GIGGLES N' HUGS, INC. 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
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
3 OverviewGiggles 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 theWestfield Mall inCentury City, California ; a second restaurant in theWestfield Mall inTopanga, California ; and a third restaurant in the Glendale Galleria inGlendale, California throughJune 26, 2016 . OnMay 13, 2016 ,Giggles N' Hugs, Inc. entered into a Termination of Lease Agreement withCentury City Mall, LLC ("landlord"), accelerating the termination date of the Lease datedJanuary 13, 2010 for its store located in WestfieldCentury City ,Los Angeles, California . Pursuant to the agreement, the lease terminatedJune 30, 2016 and the landlord agreed to a monetary reimbursement of$350,000 which was received byJune 26, 2016 .
The Company continues to operate its restaurants in
4 RESULTS OF OPERATIONS Results of Operations for the Thirteen Weeks EndedSeptember 29, 2019 andSeptember 30, 2018 : COSTS AND OPERATING EXPENSES For Thirteen For Thirteen Weeks Ended Weeks Ended Increase (Decrease) September 29, 2019 September 30, 2018 $ % Revenue: Net sales $ 554,225 $ 677,838$ (123,613 ) -18.2 % Costs and operating expenses: Cost of operations 440,532 476,888 (36,356 ) -7.6 % General and administrative expenses 232,697 178,340 54,357 30.5 % Depreciation and amortization 36,782 56,211 (19,429 ) -34.6 % Total operating expenses 710,011 711,439 (1,428 ) -0.2 % Loss from Operations (155,786 ) (33,601 ) (122,185 ) 363.6 % Other expenses: Loss on settlement (400 ) 400 -100.0 % Finance and interest expenses (12,701 ) (10,850 ) (1,851 ) 17.1 % Loss before provision for income taxes liability (168,487 )
(44,851 ) (123,636 ) 275.7 %
Provision for income taxes -
- - * Net Loss $ (168,487 ) $ (44,851 )$ (123,636 ) 275.7 %
Notes to Costs and Operating Expenses Table:
Net sales. Net sales for the thirteen weeks ended
Cost of operations. Costs of operations consist of cost of goods sold, restaurant utilities, supplies, administrative and other operating expenses, labor cost, and occupancy cost. For the thirteen weeks endedSeptember 29, 2019 andSeptember 30, 2018 , cost of operations were$440,532 and$476,888 , respectively. The decrease of$36,356 was mainly attributable to the reduced food costs and labor costs. General and administrative expenses. General and administrative expenses for the thirteen weeks endedSeptember 29, 2019 andSeptember 30, 2018 were$232,697 and$178,340 , respectively. This increase of$54,357 was mainly attributable fair value of warrants granted during the current period. Depreciation and amortization. Depreciation and amortization were$36,782 and$56,211 for the thirteen weeks endedSeptember 29, 2019 andSeptember 30, 2018 , respectively. The decrease was due to some assets that have been fully depreciated. Finance and interest expense. The total finance and interest expenses of$12,701 for the thirteen weeks endedSeptember 29, 2019 virtually has no change compared to the prior year at the quarter.
Net Loss. The overall net losses of
5 Results of Operations for the Thirty-Nine Weeks EndedSeptember 29, 2019 andSeptember 30, 2018 : COSTS AND OPERATING EXPENSES For Thirty-Nine For Thirty-Nine Weeks Ended Weeks Ended Increase (Decrease) September 29, 2019 September 30, 2018 $ % Revenue: Net sales $ 1,807,513 $ 1,871,138 (63,625.00 ) -3.4 % Costs and operating expenses: Cost of operations 1,344,822 1,443,351 (98,529 ) -6.8 % General and administrative expenses 735,199 760,081 (24,882 ) -3.3 % Depreciation and amortization 138,781 176,361 (37,580 ) -21.3 % Total operating expenses 2,218,802
2,379,793 (160,991 ) -6.8 %
Loss from Operations (411,289 )
(508,655 ) 97,366 -19.1 %
Other income (expenses): Finance and interest expenses (34,728 ) (36,986 ) 2,258 -6.1 % Loss on settlement - (1,400 ) 1,400 * Loss before provision for income taxes (446,017 ) (547,041 ) 101,024 -18.5 % Provision for income taxes (2,400 )
- (2,400 ) * Net loss $ (448,417 ) $ (547,041 )$ 98,624 -18.0 %
Notes to Costs and Operating Expenses Table:
The net sales for the thirty-nine weeks endedSeptember 29, 2019 andSeptember 30, 2018 were$1,807,513 and$1,871,138 , respectively. The 3.4% decrease was mostly attributable to reduced food sales. Cost of operations. Costs of operations consist of cost of goods sold, restaurant utilities, supplies, administrative and other operating expenses, labor cost, and occupancy cost. For the thirty-nine weeks endedSeptember 29, 2019 andSeptember 30, 2018 , cost of operations were$1,344,822 and$1,443,351 , respectively. The decrease of$98,529 (6.8%) was mostly attributable to reduced food costs, and labor cost, General and administrative expenses. General and administrative expenses for the thirty-nine weeks endedSeptember 29, 2019 andSeptember 30, 2018 were$735,199 and$760,081 , respectively. The reduction of$24,882 (3.3%) was mostly due to reduced legal fee, professional fee, and CEO salary, to offset increase stock-based compensation. Depreciation and amortization. The depreciation and amortization were$37,580 less than the same period in the previous year. The decrease was due to some assets have been completed depreciated.
Finance and interest expense. The total finance and operating expenses of
Net Loss. The overall net losses of$448,417 and$547,041 for the thirty-nine weeks endedSeptember 29, 2019 andSeptember 30, 2018 , respectively, reflects a decrease of $18% was mostly attributable to decreased operating expenses. 6 LIQUIDITY AND CAPITAL RESOURCES As ofSeptember 29, 2019 , the Company has$3,881 in cash and cash equivalents,$23,132 in inventory, and$21,114 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 thirteen
weeks ended
For Thirty-Nine For Thirty-Nine
Weeks Ended Weeks Ended
September 29, 2019 September 30, 2018 Net cash provided by (used in) operating activities $ (62,918 ) $ (616,824 ) Net cash used in investing activities 9,157 - Net cash provided by financing activities - 588,755 Net (decrease) increase in Cash (53,761
) (28,069 ) Cash, beginning of period 57,642 131,336 Cash, end of period $ 3,881 $ 103,267 Operating activities
Net cash used in operating activities was$62,918 for the thirty-nine weeks endedSeptember 29, 2019 compared to$616,824 provide in operating activities for the thirty-nine weeks endedSeptember 30, 2018 . This significant decrease of cash used is mostly attributable to decreased net loss, fair value of warrants issued to officers, and implementing new lease accounting policy. Investing activities
Net cash used in investing activities was
Financing activities
Net cash provided by financing activities for the thirty-nine weeks ended
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.
7 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 period endedSeptember 29, 2019 , the Company incurred a net loss of$448,417 , and$62,918 of cash used in operations, and had a stockholders' deficit of$2,269,333 as of that date. In addition, the note payable to the Company's landlord was in default. 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 theDecember 30, 2018 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. AtSeptember 29, 2019 , the Company had cash on hand in the amount of$3,881 . Management estimates that the current funds on hand would be sufficient to continue operations throughDecember 29, 2019 . 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 - in default OnFebruary 12, 2013 , the Company entered into a$700,000 Promissory Note Payable Agreement withGGP 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 andGlendale II Mall Associates, LLC . The Note Payable accrued interest at a rate of 10% throughOctober 15, 2015 , 12% throughOctober 31, 2017 , and 15% throughOctober 31, 2023 and matures onOctober 31, 2023 .
On
OnAugust 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 onMay 31, 2028 . The lender under the Note isGGP Limited Partnership (GGP). GGP is an affiliate ofGlendale II Mall Associates , the lessor of the Company'sGlendale 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 andGlendale 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 ofSeptember 29, 2019 , the Company was delinquent in its payments to GGP under the note, and as such, the Note has been reflected as currently due and disclosed as in default. Convertible Notes Payable OnAugust 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 onAugust 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. 8
Recent Accounting Pronouncements
See Note 3 of the condensed 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 inthe 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 3 to the Condensed 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. 9 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 theFinancial 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 theFinancial 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. The Company also issues restricted shares of its common stock for share-based compensation programs to employees and non-employees. The Company measures the compensation cost with respect to restricted shares to employees based upon the estimated fair value at the date of the grant, and is recognized as expense over the period, which an employee is required to provide services in exchange for the award. For non-employees, the Company measures the compensation cost with respect to restricted shares based upon the estimated fair value at the measurement date which is 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. During the thirty-nine weeks endedSeptember 29, 2019 , the Company granted and issued 600,000 shares of restricted common stock with a fair value of$5,850 for services. And during the thirty-nine weeks endedSeptember 29, 2019 , the Company issued 50,000 shares of common stock at fair value of$350 to an employee. These stock issuances were issued under an exemption for the registration provision of the Securities Act of 1933 pursuant to Section 4(a)(1) of the Securities Act.
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 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. 10
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