FORM 10-Q

 

 

 

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 September 29, 2013

 

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

 

Commission file 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.)

 

10250 Santa Monica, #155, Los Angeles, CA   90067
(Address of principal executive offices)   (Zip Code)

 

(310) 553-4847

(Registrant’s telephone number, including area code)

 

Copies of Communications to:

Richardson & Patel, LLP

1100 Glendon Avenue

Suite 850

Los Angeles, CA 90024

(310) 208-1187

Fax (310) 708-1154

 

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 11, 2013 was 24,139,145 shares.

 

 

 

 
 

 

GIGGLES N HUGS, INC.
THIRTEEN WEEKS ENDED SEPTEMBER 29, 2013

 

Index to Report on Form 10-Q

 

    Page No.
  PART I - FINANCIAL INFORMATION  
     
Item 1. Financial Statements 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 11
     
Item 4T. Controls and Procedures 11
     
  PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 12
     
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. Exhibits 14
 
  Signature 15

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

GIGGLES N HUGS, INC. 
CONSOLIDATED BALANCE SHEETS

(unaudited)

 

   September 29, 2013   December 31, 2012 
Assets          
           
Current assets:          
Cash and equivalents  $67,464   $156,474 
Inventory   31,185    16,755 
Prepaid stock-based compensation   -    244,366 
Prepaid expenses, other   7,955    2,470 
Total current assets   106,604    420,065 
           
Fixed assets:          
Total fixed assets, net   2,094,397    1,198,084 
           
Other assets:          
Security deposits, other   38,730    32,500 
Total other assets   38,730    32,500 
           
Total assets  $2,239,731   $1,650,649 
           
Liabilities and Stockholders’ Equity (Deficit)          
           
Current liabilities:          
Accounts payable  $354,341   $294,919 
Incentive from lessor — current portion   63,151    49,910 
Note payable from lessor - current portion   21,290    - 
Accrued expenses   320,246    72,868 
Deferred revenue   55,556    45,770 
Due to related party   40,000    - 
Convertible note payable, net of debt discount of $7,295 and $44,795, respectively   42,705    5,205 
Total current liabilities   897,289    468,672 
           
Long-term liabilities:          
Incentive from lessor — long-term
   1,160,891    724,917 
Note payable - lessor   398,710    - 
Total long-term liabilities   1,599,601    724,917 
           
Total liabilities   2,456,890    1,193,589 
           
Stockholders’ equity (Deficit):          
Common stock, $0.001 par value, 1,125,000,000 shares authorized, 24,055,812 and 23,149,145 shares issued and outstanding as of September 29, 2013 and December 3 1, 2012, respectively   24,056    23,149 
Common stock payable (133,334 shares as of September 29, 2013)   415,500    347,400 
Additional paid-in capital   3,566,837    3,357,544 
Accumulated deficit   (4,223,552)   (3,271,033)
Total stockholders’ equity (Deficit)   (217,159)   457,060 
           
Total liabilities and stockholders’ equity (Deficit)  $2,239,731   $1,650,649 

 

See Accompanying Notes to Consolidated Financial Statements.

 

F-1
 

 

GIGGLES N HUGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS 

(unaudited)

 

   Thirteen Weeks Ended
September 29, 2013		   Nine Months Ended
September 30, 2013		 
   2013   2012   2013   2012 
Revenue                    
Food and beverage sales  $346,059  $199,075   $901,814   $534,885 
Private party rentals
   113,638    70,875    368,890    266,824 
Other sales   184,978    79,828    442,765    213,718 
Allowances, returns and discounts   (30,165)   (16,741)   (88,528)   (40,516)
Net sales   614,510    333,037    1,624,941    974,911 
                     
Costs and operating expenses                    
Cost of sales including food and beverage   100,548    78,516    264,265    217,321 
Labor   230,979    97,109    599,705    329,485 
Occupancy cost   153,242    62,323    358,761    181,790 
Other   92,516   -    185,697    - 
Depreciation and amortization   56,928    26,101    137,039    77,633 
Total operating expenses   634,213    264,049    1,545,467    806,229 
                     
Other expenses                    
Executive compensation   94,545    108,783    264,661    318,458 
Employee stock-based compensation   -    -    -    1,100,883 
Non-employee stock-based compensation   87,600    62,900    272,666    115,380 
Professional and consulting expenses   86,794    92,320    345,117    262,349 
General and administrative expenses   31,759    19,753    136,454    150,066 
Finance and interest expense   31,355    -    58,355    - 
Gain on stock issuance for payable settlement   -    -    (50,000)    - 
Total costs and operating expenses   966,266    547,805    2,572,720    2,753,365 
                     
Loss before provision for income taxes  $(351,756)  $(214,768)  $(947,779)  $(1,778,454)
                     
Provision for income taxes  $4,740  $-   $4,740   $(1600)
                     
Net loss  $(356,496)  $(214,768)  $(952,519)  $(1,780,054)
                     
Net loss per share - basic  $(0.01)  $(0.01)  $(0.04)  $(0.08)
                     
Weighted average number of common shares outstanding - basic   23,886,123    22,875,692    23,522,653    22,875,692 

  

See Accompanying Notes to Consolidated Financial Statements.

 

F-2
 

 

GIGGLES N HUGS, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
(unaudited) 

 

   Thirteen Weeks ended   Nine Months Ended 
   September 29, 2013   September 30, 2013 
         
Cash flows from operating activities          
Net loss  $(952,519)  $(1,780,054)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   137,039    77,633 
Amortization of debt discount   37,500    - 
Non-employee stock-based compensation   272,666    115,380 
Gain on stock issuance for payable settlement   (50,000)    - 
Employee stock-based compensation   -    1,100,883 
Changes in operating assets and liabilities:   -      
Increase in prepaid expenses and deposits   (5,485)   (5,987)
Increase in security deposits, other   (6,230)   - 
Increase in inventory   (14,430)   (758)
Increase in accounts payable   209,422    11,842 
Increase in lease incentive liability   449,215     12,927 
Increase in accrued expenses   247,378    42,007 
Increase in deferred revenue   9,786    188 
Net cash provided by (used in) operating activities   334,342    (425,939)
           
Cash flows from investing activities          
Acquisition of fixed assets   (1,033,352)   (162,645)
Net cash used in investing activities   (1,033,352)   (162,645)
           
Cash flows from financing activities          
Proceeds from lessor note payable   420,000    - 
Proceeds from common stock payable   -    75,000 
Proceeds from shares issued   150,000    - 
Proceeds from related party   150,000    - 
Payments to related party   (110,000)    - 
Net cash provided by financing activities   610,000    75,000 
           
NET DECREASE IN CASH   (89,010)   (513,584)
           
CASH AT BEGINNING OF PERIOD   156,474    608,309 
           
CASH AT END OF PERIOD  $67,464   $94,725 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Interest paid  $-   $- 
Income taxes paid  $-   $- 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:  $   $ 
Shares issued for prepaid stock compensation   -    - 
Accounts payable settled by share issuance  $150,000   $- 

  

See Accompanying Notes to Consolidated Financial Statements. 

 

F-3
 

 

GIGGLES N’ HUGS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – HISTORY AND ORGANIZATION

 

Giggles N’ Hugs, Inc. (“GIGL Inc.”) 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. The Company is authorized to issue 1,125,000,000 shares of its $0.001 par value common stock.

 

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 (the “SEA”). Under the SEA, GIGL Inc. issued 18,289,716 shares of its common stock in exchange for a 100% interest in GNH. Additionally under the SEA, the former officer, director and shareholders of GIGL Inc. agreed to cancel a total of 47,607,500 shares of its common stock.

 

For accounting purposes, the acquisition of GNH by GIGL Inc. has been recorded as a reverse merger of a public company, with the exception that no goodwill is generated, and followed up with a recapitalization of GNH based on the factors demonstrating that GNH represents the accounting acquirer. As part of closing of the merger between GNH and GIGL Inc. GNH obtained 100% of the restaurant operations of Giggles N Hugs in Westfield Mall in Century City, California. The restaurant operations of Giggles N Hugs in Westfield Mall in Century City, California was originally formed April 30, 2010 and opened for operation December 3, 2010. Consequently, the historical financial information in the accompanying consolidated financial statements is that of GNH and the restaurant operations of Giggles N Hugs located in Century City, California. As a result of the Merger, GIGL Inc. now owns all of the assets, liabilities and operations of a kid friendly restaurant named Giggles N Hugs in Westfield Mall in Century City, California. Additionally, GIGL Inc. obtained ownership to all intellectual property rights for Giggles N Hugs facilities in the future.

 

On December 30, 2011, the transactions were completed and resulted in a change in control of the Company. Pursuant to the terms of the Agreement, the Company accepted the resignation of its prior officer and director, Tracie Hadama and appointed Mr. Joey Parsi as President, Chief Executive Officer, Treasurer, and Secretary of the Company.

 

F-4
 

 

GIGGLES N’ HUGS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

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 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 December 31, 2012 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 Company adopted a 52/53 week fiscal year ending on the Sunday closest to December 31st for financial reporting purposes. 2012 consists of calendar year ending December 31, 2012. The election for fiscal year was made with the 8-K filing in October 2013.

 

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

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of consolidation

 

At September 29, 2013 and September 30, 2012, the consolidated financial statements include the accounts of Giggles N’ Hugs, Inc., GNH CC, Inc., GNH Topanga, Inc. and restaurant operations of Giggles N Hugs in Westfield Mall in Century City, California. All significant intercompany balances and transactions have been eliminated. Giggles N’ Hugs, Inc., GNH, Inc., GNH Topanga, Inc. and restaurant operations of Giggles N Hugs in Westfield Mall in Century City and Giggles N Hugs in Westfield Mall in Topanga, California 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 revenue and expenses during the reporting period. Actual results could differ significantly from those estimates.

 

Cash and cash equivalents

 

For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. The carrying value of these investments approximates fair value.

 

F-5
 

 

GIGGLES N’ HUGS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Inventories

 

Inventories are stated at the lower of cost or market on a first-in, first-out basis and consist of restaurant food and other supplies.

 

Property and equipment

 

The Company records all property and equipment at cost less accumulated depreciation. Improvements are capitalized while repairs and maintenance costs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful life of the assets or the lease term, whichever is shorter. Leasehold improvements include the cost of the Company’s internal development and construction department. Depreciation periods are as follows:

 

Leasehold improvements   10 years
Restaurant fixtures and equipment   10 years
Computer software and equipment   3 to 5 years

 

Leases

 

The Company currently leases its restaurant locations. The Company evaluates the 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 expense, which is based on a percentage of revenue, is also recorded to the extent it exceeds minimum base rent per the lease agreement.

 

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 $590,000 was reimbursed to Century City, $488,409 was reimbursed to Topanga, and $284,000 was reimbursed to Glendale by their landlords 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.

 

F-6
 

 

GIGGLES N’ HUGS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Impairment of long-lived assets

 

The Company assesses potential impairment of our long-lived assets whenever events or changes in circumstances indicate that the carrying value of the assets or asset group may not be recoverable. Factors considered include, but are not limited to, significant underperformance relative to historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. The Company regularly reviews the restaurant if it is cash flow negative for the previous four quarters to determine if impairment testing is warranted. At any given time, the Company may monitor its operations, and impairment charges could be triggered in the future if the restaurant performance does not improve.

 

The Company has identified leasehold improvements as the primary asset because it is the most significant component of our restaurant assets, it is the principal asset from which the Company derives cash flow generating capacity and has the longest remaining useful life. The recoverability is assessed in most cases by comparing the carrying value of the assets to the undiscounted cash flows expected to be generated by these assets. Impairment losses are measured as the amount by which the carrying values of the assets exceed their fair values.

 

At September 29, 2013 and September 30, 2012 we did not record an impairment charge against the carrying value of the restaurants located in Century City and Topanga, California.

 

Stock-based compensation

 

The Company records stock based compensation in accordance with the guidance in ASC Topic 505 and 718 which requires the Company to recognize expenses related to the fair value of its employee stock option awards. This eliminates accounting for share-based compensation transactions using the intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award.

 

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions reached by the FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 505-50.

 

F-7
 

 

GIGGLES N’ HUGS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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 warrants. Loss per common share has been computed using the weighted average number of common shares outstanding during the year.

 

Fair Value of Financial Instruments

 

The carrying amounts reflected in the balance sheets for cash, accounts payable and accrued expenses approximate the respective fair values due to the short maturities of these items. The Company does not hold any investments that are available-for-sale.

 

As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The three levels of the fair value hierarchy are described below:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

F-8
 

 

GIGGLES N’ HUGS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Revenue recognition

 

Our revenues consist of sales from our restaurant operations and sales of memberships entitling members unlimited access to our play areas for the duration of their membership. As a general principle, revenue is recognized when the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and services have been rendered; (iii) the price to the buyer is fixed or determinable; and (iv) collectability is reasonably assured.

 

With respect to memberships, access to our play area extends throughout the term of membership. The vast majority of memberships sold are for one-month terms. Revenue is recognized on a straight-line basis over the membership period. Century City, Topanga, and Glendale receive payments from its customers at the start of the subscription period and each record deferred revenue for the unearned portion of the subscription period.

 

Revenues from restaurant sales are recognized when payment is tendered at the point of sale. Revenues are presented net of sales taxes. The obligation is included in other accrued expenses until the taxes are remitted to the appropriate taxing authorities.

 

We recognize a liability upon the sale of our gift cards and recognize revenue when these gift cards are redeemed in our restaurants.

 

For party rental agreements, we rely upon a signed contract between us and the customer as the persuasive evidence of a sales arrangement. Party rental deposits are recorded as deferred revenue upon receipt and recognized as revenue when the service has been rendered.

 

Additionally, revenues are recognized net of any discounts, returns, allowances and sales incentives, including coupon redemptions and complimentary meals.

 

Recent pronouncements

 

The Company has evaluated the recent accounting pronouncements through November 2013 and believes that none of them will have a material effect on the Company’s financial position, results of operations or cash flows.

 

F-9
 

 

GIGGLES N’ HUGS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 4 – RECLASSIFICATION

 

Certain amounts in the consolidated balance sheet for the year ended December 31, 2012 have been reclassified to be consistent with the current year presentation. $7,875 previously included in due to related party are now included in the accrued expenses. The reclassification had no material impact on the Company’s financial conditions, results of operations or cash flows.

 

NOTE 5 – GOING CONCERN

 

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplate continuation of the Company as a going concern. The Company has recently sustained operating losses and has an accumulated deficit of $4,223,552 at September 29, 2013. In addition, the Company has negative working capital of $790,685 at September 29, 2013.

 

The Company has and will continue to use significant capital to grow and acquire market share. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In this regard, management is proposing to raise any necessary additional funds not provided by operations through loans or through sales of their common stock. There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.

 

NOTE 6 – INVENTORY

 

Inventory consisted of the following at:

 

   September 29, 2013   December 31, 2012 
Restaurant food and supplies  $31,185   $16,755 
Total  $31,185   $16,755 

 

NOTE 7 – FIXED ASSETS

 

Fixed assets consisted of the following at:

 

   September 29, 2013   December 31, 2012 
Leasehold improvements  $2,303,162   $1,359,141 
Fixtures and equipment   124,753    37,457 
Computer software and equipment   13,967    12,910 
           
Property and equipment, total   2,441,882    1,409,508 
Less: accumulated depreciation   (347,485)   (211,424)
Property and equipment, net  $2,094,397   $1,198,084 

 

Repair and maintenance expenses for the thirteen and thirty nine weeks ended September 29, 2013 were $13,407 and $27,092, respectively, for the three and nine months ended September 30, 2012 were $14,292 and $19,451, respectively. Depreciation expenses for the thirteen and thirty nine weeks ended September 29, 2013 were $56,928 and $137,039, respectively, and for the three and nine months ended September 29, 2012 were $26,101 and $77,633, respectively.

 

F-10
 

 

GIGGLES N’ HUGS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 8 – DEFERRED REVENUE

 

Deferred revenue consisted of the following at:

 

   September 29, 2013   December 31, 2012 
Membership cards  $1,278   $1,463 
Gift cards   5,400    3,626 
Dining credit program   17,425    32,382 
Party deposits   31,453    8,299 
Total  $55,556   $45,770 

 

NOTE 9 – INCENTIVE FROM LESSOR

 

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. The incentive from lessor is amortized over the life of the lease which is 10 years.

 

The Company received $590,000 from the Company’s landlords as construction contributions pursuant to agreed-upon terms in its lease agreement with Westfield Century City.

 

As of September 29, 2013, the Company received a total of $488,409 from the landlords as construction contributions related to the Topanga lease.

 

Amortization of the incentive from lessor was $15,391 and $40,931 for the thirteen and thirty nine weeks ended September 29, 2013, and $11,112 and $35,619 for the three and nine months ended September 30, 2012.

 

The Company is currently building out its new Glendale, CA location. Through September 29, 2013, the Company received $285,000 from the Company’s landlord as construction contributions pursuant to agreed-upon terms in its lease agreement with Glendale II Mall Associates, LLC to lease approximately 5,900 square feet in the Westfield Glendale Galleria Shopping Center. A total of $118,750 of the $475,000 was received in the current quarter and an additional $118,750 is anticipated in the fourth quarter of 2013.

 

F-11
 

 

GIGGLES N’ HUGS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 10 – 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 Glendale II Mall Associates, LLC. The Note Payable accrues 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. The monthly principal and interest payment will commence upon the earlier of (i) the Rental Commencement Date (as defined in the Lease); or (ii) November 1, 2013 and continuing through and including the Maturity Date, make a fixed monthly installment payment of principal and accrued Interest in an amount equal to the principal and interest commencing from the date of the first advance and continuing through and including the Maturity Date.

 

The Lender agrees to loan draws to the Company in accordance with the following schedule:

 

  1. An amount equal to 35% of the Principal Amount upon completion of all the requirements for payment of the Construction Allowance set forth in the Lease.
  2. An amount equal to 25% of the Principal Amount upon completion of all the requirements for payment of the Construction Allowance set forth in the Lease.
  3. An amount equal to 25% of the Principal Amount upon completion of all the requirements for payment of the Construction Allowance set forth in the Lease.
  4. An amount equal to 15% of the Principal Amount upon completion of all the requirements for payment of the Construction Allowance set forth in the Lease.

 

As of September 29, 2013, the Company had drawn $420,000 from the Promissory Note.

 

NOTE 11 – CONVERTIBLE NOTE PAYABLE

 

A summary of convertible debentures payable as of September 29, 2013 and December 31, 2012 is as follows:

 

   September 29, 2013   December 31, 2012 
Convertible note, accrue interest at 8% per annum and mature on          
November 23, 2013  $50,000   $50,000 
Debt discount - beneficial conversion feature   (7,295)   (44,795)
Convertible note, net unamortized discount  $42,705   $5,205 

 

On November 23, 2012, the Company entered into an unsecured Note Payable Agreement with Gary Schahet (the “Buyer”) pursuant to which the Company issued $50,000 of an unsecured convertible note (the “Note Payable”). The Note Payable accrues interest at a rate of 8% per annum and matures on November 23, 2013. The Lender may also convert all or a portion of the Note at any time at a price equal to the lesser of (i) $0.25, or (ii) ninety percent (90%) of a Subsequent Financing Price (price per share paid by investors in a subsequent financing), or (iii) ninety percent (90%) of a Change of Control price (per share consideration paid in a change of control transaction.

 

The Company has determined the value associated with the beneficial conversion feature in connection with the notes to be $50,000. The aggregate beneficial conversion feature has been accreted and charged to financing expense in the amount of $12,500 and $37,500 during the thirteen and thirty nine weeks ended September 29, 2013 and $5,205 as of December 31, 2012, respectively. During the thirteen and thirty nine weeks ended September 29, 2013, the Company recorded interest expense of $1,000 and $3,000, respectively.

 

F-12
 

 

GIGGLES N’ HUGS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 12 – STOCKHOLDERS’ EQUITY

 

The Company is authorized to issue 1,125,000,000 shares of $0.001 par value common stock. As of September 29, 2013 and December 31, 2012, 24,055,812 and 23,149,145 shares were issued and outstanding, respectively.

 

On February 11, 2013, the Company issued 15,000 shares of common stock to a third party entity for investor relation services. The fair value of the shares of common stock was $22,500 which is recorded to common stock payable as of December 31, 2012.

 

On February 11, 2013, the Company issued 20,000 shares of common stock to a third party entity for financial and governance reporting services, SEC reporting services, and other business related services. The fair value of the shares of common stock was $17,400 which is recorded to common stock payable as of December 31, 2012.

 

On February 25, 2013, the Company issued 20,000 shares of common stock to a third party entity for strategic management services. The fair value of the shares of common stock was $17,000 which is recorded to common stock payable as of December 31, 2012.

 

On January 12, 2013, the Company authorized the issuance of 670,000 shares of common stock to an investor for $100,000 cash received. The Company issued the shares on April 19, 2013.

 

On March 7, 2013, the Company authorized the issuance of 166,667 shares of common stock to an investor for $50,000 cash received. The Company issued the shares on April 19, 2013.

 

On May 15, 2013, the Company authorized the issuance of 333,333 shares of common stock to a construction contractor for the settlement of outstanding invoices due in the amount of $150,000. The fair value of the shares of common stock on the settlement date was $100,000 which is recorded to common stock payable as of June 30, 2013. The Company recorded a gain on accounts payable settlement of $50,000 during the three months ended June 30, 2013.

 

On July 11, 2013, the Company issued 15,000 shares of common stock to a third party entity for graphic design services. The fair value of the shares of common stock was $3,300 which is recorded to graphic design expense on July 11, 2013.

 

On August 19, 2013, the Company authorized the issuance of 83,334 shares of common stock for advisory services for 3 month service. The value of the shares of common stock was $37,500 out of which $25,000 is recorded to common stock payable in the third quarter of 2013. The remaining $12,500 is anticipated in the fourth quarter of 2013.

 

F-13
 

 

GIGGLES N’ HUGS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 13 – STOCK OPTIONS

 

Employee Stock Options

 

The following table summarizes the changes in the options outstanding at September 29, 2013, 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.

 

Range of
Exercise
Prices		   Number
Outstanding		   Weighted
Average
Exercise
Price		   Weighted
Average
Remaining
Contractual
Life		   Number
Exercisable		   Weighted
Average
Exercise
Price		 
                      
 4.50    195,000   $4.50    3.09    195,000   $4.50 
                            
      195,000         3.09    195,000      

 

A summary of the Company’s stock awards for options as of September 29, 2013 and changes for the thirty nine weeks ended September 29, 2013 is presented below:

 

   Stock
Options		   Weighted
Average
Exercise
Price		 
Outstanding, December 31, 2012   211,000   $4.50 
Granted   —    — 
Exercised   —    — 
Expired/Cancelled   (16,000)   — 
Outstanding, September 29, 2013   195,000   $4.50 
Exercisable, September 29, 2013   195,000   $4.50 

 

The weighted-average fair value of stock options granted to employees during the period ended September 29, 2013 and September 30, 2012 and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes-Merton (“Black-Scholes”) option pricing model are as follows:

 

   September 29, 2013   September 30, 2012 
Significant assumptions (weighted-average):          
Risk-free interest rate at grant date   -%   0.78%
Expected stock price volatility   -%   139%
Expected dividend payout   -    - 
Expected option life (in years)   -   5 
Expected forfeiture rate   -%   

0

%
Fair value per share of options granted  $-   $3.96 

 

F-14
 

 

GIGGLES N’ HUGS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 13 – STOCK OPTIONS (CONTINUED)

 

The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company has no historical experience with which to establish a basis for determining an expected life of these awards. Therefore, the Company only gave consideration to the contractual terms and did not consider the vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures significant to the expected life of the option award.

 

We estimate the volatility of our common stock based on the calculated historical volatility of similar entities in industry, in size and in financial leverage whose share prices are publicly available. We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. We have not paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model.

 

There were no options granted during the quarter ended September 29, 2013.

 

Total stock-based compensation expense in connection with options granted to employees recognized in the consolidated statement of operations for the thirty nine weeks ended September 29, 2013 and nine months ended September 30, 2012 was $0 and $891,383, respectively.

 

NOTE 14 – RELATED PARTY TRANSACTIONS

 

From time to time, the Company has received advances from certain of its officers and related parties to meet short term working capital needs. These advances may not have formal repayment terms or arrangements. During the thirty nine weeks ended September 29, 2013, the Company received a total of $150,000 advances from related parties and repaid back $110,000 to the related parties. As of September 29, 2013, the Company recorded due to related party of $40,000. These advances are unsecured, bear no interest, and do not have formal repayment terms or arrangements.

 

NOTE 15 – COMMITMENTS AND CONTINGENCIES

 

The Company leases its Century City restaurant location under an operating lease, with the remaining term being 10 years. Restaurant leases typically include land and building shells, require contingent rent above the minimum base rent payments based on a percentage of sales ranging from 7% to 10%, have escalating minimum rent requirements over the term of the lease and require various expenses incidental to the use of the property. The lease also has a renewal option, which the Company may exercise in the future. The Company’s current lease provides early termination rights, permitting the Company and its landlord to mutually terminate the lease prior to expiration if the Company does not achieve specified sales levels in certain years.

 

F-15
 

 

GIGGLES N’ HUGS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 15 – COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

As of September 29, 2013, the aggregate minimum annual lease payments under operating leases, including amounts characterized as deemed landlord financing payments are as follows:

 

2013  $47,359 
2014   194,644 
2015   200,483 
2016   206,498 
2017   212,692 
Thereafter   482,983 
Total  $1,344,659 

 

Rent expense for the Company’s Century City operating lease was $34,766 and $34,766 for the thirteen weeks ended September 29, 2013 and three months ended September 30, 2012, respectively, and was $104,299 and $104,299 for the thirty nine weeks ended September 29, 2013 and nine months ended September 30, 2012, respectively.

 

During the year ended December 31, 2012, GNH Topanga entered into a Lease Agreement with Westfield Topanga Owner, LP, a Delaware limited partnership, to lease approximately 5,900 square feet in the Westfield Topanga Shopping Center. The lease includes land and building shells, provides a construction reimbursement allowance of up to $475,000, requires contingent rent above the minimum base rent payments based on a percentage of sales ranging from 7% to 10% and require other expenses incidental to the use of the property. The lease also has a renewal option, which GNH Topanga may exercise in the future. The Company’s current lease provides early termination rights, permitting the Company and its landlord to mutually terminate the lease prior to expiration if the Company does not achieve specified sales levels in certain years. The lease commenced on March 23, 2013, Topanga’s grand opening, and expires on April 30, 2022. As of September 29, 2013, the aggregate minimum annual lease payments under operating leases, including amounts characterized as deemed landlord financing payments are as follows:

 

2013  $55,224 
2014   228,996 
2015   238,155 
2016   247,682 
2017   257,589 
Thereafter   1,241,388 
Total  $2,269,034 

 

Rent expense for the Company’s Topanga operating lease was $52,048 and $0 for the thirteen weeks ended September 29, 2013 and three months ended September 30, 2012, and was $104,096 and $0 for the thirty nine weeks ended September 29, 2013 and nine months September 30, 2012, respectively.

 

F-16
 

 

GIGGLES N’ HUGS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 15 – COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

On April 1, 2013, the Company entered into a Lease Agreement with II MALL ASSOCIATES, LLC, a Delaware limited liability company, to lease approximately 6,000 square feet in the Glendale Galleria in the City of Glendale, County of Los Angeles, and State of California. The lease includes land and building shells, provides a construction reimbursement allowance of up to $475,000, requires contingent rent above the minimum base rent payments based on a percentage of sales ranging from 4% to 7% and require other expenses incidental to the use of the property. The lease is expected to commence on October 1, 2013 and expire on September 30, 2023. Upon commencement, the aggregate minimum annual lease payments under operating leases, including amounts characterized as deemed landlord financing payments are as follows:

 

2013  $31,070 
2014   187,663 
2015   195,169 
2016   202,976 
2017   211,095 
Thereafter   1,410,205 
Total  $2,238,178 

 

Litigation

 

The Company, the Company’s CEO, Joey Parsi, and a third party, were named in a complaint filed on July 19, 2012 in the Los Angeles Superior Court by Alex Nerush and Preferred Scan, Inc., that alleges fraud, negligent misrepresentation, sale of securities by unlicensed broker, sale of securities by means of false and misleading statements, and money had and received. The Company does not believe there is any merit to the allegations and will vigorously defend this action. Furthermore, on September 24, 2012 the Company and the Company’s CEO, Joey Parsi counter-sued Richard Steele, Jr. and Donald Stoecklein, Anthony Risas for breach of fiduciary duty, breach of contract, negligence and negligent misrepresentation, fraud and indemnity. On October 13, 2012, Stoecklein Law Group, LLP (“Law Group”) which acted as our securities counsel from September 2010 until September 2012, filed an Interpleader action in the United States District Court for the Southern District of California to determine the proper ownership of 16 stock certificates representing an aggregate of 2,364,000 shares of our stock (the “Disputed Certificates”) held by the Law Group. Joey Parsi, Balata Partners, Inc., and Patrick Deparini were each named as defendants (the “Defendants”). Law Group claims that they entered into an oral agreement to hold the Disputed Certificates unless and until each of the Defendants agreed otherwise. The Company maintains that no such oral agreement was entered into and plans to vigorously argue for the release of the Disputed Certificates into the custody of our current securities counsel. The Company does not believe there is any merit to the allegations and will vigorously defend this action.

 

NOTE 16 – SUBSEQUENT EVENTS

 

On October 29, 2013, the Company issued 83,333 shares of common stock to a third party entity for advisory services. The value of the shares of common stock was $37,500 which $25,000 was recorded as common stock payable as of September 29, 2013.

 

The Company’s Management has reviewed all material events through the date of this report in accordance with ASC 855-10, and believes there are no other material subsequent events to report.

 

F-17
 

 

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

 

This Thirteen Week 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.

 

In October 2013, The Company filed an 8K to convert to a fiscal calendar closing on the Sunday closest to December 31st.

 

Overview

 

Giggles is a family-friendly restaurant with play areas for children 10 years and younger. The restaurant also features daily live entertainment and shows. The restaurant design is intended to create a fun, casual, family atmosphere where children can interact with parents and each other and where everyone enjoys freshly prepared, organic, nutritious and reasonably priced meals.

 

Currently, Giggles owns and operates one restaurant in the Westfield Mall in Century City, California and a second restaurant in the Westfield Mall in Topanga, California. In the future, we plan to open a number of our Giggles N Hugs themed restaurants in high end malls throughout the country, including an upcoming location in Glendale, California.

 

3
 

 

RESULTS OF OPERATIONS

 

Results of Operations for the Thirteen Weeks Ended September 29, 2013 and Three Months Ended September 30, 2012:

 

REVENUE

 

   For Thirteen
Weeks Ended		   For the three
months ended		   Increase (Decrease) 
   September 29, 2013   September 30, 2012   $   % 
Revenue:                    
Food and beverage sales  $346,059   $199,075   $146,984    73.8%
Private party rentals   113,638    70,875    42,763    60.3%
Other sales   184,978    79,828    105,150    131.7%
Allowances, returns and discounts   (30,165)   (16,741)   (13,424)   80.2%
Net sales  $614,510   $333,037   $281,473    84.5%

 

Our food and beverage sales for the thirteen weeks ended September 29, 2013 were $346,059 compared to $199,075 in the three months ended September 30, 2012 including revenue from the Westfield Topanga location which opened March 23, 2013. This resulted in an increase in food and beverage sales of $146,984, or 73.8%, from the same period a year ago. We offer a healthy alternative to typical child friendly restaurants, offering appetizing menu options that incorporate nutritious ingredients some children would normally shy away from. We are continuously evaluating and modifying our menu to accommodate guest requests.

 

Our private party rentals for the thirteen weeks ended September 29, 2013 were $113,638, including revenue from the Westfield Topanga location, compared to $70,875 in three months ended September 30, 2012. This resulted in an increase in private party rentals of $42,763, or 60.3%, from the same period a year ago. Topanga private party rentals for Party rentals range from as few as 15 guests up to 200 and contribute significantly to our revenues. Private party rentals accounted for 18% of net sales during the thirteen weeks ended September 29, 2013 and 21% in the thirteen weeks ended September 30, 2012. We believe that party revenue will continue to be a significant contributor to net sales and we plan to work diligently to advertise the availability of and attract future parties. Management believes that party revenue will tend to be cyclical; the first fiscal quarter of the year is a typically slower period for parties, as there are fewer major holidays compared to the fourth quarter, for example. As a result, management expects revenues from parties to increase during the summer months and winter, while the first and third quarters may experience some weakness.

 

Sales from other sources include the fee we charge for guests to access our over 2,000 square-foot children’s play area, sales of our one-, three- or six-month membership cards entitling entrance to the play area at a discounted price and sales from Giggles N Hugs-branded merchandise. Other sales for the thirteen weeks ended September 29, 2013 were $184,978, including revenue from the Westfield Topanga location, compared to $79,828 in the three months ended September 30, 2012. This resulted in an increase in sales of $105,150, or 131.7%, from the same period a year ago. Management attributes this to our own internal marketing efforts, as well as the Westfield Century City Mall and Westfield Topanga Mall holding periodic events to boost traffic to the mall, in general.

 

Allowances, returns and discounts for the thirteen weeks ended September 29, 2013 were $30,165 compared to $16,741 in the three months ended September 30, 2012 primarily from the Westfield Topanga location grand opening promotional discounts. This resulted in increases in allowances, returns and discounts of $13,424, or 80.2%, from the same period a year ago.

 

4
 

 

COSTS AND OPERATING EXPENSES

 

   For Thirteen
Weeks Ended		   For the three
months ended		   Increase (Decrease) 
   September 29, 2013   September 30, 2012   $   % 
Costs and operating expenses:                    
Cost of sales including food and beverage  $100,548   $78,516   $22,032    28.1%
Labor   230,979    97,109    133,870    137.9%
Occupancy cost   153,242    62,323    90,919    145.9%
Other   92,516    -    92,516    * 
Depreciation   56,928    26,101    30,827    118.1%
Total operating expenses  $634,213   $264,049   $370,164    140.2%
                     
Other expenses:                    
Executive compensation   94,545    108,783    (14,238)   -13.1%
Non-employee stock-based compensation   87,600    62,900    24,700    39.3%
Professional and consulting expenses   86,794    92,320    (5,526)   -6.0%
General and administrative expenses   31,759    19,753    12,006    60.8%
Finance and interest expenses   31,355    -    31,355    * 
Total other expenses   332,053    283,756    48,297    17.0%
                     
Total costs and operating expenses   966,266    547,805    418,461    76.4%
                     
Provision for income taxes   4,740    -    4,740    * 
                     
Net loss  $(356,496)  $(214,768)  $(141,728)   66.0%

 

Notes to Costs and Operating Expenses table:

 

Cost of sales. Costs related to food purchases, supplies and general restaurant operations totaled $100,548 during the thirteen weeks ended September 29, 2013 including costs from the Westfield Topanga location, as a result was 28.1% higher than cost of sales of $78,516 in the three months ended September 30, 2012. Food costs fluctuate regularly and are difficult to offset or minimize. Any increase in costs of certain commodities could adversely impact our operations unless we pass any such price increases to our guests. Cost of sales is high due to the inefficiencies of opening the new Glendale location.

 

Labor. Labor expenses for the thirteen weeks ended September 29, 2013 was $230,979, including cost from the Westfield Topanga location, an increase of 137.9%, from the three months ended September 30, 2012, which was $97,109. We are a customer service company and our primary variable cost is related to providing such services. As a result, labor costs comprised 36% of our total operating expenses during the thirteen weeks ended September 29, compared to 37% in the comparable three months ended September 30, 2012. Labor costs are constantly fluctuating and any changes to minimum wages payable could adversely impact our operations. Cost of sales is high due to the inefficiencies of opening the new Glendale location.

 

Occupancy Cost. Occupancy cost for the thirteen weeks ended September 29, 2013 was $153,242, including the lease costs of the Westfield Topanga location, an increase of 145.9%, from the three months September 30, 2012. Facility and other related items should not materially vary from period to period.

 

5
 

 

Depreciation. Depreciation for the thirteen weeks ended September 29, 2013 was $56,928 including the Westfield Topanga location depreciation expense, an increase of 118.1%, from the three months ended September 30, 2012, which was $26,101. We depreciate and amortize purchases of our ongoing capital investments and the construction and leasehold improvements related to the development of our stores. On March 23, 2013 we opened a new location in Topanga, California, for which we expect to incur further construction costs that will be depreciated and amortized in future periods.

 

Executive Compensation. During the thirteen weeks ended September 29, 2013, executive compensation decreased $14,238 or 13.1%, to $94,545, from $108,783 for the three months ended September 30, 2012.

 

Non-Employee Stock Based Compensation. During the thirteen weeks ended September 29, 2013, we incurred $87,600 in non-cash non-employee stock based compensation charges. The Company amortized shares of common stock shares for stock issuances for professional and advisory services.

 

Professional and Consulting Expenses. For the thirteen weeks ended September 29, 2013 was $86,794, a decrease of 6.0%, from the three months ended September 30, 2012, in which we incurred $92,320 in professional fees. These fees primarily include accounting fees, fees related to the audit of our financial statements, legal fees and fees incurred from other professional service firms. We expect to continue to incur professional fees in relation to maintaining our public reporting status with the Securities and Exchange Commission.

 

General and Administrative. In the normal course of our operations, we incur various expenses, including, but not limited to, legal fees, accounting fees, advertising and promotion, utilities, office supplies and postage and shipping expenses. During the thirteen weeks ended September 29, 2013, general and administrative expenses were $31,759, compared to $19,753 in the three months ended September 30, 2012.

 

Net Loss

 

Our net loss for the thirteen weeks ended September 29, 2013 was $356,498, an increase of $141,728, or 66.0%, from $214,768 for the three months ended September 30, 2012. We continue to have a net loss and believe the loss will be reduced and profitability will be attained in future quarters as the popularity of our restaurants increase.

 

Results of Operations for the Thirty Nine Weeks Ended September 29, 2013 and Nine Months Ended September 30, 2012:

 

REVENUE

 

   For Thirty Nine
Weeks Ended		   For the Nine
Months Ended		   Increase (Decrease) 
   September 29, 2013   September 30, 2012   $   % 
Revenue:                    
Food and beverage sales  $901,814   $534,885$   366,929    68.6%
Private party rentals   368,890    266,824    102,066    38.3%
Other sales   442,765    213,718    229,047    107.2%
Allowances, returns and discounts   (88,528)   (40,516)   (48,012)   118.5%
Net sales  $1,624,941   $974,911$   650,030    66.7%

 

Our food and beverage sales for the thirty nine weeks ended September 29, 2013 were $901,814 compared to $534,885 in the nine months ended September 30, 2012 including revenue from the Westfield Topanga location which opened March 23, 2013. This resulted in an increase in food and beverage sales of $366,929, or 68.6%, from the same period a year ago. We offer a healthy alternative to typical child friendly restaurants, offering appetizing menu options that incorporate nutritious ingredients some children would normally shy away from. We are continuously evaluating and modifying our menu to accommodate guest requests.

 

6
 

 

Our private party rentals for the thirty nine weeks ended September 29, 2013 were $368,890, including revenue from the Westfield Topanga location, compared to $266,824 in the nine months ended September 30, 2012. This resulted in an increase in private party rentals of $102,066, or 38.3%, from the same period a year ago. Party rentals range from as few as 15 guests up to 200 and contribute significantly to our revenues. Private party rentals accounted for over 23% of net sales during the thirty nine weeks ended September 29, 2013 and over 27% in the nine months ended September 30, 2012. We believe that party revenue will continue to be a significant contributor to net sales and we plan to work diligently to advertise the availability of and attract future parties. Management believes that party revenue will tend to be cyclical; the first fiscal quarter of the year is a typically slower period for parties, as there are fewer major holidays compared to the fourth quarter, for example. As a result, management expects revenues from parties to increase during the summer months and winter, while the first and third quarters may experience some weakness.

 

Sales from other sources include the fee we charge for guests to access our over 2,000 square-foot children’s play area, sales of our one-, three- or six-month membership cards entitling entrance to the play area at a discounted price and sales from Giggles N Hugs-branded merchandise. Other sales for the thirty nine weeks ended September 29, 2013 were $442,765, including revenue from the Westfield Topanga location, compared to $213,718 in the nine months ended September 30, 2012. This resulted in an increase in sales of $229,047, or 107.2%, from the same period a year ago. Management attributes this to our own internal marketing efforts, as well as the Westfield Century City Mall and Westfield Topanga Mall holding periodic events to boost traffic to the mall, in general.

 

Allowances, returns and discounts for the thirty nine weeks ended September 29, 2013 were $88,528, compared to $40,516 in the nine months ended September 30, 2012. This resulted in an increase in allowances, returns and discounts of $48,012, or 118.5%, from the same period a year ago primarily from the Westfield Topanga location grand opening promotional discounts. We hope to reduce our reliance on the use of coupons and discounts to attract customers in future periods.

 

7
 

 

COSTS AND OPERATING EXPENSES

 

   For Thirty Nine
Weeks Ended		   For the Nine
Months Ended		   Increase (Decrease) 
   September 29, 2013   September 30, 2012   $   % 
Costs and operating expenses:                    
Cost of sales including food and beverage  $264,265   $217,321   $46,944    21.6%
Labor   599,705    329,485    270,220    82.0%
Occupancy cost   358,761    181,790    176,971    97.3%
Other   185,697    -    185,697    * 
Depreciation   137,039    77,633    59,406    76.5%
Total operating expenses  $1,545,467   $806,229   $739,238    91.7%
                     
Other expenses:                    
Executive compensation   264,661    318,458    (53,797)   -16.9%
Employee stock-based compensation   -    1,100,883    (1,100,883)   * 
Non-employee stock-based compensation   272,666    115,380    157,286    136.3%
Professional expenses and consulting expenses   345,117    262,349    82,768    31.5%
General and administrative expenses   136,454    150,066    (13,612)   -9.1%
Finance and interest expense   58,355    -    58,355    * 
Gain on stock issuance for payable settlement   (50,000)   -    (50,000)   * 
Total other expenses   1,027,253    1,947,136    (919,883)   47.2%
                     
Total costs and operating expenses   2,572,720    2,753,365    (180,645)   -6.6%
                     
Provision for income taxes   4,740    (1,600)   6,340    -396.3%
                     
Net loss before taxes  $(952,519)  $(1,776,854)  $824,335    46.4%

 

Notes to Costs and Operating Expenses table:

 

* Not divisible by zero.

 

Cost of sales. Costs related to food purchases, supplies and general restaurant operations totaled $264,265 during the thirty nine weeks ended September 29, 2013, including costs from the Westfield Topanga location, which was 21.6% higher than cost of sales of $217,321 in the nine months ended September 30, 2012. Food costs fluctuate regularly and are difficult to offset or minimize. Any increase in costs of certain commodities could adversely impact our operations unless we pass any such price increases to our guests.

 

Labor. Labor expenses for the thirty nine weeks ended September 29, 2013 was $599,705, including cost from the Westfield Topanga location, an increase of 82.0%, from the nine months ended September 30, 2012. We are a customer service company and our primary variable cost is related to providing such services. As a result, labor costs comprised 39% of our total expenses during the thirty nine weeks ended September 29, 2013, compared to 41% in the comparable period ended September 30, 2012. Labor costs are constantly fluctuating and any changes to minimum wages payable could adversely impact our operations.

 

Occupancy Cost. Occupancy cost for the thirty nine weeks ended September 29, 2013 was $358,761, including the lease costs Westfield Topanga location, an increase of 97.3%, from the nine months ended September 30, 2012. Facility and other related items should not materially vary from period to period.

 

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Depreciation. Depreciation for the thirty nine weeks ended September 29, 2013 was $137,039, including the Westfield Topanga location depreciation expense, an increase of 76.5%, from the nine months ended September 30, 2012. We depreciate and amortize purchases of our ongoing capital investments and the construction and leasehold improvements related to the development of our stores. In May 2013, we began construction on a new location in Glendale, California, for which we expect to incur further construction costs that will be depreciated and amortized in future periods.

 

Executive Compensation. During the thirty nine weeks ended September 29, 2013, executive compensation decreased $53,797 or 16.9%, to $264,661 from $318,458 for the nine months ended September 30, 2012.

 

Employee Stock-Based Compensation. During the nine months ended September 30, 2012, we incurred employee stock-based compensation expenses of $1,100,883 from the issuances of employee incentive stock options. The incentive stock options were valued using the Black Scholes method, with 225,000 options becoming exercisable immediately. Furthermore, the Company authorized 50,000 shares of common stock valued at $209,500 to the Chief Operating Officer upon employment in February 2012. There were no stock option issuances in the current year period.

 

Non-Employee Stock Based Compensation. During the thirty nine weeks ended September 29, 2013, we incurred non-cash non-employee stock based compensation charges of $272,666. The Company amortized shares of common stock shares for stock issuances for professional and advisory services.

 

Professional Expenses and Consulting Expenses. Professional and consulting fees for the thirty nine weeks ended September 29, 2013 was $345,117, an increase of 31.5%, from the nine months ended September 30, 2012, in which we incurred $262,349 in fees. These fees primarily include accounting fees, fees related to the audit of our financial statements, legal fees and fees incurred from other professional service firms. We expect to continue to incur professional fees in relation to maintaining our public reporting status with the Securities and Exchange Commission.

 

General and Administrative. In the normal course of our operations, we incur various expenses, including, but not limited to, legal fees, accounting fees, advertising and promotion, utilities, office supplies and postage and shipping expenses. During the thirty nine weeks ended September 29, 2013, general and administrative expenses were $136,454 compared to $150,066 in the nine months ended September 30, 2012.

 

Net Loss

 

Our net loss for the thirty nine weeks ended September 29, 2013 was $952,519, a decrease of $825,935 or 46.4%, from $1,778,454 for the nine months ended September 30, 2012. We continue to have a net loss and believe the loss will be reduced and profitability will be attained in future quarters as the popularity of our restaurants increase.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

As of September 29, 2013, we had $67,464 in cash and equivalents, $31,185 in inventory, and $7,955 in prepaid expenses and other. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report. To date, we have financed our operations through the issuance of stock and borrowings, in addition to sales-generated revenue.

 

The following table sets forth a summary of our cash flows for the thirty nine weeks ended September 29, 2013 and September 30, 2012:

 

   For Thirty Nine
Weeks Ended		   For Nine
Months Ended		 
   September 29, 2013   September 30, 2012 
Net cash provided by (used in) operating activities  $206,042   $(425,939)
Net cash used in investing activities   (1,033,352)   (162,645)
Net cash provided by financing activities   738,300    75,000 
Net decrease in Cash   (89,010)   (513,584)
Cash, beginning of period   156,474    608,309 
Cash, end of period  $67,464   $94,725 

 

Operating activities

 

Net cash provided by operating activities was $206,042 for the thirty nine weeks ended September 29, 2013, as compared to ($425,939) used in operating activities for the same period in 2012.

 

Investing activities

 

Net cash used in investing activities was $1,033,352, for the thirty nine weeks ended September 29, 2013, as compared to $162,645 used in investing activities for the same period in 2012.

 

Financing activities

 

Net cash provided by financing activities for the thirty nine weeks ended September 29, 2013, was $738,300, as compared to $75,000 for the same period of 2012.

 

We expect to use our cash to invest in our core businesses, including new product innovations, advertising and marketing, as well as the construction and build-out of additional restaurant locations. Other than normal operating expenses, cash requirements for 2013 are expected to consist primarily of capital expenditures for the build out of our Glendale, California store and additional investments in advertising and marketing efforts.

 

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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 for the next 12 months. We will require additional cash resources due to changed business conditions, implementation 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 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

 

This item is not applicable as we are currently considered a smaller reporting company.

 

Item 4T. 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.

 

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Changes in Internal Control Over Financial Reporting

 

On March 14, 2013, the Company received notice from Carrolton Partners, LLC, the Company’s outside financial advisor (the “Advisor”), that the Company’s previously issued financial statements, as presented in the Company’s quarterly reports on Form 10-Q for the periods ended March 31, 2012, June 30, 2012, and September 30, 2012, should no longer be relied upon.

 

While Joey Parsi, the Company’s Chief Executive Officer and a member of its Board of Directors, is also the Company’s Principal Financial Officer, the Company has effectively outsourced its internal accounting function to the Advisor.

 

Mr. Parsi and the Advisor discussed the matters disclosed in the Original 8-K with DeJoya Griffith LLC, the Company’s certified independent auditor. The Company filed revised financial statements as restated 10-Q/A filings on May 3, 2013.

 

This event is likely to materially affect our 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.

 

The Company, the Company’s CEO, Joey Parsi, and a third party, were named in a complaint filed on July 19, 2012 in the Los Angeles Superior Court by Alex Nerush and Preferred Scan, Inc., that alleges fraud, negligent misrepresentation, sale of securities by unlicensed broker, sale of securities by means of false and misleading statements, and money had and received. The Company does not believe there is any merit to the allegations and will vigorously defend this action. Furthermore, on September 24, 2012 the Company and the Company’s CEO, Joey Parsi counter-sued Richard Steele, Jr., Donald Stoecklein, and Anthony Risas for breach of fiduciary duty, breach of contract, negligence and negligent misrepresentation, fraud and indemnity. On October 13, 2012, Stoecklein Law Group, LLP (“Law Group”) which acted as our securities counsel from September 2010 until September 2012, filed an Interpleader action in the United States District Court for the Southern District of California to determine the proper ownership of 16 stock certificates representing an aggregate of 2,364,000 shares of our stock (the “Disputed Certificates”) held by the Law Group. Joey Parsi, Balata Partners, Inc., and Patrick Deparini were each named as defendants (the “Defendants”). Law Group claims that they entered into an oral agreement to hold the Disputed Certificates unless and until each of the Defendants agreed otherwise. The Company maintains that no such oral agreement was entered into and plans to vigorously argue for the release of the Disputed Certificates into the custody of our current securities counsel.

 

As of the date of this Report, the Company was not subject to any other material legal proceedings. From time to time, however, the Company is named as a defendant in legal actions arising from normal business activities. Although the Company cannot accurately predict the amount of its liability, if any, that could arise with respect to currently pending legal actions, it is not expected that any such liability will have a material adverse effect on the Company’s financial position, operating results or cash flows.

 

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Item 1A. Risk Factors

 

Our significant business risks are described in Item 1A to Form 10-K for the year ended December 31, 2012 to which reference is made herein.

 

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

 

Stock Issuances

 

On April 19, 2013, the Company issued 670,000 shares of common stock to an investor in conjunction with a $100,000 private placement.

 

On April 19, 2013, the Company issued 166,667 shares of common stock to an investor in conjunction with a $50,000 private placement.

 

On May 15, 2013, the Company authorized the issuance of 333,333 shares of common stock to a construction contractor for the reduction in outstanding invoices due in the amount of $150,000. The fair value of the shares of common stock was $100,000 which is recorded to common stock payable as of June 30, 2013.

 

On August 19, 2013, the Company authorized the issuance of 83,334 shares of common stock in exchange for advisory services.

 

We believe that the issuance and sale of the above securities was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2) and Regulation D Rule. The securities were sold directly by us and did not involve a public offering or general solicitation. The recipients of the securities were afforded an opportunity for effective access to files and records of the Company that contained the relevant information needed to make their investment decision, including the financial statements and 34 Act reports. We reasonably believed that the recipients, immediately prior to the sale of the securities, were accredited investors and had such knowledge and experience in our financial and business matters that they were capable of evaluating the merits and risks of their investment. The management of the recipients had the opportunity to speak with our management on several occasions prior to their investment decision. There were no commissions paid on the issuance and sale of the securities.

 

Issuer Purchases of Equity Securities

 

We did not repurchase any of our equity securities from the time of our inception through the period ended September 29, 2013.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

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Item 5. 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.

 

14
 

 

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 14, 2013 By: /s/ Joey Parsi
    Joey Parsi
    Chief Executive Officer
    (Principal Executive Officer and duly authorized signatory)

 

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