed as to the conversion price set in the note agreement due to execution by the parties of different versions of the document. St. George claimed for additional damages. The Company believed these claims lacked merit and the Company retained counsel to vigorously defend this action. Effective May 3, 2017, the Company counter-sued for full damages for breaching the contract, claiming mistakes, rescission, breach of the covenant of good faith and fair dealing and unjust enrichment. On August 14, 2017, the Company and St. George entered into a settlement agreement whereby the Company agreed to deliver 7,900,000 unrestricted free-trading shares to St. George upon signing a final settlement agreement. The fair value of shares issued was determined to be $553,000 based on the trading price of the shares at the date of the settlement. The company considered the settlement as a debt extinguishment and accounted for the issuance of the 7,900,000 shares valued at $553,000 offset by the extinguishment of the aggregate face value of the note and accrued interest of $143,740, and the remaining value of the derivative liability of $222,436, resulting in a loss on extinguishment of $186,818.

 

As part of the settlement agreement, St. George agreed to purchase an additional 1,100,000 shares of common stock for a purchase price of $110,000 at $0.10 per share.

 

As of October 1, 2017, all the terms and conditions of the settlement have been completed.

 

 

NOTE 8 – BUSINESS LOAN AND SECURITY AGREEMENT

 

In August 2015, the Company entered into a Business Loan and Security Agreement with American Express Bank, which allows the Company to borrow up to $174,000. The loan originally matured in August 2016 but will remain in effect for successive one-year periods unless terminated by either party. The loan is secured by credit card collections from the Company’s store operations. The agreement provides that the Company will receive an advance of up to $180,000 at the beginning of each fiscal month, and requires the Company to repay the loan from the credit card deposits it receives from its customers. Assuming the balance has been paid off by the end of the month, the Company will receive another advance up to the face amount of the note at the beginning of the next fiscal month.

 

The loan requires a loan fee of 0.5% of the outstanding balance as of each disbursement date. At October 1, 2017 and January 1, 2017, $424 and $136,629 was outstanding and is included in accrued expenses in the accompanying balance sheets.

 

NOTE 9 - DERIVATIVE LIABILITY

 

Under authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The Company has issued certain convertible notes whose conversion price is based on a future market price. However, since the number of shares to be issued is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares are available to share settle the conversion option. The result is that the conversion option is classified as a liability and bifurcated from the debt host and accounted for as a derivative liability in accordance with ASC 815 and will be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

 

The fair value of the derivative liability related to the St. George note was determined to be $238,538 at January 1, 2017. During 2017, and through April 2, 2017, the Company settled principal balance amounting to $48,914. As a result, the Company extinguished the fair value of the corresponding derivative liability of $66,731 prior to conversion as a gain on settlement. At April 2, 2017, the Company determined the FV of the remaining DL to be $222,346. After the conversions through April 2, 2017, the Company and St. George had a dispute as to ultimate settlement of this obligation. During the period, the Company and St. George agreed to settle the outstanding amount of convertible notes due for the issuance of 7,900,000 shares of common stock at which time the fair value of derivative was determined to be $222,346. As a result, the Company recorded a cost of $50,629 to account for the change in fair value up to the date of extinguishment.

 

The settlement was accounted for as a debt extinguishment. As such, given that the debt was extinguished, the extinguishment of the remaining derivative liability of $222,346 was included in the calculation of loss on debt extinguishment.

 

The fair value of the derivative liability related to the Iconic note was determined to be $118,873 at January 1, 2017. In January 2017, the lender converted all outstanding principal and interest due him in exchange for 38,457,435 shares of common stock. As a result, the Company extinguished the recorded derivative liability of $118,873 and recorded as a gain on extinguishment.

 

 

NOTE 10 – COMMON STOCK

 

Issuance of Common Stock

 

During the thirty-nine weeks ended October 1, 2017, the Company granted and issued to officers and employees 10,170,000 shares of restricted common stock with a fair value of $28,470.

 

During the thirty-nine weeks ended October 1, 2017, the Company issued 2,384,226 shares of common stock in settlement of an accounts payable amounting to $156,800. The fair value of the shares issued was $265,896 based on the fair value of the shares on the date of settlement resulting in an additional cost to the Company of $109,096.

 

During the thirty-nine weeks ended October 1, 2017, the Company received $75,000 from the sale of 992,602 shares of common stock and warrants to acquire 357,142 shares of common stock at an excise price of $0.12 per share that expire in June 2020. The shares have not yet been issued and are included in common stock issuable as of October 1, 2017.

 

During the thirty-nine weeks ended October 1, 2017, the Company issued 1,170,774 shares of common stock at fair value of $45,144for services rendered

 

Employee Stock Options

 

The following table summarizes the changes in the options outstanding at October 1, 2017, and the related prices for the shares of the Company’s common stock issued to employees of the Company under a non-qualified employee stock option plan.

 

						Weighted
						Average
		Stock				Exercise
		Options				Price
Outstanding, January 1, 2017			115,000			$	4.50
Granted			-				-
Exercised			-				-
Outstanding, October 1, 2017			115,000			$	4.50
Exercisable, October 1, 2017			115,000			$	4.50

 

As of October 1, 2017, the stock options had no intrinsic value.

 

There were no options granted during the fiscal quarter ended October 1, 2017, and there was no stock-based compensation expense in connection with options granted to employees recognized in the consolidated statement of operations for the thirty-nine weeks ended October 1, 2017.

 

 

NOTE 10 – COMMON STOCK (CONTINUED)

 

Warrants

 

The following table summarizes the changes in the warrants outstanding at October 1, 2017, and the related prices.

 

A summary of the Company’s warrants as of October 1, 2017 is presented below:

  

						Weighted
						Average
						Exercise
		Warrants				Price
Outstanding, January 1, 2017			606,500			$	0.13
Granted			5,507,143				0.10
Exercised			-				-
Outstanding, October 1, 2017			6,113,643			$	0.11
Exercisable, October 1, 2017			6,113,643			$	0.11

 

Weighted

Weighted

Average

Weighted

Range of

Average

Remaining

Average

Exercise

Number

Exercise

Contractual

Number

Exercise

Prices

Outstanding

Price

Life

Exercisable

Price

$0.01 ~ $0.15

6,113,643

$

0.11

4.07

6,113,643

$

0.11

6,113,643

4.07

6,113,643

 

On May 17, 2016, GIGL entered into a Strategic Alliance Agreement with Kiddo, Inc., a Florida corporation (“consultant”) whereby consultant will provide marketing and branding services as well as introductions to potential strategic partners and investors. As consideration for consultant’s services pursuant to the Strategic Alliance Agreement, GIGL agreed to issue to consultant a warrant to purchase up to 4,400,000 shares of GIGL’s common stock at an exercise price of $0.075 per share, which warrant vests in increments based upon the achievement of certain milestones. As of January 1, 2017, 440,000 of these warrants with a fair value of $31,000 were deemed have been achieved and are included in the table of outstanding warrants above. At October 1, 2017, the achievement of the corresponding milestones for the remaining warrants to acquire 3,960,000 has been determined to be remote or undeterminable, as such, the warrants have not been included as outstanding in the table above.

 

During the thirty-nine weeks ended October 1, 2017, the Company entered into agreements to issue warrants to acquire 5,150,000 shares of common stock for celebrity services to promote the Company’s business. The warrants were fully vested upon issuance, expire 5 years from the date of issuance, and 5,000,000 of the warrants are exercisable at $0.10 per share and 150,000 of the warrants are exercisable at $0.20 per share. The total fair value of these warrants at grant date was $531,000 using the Black-Scholes Option Pricing model with the following assumptions: life of 5 years; risk free interest rate of 1.73%; volatility of 350% and dividend yield of 0%.

 

 

NOTE 11 – LEASES

 

The Company currently leases its restaurant locations. The Company evaluates teach lease to determine its appropriate classification as an operating or capital lease for financial reporting purposes.

 

Minimum base rent for the Company’s operating leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over the lease term. The initial rent term includes the build-out, or rent holiday period, for the Company’s leases, where no rent payments are typically due under the terms of the lease. Deferred rent liabilities are recorded to the extent it exceeds minimum base rent per the lease agreement. Rent expense for the Company’s restaurant operating leases was $84,773 and $98,405 for the thirteen weeks ended October 1, 2017 and September 25, 2016, respectively, and $255,738 and $488,700 for the thirty-nine weeks ended October 1, 2017 and September 25, 2016, respectively.

 

The Company disburses cash for leasehold improvements and furniture, fixtures and equipment to build out and equip its leased premises. The Company also expends cash for structural additions that it makes to leased premises of which $506,271 and $475,000 were initially reimbursed Topanga and Glendale by its landlords, respectively, as construction contributions pursuant to agreed-upon terms in the lease agreements. Landlord construction contributions usually take the form of up-front cash. Depending on the specifics of the leased space and the lease agreement, amounts paid for structural components are recorded during the construction period as leasehold improvements or the landlord construction contributions are recorded as an incentive from lessor.

 

On August 12, 2016, the Company entered into a third amendment on its lease at The Glendale Galleria. The amendment covered several areas, including adjustment to percentage rent payable, reduced the minimum rent payable and payment and principal of the Promissory Note payable to GGP which resulted in an aggregate gain of $455,287 which has been deferred, and will be amortized on the straight-line basis over the remaining life of the lease as an adjustment to rent expense. During the year ended January 1, 2017, $26,172 of the deferred gain was amortized and offset to rent expense, resulting in a remaining deferred gain balance of $429,115 as of January 1, 2017. During the thirty-nine weeks ended October 1, 2017, an additional adjustment of outstanding rent of $37,937 was added to the deferred gain and will be amortized on the straight-line basis. During the thirty-nine weeks ended October 1, 2017, $48,594 of the deferred gain was amortized and offset to rent expense, resulting in a remaining deferred gain balance of $418,456 as of October 1, 2017.

 

The balance of the incentive from lessor as of October 1, 2017 and January 1, 2017, were $675,826 and $740,428, and included deferred rent of $129,841 and $117,056, respectively. As of October 1, 2017, $98,450 of the incentive from lessor was current and $577,376 was long term. Amortization of the incentive from lessor was $22,059 and $18,495 for the thirteen weeks ended October 1, 2017 and September 25, 2016, respectively, and $64,602 and $80,148 for thirty-nine weeks ended October 1, 2017 and September 25, 2016, respectively.

 

 

NOTE 12 – COMMITMENTS AND CONTINGENCIES

 

Litigation

 

On August 14, 2017, the Company and St. George Investments, LLC (“St. George”) entered into a settlement agreement. As of October 1, 2017, all the terms and conditions of the settlement have been satisfied.

 

As of October 1, 2017, there was no material outstanding litigation.

 

NOTE 13 – SUBSEQUENT EVENTS

 

On October 2, 2017, the Company issued to a consultant 325,000 unrestricted shares of common stock at fair value of $6,500 for service rendered.

 

On October 11, 2017, the Company issued 500,000 unrestricted shares of common stock at fair value of $10,000 in settlement of an accounts payment.

 

On October 15, 2017, the Company issued 500,000 unrestricted shares of common stock at fair value of $10,000 in settlement of an accounts payment.

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Report on Form 10-Q contains forward-looking statements and involves risks and uncertainties that could materially affect expected results of operations, liquidity, cash flows, and business prospects. These statements include, among other things, statements regarding:

 

	●	our ability to diversify our operations;
	●	inability to raise additional financing for working capital;
	●	the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require our management to make estimates about matters that are inherently uncertain;
	●	our ability to attract key personnel;
	●	our ability to operate profitably;
	●	deterioration in general or regional economic conditions;
	●	adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
	●	changes in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which we operate;
	●	the inability of management to effectively implement our strategies and business plan;
	●	inability to achieve future sales levels or other operating results;
	●	the unavailability of funds for capital expenditures;
	●	other risks and uncertainties detailed in this report;

 

As well as other statements regarding our future operations, financial condition and prospects, and business strategies. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the heading “Risk Factors” in Part II, Item 1A and those discussed in other documents we file with the Securities and Exchange Commission. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

References in the following discussion and throughout this quarterly report to “we”, “our”, “us”, “Giggles”, “the Company”, and similar terms refer to Giggles N’ Hugs, Inc. unless otherwise expressly stated or the context otherwise requires.

 

The Company adopted a 52/53 week fiscal year ending on the Sunday closest to December 31^st for financial reporting purposes. For the years 2016 and 2017 consists of a year ending January 1, 2017 and December 31, 2017.

 

 

Overview

 

Giggles N Hugs is a unique restaurant concept that brings together high-end, organic food with the play elements and entertainment for children. Giggles N Hugs offers an upscale, family-friendly atmosphere with a play area dedicated to children ages 10 and younger. The restaurant has a high-quality menu made from fresh, organic foods that are enjoyed by both children and adults. With nightly entertainment, such as magic shows, concerts, puppet shows, as well as activities and games which include face painting, dance parties, karaoke, and arts and crafts, Giggles N Hugs has become a premier destination for families seeking healthy food in a casual and fun atmosphere. Parents get to eat and relax while the kids play.

 

In addition to its family-friendly vibe, Giggles N Hugs is also known for its own creation called “Mom’s Tricky Treat Sauce,” which hides pureed vegetables in kids’ favorite meals such as pizza, pastas and macaroni and cheese.

 

Originally, Giggles N’ Hugs owned and operated one restaurant in the Westfield Mall in Century City, California; a second restaurant in the Westfield Mall in Topanga, California; and a third restaurant in the Glendale Galleria in Glendale, California through June 26, 2016.

 

On May 13, 2016, Giggles N’ Hugs, Inc. entered into a Termination of Lease Agreement with Century City Mall, LLC (“landlord”), accelerating the termination date of the Lease dated January 13, 2010 for its store located in Westfield Century City, Los Angeles, California. Pursuant to the agreement, the lease terminated June 30, 2016 and the landlord agreed to a monetary reimbursement of $350,000 which was received by June 26, 2016.

 

The Company continues to operate its restaurants in Topanga and in the Glendale Galleria Mall.

  

 

RESULTS OF OPERATIONS

 

Results of Operations for the Thirteen Weeks Ended October 1, 2017 and September 25, 2016:

 

COSTS AND OPERATING EXPENSES

 

		For Thirteen				For Thirteen
		Weeks Ended				Weeks Ended				Increase (Decrease)
		October 1, 2017				September 25, 2016				$				%
Revenue:
Net sales		$	652,977			$	628,357			$	24,620				3.9	%
Costs and operating expenses:
Cost of operations			485,308				510,097				(24,789	)			-4.9	%
General and administrative expenses			277,841				247,981				29,860				12.0	%
Depreciation and amortization			64,205				64,069				136				0.2	%
Total operating expenses			827,354				822,147				5,207				0.6	%
Loss from Operations			(174,377	)			(193,790	)			19,413				-10.0	%
Other income (expenses):
Finance and interest expenses			(12,876	)			(251,021	)			238,145				-94.9	%
Change in fair value of derivatives			-				(205,128	)			205,128				*
Loss before provision for income taxes			(187,253	)			(649,939	)			462,686				-71.2	%
Provision for income taxes			-				(800	)			800				-100.0	%
Net loss		$	(187,253	)		$	(650,739	)		$	463,486				-71.2	%

  

Notes to Costs and Operating Expenses Table:

 

Net sales. Net sales for the thirteen weeks ended October 1, 2017 and September 25, 2016 were $652,977 and $628,357 respectively. The increase of $24,620 (3.9%) was a result of increased foot traffic due to recognition of brand name.

 

Cost of operations. Costs of operations of $485,308 and $510,097 for the thirteen weeks ended October 1, 2017 and September 25, 2016, respectively, reflecting a decline of $24,789 (-4.9%).

 

General and administrative expenses. General and administrative expenses for the thirteen weeks ended October 1, 2017 and September 25, 2016 were $277,841 and $247,981, respectively. This increase of $29,860 (12.0%) was mainly attributable to higher professional fees.

 

Depreciation and amortization. Depreciation and amortization were $64,205 compared to $64,069 for the thirteen weeks ended October 1, 2017 and September 25, 2016, respectively. There was virtually no change.

 

Finance and interest expense. The total finance and interest expenses of $12,876 for the thirteen weeks ended October 1, 2017 decreased by $238,145, from the $251,021 for the thirteen weeks ended September 25, 2016, and was due to lower debt.

 

Net Loss. The overall net losses of $187,253 and $650,739 for the thirteen weeks ended October 1, 2017 and September 25, 2016, respectively, reflects a decrease of 463,486. This significant change was due to change in fair value of derivatives and finance and interest expense during the same period last year.

 

 

Results of Operations for the Thirty-Nine Weeks Ended October 1, 2017 and September 25, 2016:

 

COSTS AND OPERATING EXPENSES

 

		For Thirty-Nine Weeks				For Thirty-Nine Weeks
		Ended				Ended				Increase (Decrease)
		October 1, 2017				September 25, 2016				$				%
Revenue:
Net sales		$	1,890,505			$	2,338,755				(448,250	)			-19.2	%
Costs and operating expenses:
Cost of operations			1,418,263				2,014,766				(596,503	)			-29.6	%
General and administrative expenses			1,463,397				892,098				571,299				64.0	%
Depreciation and amortization			192,342				241,950				(49,608	)			-20.5	%
Total operating expenses			3,074,002				3,148,814				(74,812	)			-2.4	%
Loss from Operations			(1,183,497	)			(810,059	)			(373,438	)			46.1	%
Other income (expenses):
Finance and interest expenses			(76,919	)			(424,352	)			347,433				-81.9	%
Change in fair value of derivatives			(50,629	)			(205,128	)			154,499				-75.3	%
Gain on extinguishment of derivatives			185,604				-				185,604				*
Loss on extinguishment of debt			(186,818	)			-				(186,818	)			*
Gain on Sale of Asset			-				5,971				(5,971	)			-100.0	%
Gain on Lease Termination			-				214,111				(214,111	)			-100.0	%
Loss before provision for income taxes			(1,312,259	)			(1,219,457	)			(92,802	)			7.6	%
Provision for income taxes			(2,650	)			616				(3,266	)			-530.2	%
Net loss		$	(1,314,909	)		$	(1,218,841	)$			(96,068	)			7.9	%

 

Notes to Costs and Operating Expenses Table:

 

The net sales for the thirty-nine weeks ended October 1, 2017 and September 25, 2016 were $1,890,505, and $2,338,755, respectively. The 19.2% decrease was solely attributable to the closing of the Century City store at the end of the 2^nd quarter, 2016. However, the Glendale and Topanga stores reflect sales increases of $89,879 (9.7%) and $46,551 (5.7%), respectively. Together there was a total increase of $136,430 (7.8%) for our two remaining stores during the thirty-nine weeks ended October 1, 2017.

 

Cost of operations. Cost of operations were $1,418,263 and $2,014,766 for the thirty-nine weeks ended October 1, 2017 and September 25, 2016, respectively. The decrease of $596,503 (-29.6%) was mostly attributable to the closing of the Century City store at the end of the 2^nd quarter, 2016.

 

General and administrative expenses. General and administrative expenses for the thirty-nine weeks ended October 1, 2017 and September 25, 2016 were $1,463,397 and $892,098, respectively. The substantial increase of 64.0% was mostly due to the fair value of $531,000 for warrants granted for services and a $109,096 charge relating to settlement of outstanding payable.

 

Depreciation and amortization. Depreciation and amortization were $49,608 less than the same period in the previous year. The decline was mostly due to the closing of the Century City store at the end of the second quarter of 2016.

 

Finance and interest expense. The total finance and operating expenses were $76,919 and $424,352 for the thirty-nine weeks ended October 1, 2017 and September 25, 2016, respectively. The decrease of $347,433 (-81.9%) mostly attribute to a lower debt.

 

Net Loss. The overall net loss of $1,314,909 and $1,218,841 for the thirty-nine weeks ended October 1, 2017 and September 25, 2016, respectively, reflects an increase in the net loss of $96,068, or 7.9%. The increase in the operating loss is mostly attributable to the fair value of $531,000 for warrants grated for services and a $109,096 charge to settlement of outstanding payable.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of October 1, 2017, the Company has $104,135 in cash and cash equivalents, $25,284 in inventory, and $19,206 in prepaid expenses and other. The following table provides detailed information about our net cash flows for all financial statement periods presented in this report.

 

The following table sets forth a summary of our cash flows for the thirty-nine weeks ended October 1, 2017 and September 25, 2016:

 

		For Thirty-Nine Weeks				For Thirty-Nine Weeks
		Ended				Ended
		October 1, 2017				September 25, 2016
Net cash used in operating activities		$	(213,887	)		$	(578,502	)
Net cash provided by investing activities			-				360,500
Net cash provided by (used in) financing activities			173,502				(15,373	)
Net increase (decrease) in Cash			(40,385	)			(233,375	)
Cash, beginning of period			144,520				334,191
Cash, end of period		$	104,135			$	100,816

 

Operating activities

 

Net cash used in operating activities was $213,887 for the thirty-nine weeks ended October 1, 2017 compared to $578,502 used in operating activities for the thirty-nine weeks ended September 25, 2016. This improvement of $364,615 mostly resulted from reduced cost from the closing of Century City store, adjusted mostly by a gain on extinguishment of derivatives.

 

Investing activities

 

The cash provided by investing activities for the thirty-nine weeks ended September 25, 2016 was $360,500 which consisted of cash received for the closure of the Century City store under the lease termination agreement with Westfield and the sales of remaining fixed assets. There were no investing activities or the thirty-nine weeks ended October 1, 2017.

 

Financing activities

 

Net cash provided by financing activities for the thirty-nine weeks ended October 1, 2017 was $173,502 from cash receipts from investors for future common stock issuable and the promissory note settlement. For the same quarter previous year, the financing activities were the payments to promissory note.

 

The Company is not required to provide a tabular disclosure of contractual obligations, as it is a smaller reporting company as defined under Rule 12b-2 of the Exchange Act.

 

 

Going Concern and Liquidity

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, during the thirty-nine weeks ended October 1, 2017, the Company incurred a net loss of $1,314,909, used cash in operations of $213,887 and had a stockholders’ deficit of $1,626,577 as of that date. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date that the financial statements are issued. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The Company’s independent registered public accounting firm in its report on the January 1, 2017 financial statements has raised substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

At October 1, 2017, the Company had cash on hand in the amount of $104,135. Management estimates that the current funds on hand would be sufficient to continue operations through December 2017. Management is currently seeking additional funds through sponsorships and promotions to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case or equity financing.

 

Notes Payable

 

On February 12, 2013, the Company entered into a $700,000 Promissory Note Payable Agreement with GGP Limited Partnership (“Lender”) to be used by the Company for a portion of the construction work to be performed by the Company under the lease by and between the Company and Glendale II Mall Associates, LLC. The Note Payable accrued interest at a rate of 10% through October 15, 2015, 12% through October 31, 2017, and 15% through October 31, 2023 and matures on October 31, 2023.

 

On March 1, 2015, the Company and the lender renegotiated the terms of the Promissory Note and agreed to a new note with a principal balance due of $683,316. As part of the new agreement, the Lender waived principal and interest payments for two years beginning March 1, 2015.

 

On August 12, 2016, the Company entered into a third amendment on its lease at The Glendale Galleria. The amendment covered several areas, including adjustment to percentage rent payable, reduced the minimum rent payable, along with the payment and principal of Promissory Note. The Promissory Note was adjusted to a balance due of $763,261.57 from $683,316, with zero percent interest, payable in equal monthly instalments of $5,300 through maturity of Note on May 31, 2028. The Company imputed interest using a discount rate of 10% to determine a fair value of the note of $443,521, resulting in a valuation discount of $319,740. As of October 1, 2017, the balance of note payable was $695,968, and unamortized note discount was $273,607, with a net balance due of $422,361.

 

 

The lender under the Note is GGP Limited Partnership (GGP). GGP is an affiliate of Glendale II Mall Associates, the lessor of the Company’s Glendale Mall restaurant location. In accordance with the note agreement, an event of default would occur if the Borrower defaults under the lease between the Company and Glendale II Mall Associates. Upon the occurrence of an event of default, the entire balance of the Note payable and accrued interest would become due and payable, and the balance due becomes subject to a default interest rate (which is 5% higher than the defined interest rate).

 

Convertible Notes Payable

 

J&N Invest LLC - On August 24, 2015, the Company entered into an unsecured Note Payable Agreement with an investor for which the Company issued a $50,000 Convertible Note Payable, which accrues interest at a rate of 5% per annum and matures on August 31, 2016. The Lender may also convert all or a portion of the Note Payable at any time into shares of common stock at a price of $0.10 per share.

 

Promissory Note

 

On December 18, 2015, the Company issued a six-month unsecured promissory note in the principal sum of $265,000 in favor of St. George Investments, LLC, pursuant to the terms of a securities purchase agreement of the same date. The Note went into default when the Company failed to make payment on the due date. Consequently, on July 8, 2016, the Company entered into an Exchange Agreement with St. George Investments, LLC, to replace the original Promissory Note with a new Convertible Promissory Note (“Note”). The Note carries a Conversion clause that allows the Holder to have a cashless conversion into shares of Common Stock for all or part of the principal, at a price equal to the average market price for 20 days prior to the conversion. The company determined that since the conversion floor had no limit to the conversion price, that the company could no longer determine if it had enough authorized shares to fulfil the conversion obligation. As such, the Company determined that the conversion feature created a derivative at the date of the modification.

 

During the period, the Holder converted $48,914 of debt into 15,660,611 shares of Common Stock. In addition, the Company paid $7,517 of the principal balance. On March 23, 2017, St. George Investments, LLC (“St. George”) served an arbitration demand and summons claiming that the Company had breached its obligations under a convertible note by preventing St. George from converting the remaining balance of the note to common stock. The parties disagreed as to the conversion price set in the note agreement due to execution by the parties of different versions of the document. St. George claimed for additional damages. The Company believed these claims lacked merit and the Company retained counsel to vigorously defend this action. Effective May 3, 2017, the Company counter-sued for full damages for breaching the contract, claiming mistakes, rescission, breach of the covenant of good faith and fair dealing and unjust enrichment.

 

On August 14, 2017, the Company and St. George entered into a settlement agreement whereby the Company agreed to deliver 7,900,000 unrestricted free-trading shares to SGI Immediately upon signing a final settlement agreement and St. George agreed to purchase an additional 1,100,000 shares of the companies restricted common stock for a purchase price of $110,000 at $0.10 per share. These shares shall be delivered pursuant to a conversion under the existing outstanding note. The shares had a fair value of $.07 per share as of the settlement date, or $553,000 in the aggregate. At the time of the settlement, the outstanding balance under the note was $132,928 and accrued interest of $10,818.

 

 

Recent Accounting Pronouncements

 

See Note 3 of the consolidated financial statements for discussion of recent accounting pronouncements.

 

Critical Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Estimates are used for, but not limited to, impairment analyses, accounting for contingencies and equity instruments issued for services. Actual results could differ materially from those estimates. The following critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements.

 

Long-Lived Assets

 

Our management regularly reviews property, equipment and other long-lived assets, including identifiable amortizing intangibles, for possible impairment. This review occurs quarterly or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairment of property and equipment or amortizable intangible assets, then management prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. The fair value is estimated at the present value of the future cash flows discounted at a rate commensurate with management’s estimates of the business risks. Quarterly, or earlier, if there is indication of impairment of identified intangible assets not subject to amortization, management compares the estimated fair value with the carrying amount of the asset. An impairment loss is recognized to write down the intangible asset to its fair value if it is less than the carrying amount. Preparation of estimated expected future cash flows is inherently subjective and is based on management’s best estimate of assumptions concerning expected future conditions.

 

Management believes that the accounting estimate related to impairment of our long lived assets, including our trademark license and trademarks, is a “critical accounting estimate” because: (1) it is highly susceptible to change from period to period because it requires management to estimate fair value, which is based on assumptions about cash flows and discount rates; and (2) the impact that recognizing an impairment would have on the assets reported on our balance sheet, as well as net income, could be material. Management’s assumptions about cash flows and discount rates require significant judgment because actual revenues and expenses have fluctuated in the past and we expect they will continue to do so.

 

 

Stock-Based Compensation

 

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

 

The fair value of the Company’s common stock option grants is estimated using the Black-Scholes Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes Option Pricing model could materially affect compensation expense recorded in future periods.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Without sufficient cash flow from operations we will require additional cash resources, including the sale of equity or debt securities, to meet our planned capital expenditures and working capital requirements through December, 2017. We will require additional cash resources due to changed business conditions to implement of our strategy to successfully expand our operations. If our own financial resources and then-current cash-flows from operations are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities will result in dilution to our existing stockholders. The incurrence of indebtedness will result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations or modify our plans to grow the business. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, will limit our ability to expand our business operations and could harm our overall business prospects.

 

 

Item 3. Quantitative and Qualitative Disclosure about Market Risk

 

Smaller reporting companies are not required to provide the information under this item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our Principal Executive Officer and Principal Financial Officer, Joey Parsi, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Based on his evaluation, he concluded that our disclosure controls and procedures are not designed at a reasonable assurance level and are not effective to provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting during the quarterly period ended October 1, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

 

PART II—OTHER INFORMATION

 

ITEM 1. Legal Proceedings.

 

On August 14, 2017, the Company and St. George Investments, LLC (“St. George”) entered into a settlement agreement. As of October 1, 2017, all the terms and conditions of the settlement have been satisfied.

 

As of October 1, 2017, the Company had no material outstanding litigation.

 

ITEM 1A. Risk Factors

 

Disclosure pursuant to this Item 1A is not required as we are smaller reporting company.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Issuer Purchases of Equity Securities

 

None.

 

ITEM 3. Defaults Upon Senior Securities.

 

None.

 

ITEM 4. Mine Safety Disclosures.

 

Not applicable.

 

ITEM 5. Other Information.

 

None.

 

 

ITEM 6. Exhibits.

 

Exhibit No.		Description
31.1*		Certification of Principal Executive Officer & Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certifications of Principal Executive Officer & Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase
101.DEF**		XBRL Taxonomy Extension Definition Linkbase
101.LAB**		XBRL Taxonomy Extension Label Linkbase
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase

 

*	Filed herewith.
**	XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	GIGGLES N’ HUGS, INC.
Date November 15, 2017	By:	/s/ Joey Parsi
		Joey Parsi
		Chief Executive Officer
		(Principal Executive Officer and duly authorized signatory)