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 April 2, 2017

 

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

 

Commission files number 000-53948

 

GIGGLES N HUGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   20-1681362

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

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

 

(818) 956-4847

(Registrant’s telephone number, including area code)

 

Copies of Communications to:

Libertas Law Group, Inc.

225 Santa Monica Blvd., 11th Floor

Santa Monica, CA 90401

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No[  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [  ]

 

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

 

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

 

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

Yes [  ] No [X]

 

The number of shares of Common Stock, $0.001 par value, outstanding on May 22, 2017 was 134,622,251 shares.

 

 

 

     
 

 

GIGGLES N’ HUGS, INC.

THIRTEEN WEEKS ENDED APRIL 2, 2017

 

Index to Report on Form 10-Q

 

  Page No.
     
PART I - FINANCIAL INFORMATION  
     
Item 1. Condensed Consolidated 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 12
     
Item 4 Controls and Procedures 12
     
PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 13
     
Item 1A. Risk Factors

13

     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 13
     
Item 3. Defaults Upon Senior Securities 13
     
Item 4. Mine Safety Disclosure 13
     
Item 5. Other Information 13
     
Item 6. Exhibits 14
     
  Signature 15

 

  2  
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

GIGGLES N’ HUGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    April 2, 2017     January 1, 2017  
    (Unaudited)        
Assets                
                 
Current assets:                
Cash and equivalents   $ 8,843     $ 144,520  
Inventory     25,325       20,331  
Prepaid expenses, other     7,803       13,806  
Total current assets     41,971       178,657  
                 
Fixed assets, net of accumulated depreciation and amortization of $1,284,168 and $1,220,099     930,059       994,128  
                 
Other assets     2,620       2,620  
                 
Total assets   $ 974,650     $ 1,175,405  
                 
Liabilities and Stockholders’ Deficit                
                 
Current liabilities:                
Accounts payable   $ 596,287     $ 610,925  
Incentive from lessor – current portion     91,071       87,420  
Note Payable - lessor, current portion net of discount of $0 and $35,094, respectively     21,544       21,544  
Accrued expenses     271,577       328,952  
Advances from officer     25,000       -    
Deferred revenue     21,218       24,159  
Promissory note payable and accrued interest     32,928       193,340  
Convertible note payable and accrued interest     50,000       151,383  
Derivative liability     222,436       357,411  
Total current liabilities     1,332,061       1,775,134  
                 
Long-term liabilities:                
Incentive from lessor – long-term     628,494       653,008  
Note payable - lessor     411,173       411,173  
Deferred gain     413,416       429,115  
Total long-term liabilities     1,453,083       1,493,296  
                 
Total liabilities     2,785,144       3,268,430  
                 

Commitments and contingencies

               
                 
Stockholders’ deficit:                
Common stock, $0.001 par value, 1,125,000,000 shares authorized, 134,222,251 and 67,934,205 shares issued and outstanding, as of April 2, 2017 and January 1, 2017, respectively     134,222       67,933  
Common stock issuable (683,333 and 405,556 shares as of April 2, 2017 and January 1, 2017, respectively)     243,535       218,535  
Additional paid-in capital     9,177,175       8,229,747  
Accumulated deficit     (11,365,426 )     (10,609,240 )
Total stockholders’ deficit     (1,810,494 )     (2,093,025 )
                 
Total liabilities and stockholders’ deficit   $ 974,650     $ 1,175,405  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

  F- 1  
   

 

GIGGLES N’ HUGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    Thirteen Weeks Ended     Thirteen Weeks Ended  
    April 2, 2017     March 27, 2016  
Revenue                
Net sales   $ 661,703     $ 878,932  
                 
Costs and operating expenses                
Cost of operations     503,791       770,518  
General and administrative expenses     935,734       324,192  
Depreciation and amortization     64,069       89,141  
Total operating expenses     1,503,594       1,183,851  
                 
Loss from Operations     (841,891 )     (304,919 )
Finance and interest expense     (49,270 )     (88,953 )
Change in fair value of derivatives     (50,629 )     -    
Gain on extinguishment of derivatives     185,604       -    
                 
Loss before provision for income taxes     (756,186 )     (393,872 )
Provision for income taxes     -         (800 )
                 
Net loss   $ (756,186 )   $ (394,672 )
                 
Net loss per share – basic and diluted   $ (0.01 )   $ (0.01 )
                 
Weighted average number of common shares outstanding – basic and diluted     96,515,942       42,140,868  

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

  F- 2  
   

 

GIGGLES N’ HUGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 

        Additional                 Total  
    Common Stock     Paid in     Stock     Accumulated     Stockholders’  
    Shares     Amount     Capital     Issuable     Deficit     Deficit  
                                     
Balance January 1, 2017     67,934,205     $ 67,933     $ 8,229,747     $ 218,535     $ (10,609,240 )   $ (2,093,025 )
                                                 
Shares issued for employees compensation     10,170,000       10,170       18,300                       28,470  
Shares issued to settle accounts payable     1,500,000       1,500       178,500                       180,000  
Shares issued for convertible notes     54,118,046       54,119       218,728                       272,847  

Cash received for stock issuable

                            25,000               25,000  
Shares issued for professional services     500,000       500       900                       1,400  
Warrants granted for service                     531,000                       531,000  
Net loss                                     (756,186 )     (756,186 )
Balance April 2, 2017     134,222,251     $ 134,222     $ 9,177,175     $ 243,535     $ (11,365,426 )   $ (1,810,494 )

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

  F- 3  
   

 

GIGGLES N’ HUGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Thirteen Weeks ended     Thirteen Weeks ended  
    April 2, 2017     March 27, 2016  
             
Cash flows from operating activities                
Net loss   $ (756,186 )   $ (394,672 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     64,069       89,141  
Amortization of debt discount     -       79,209  
Stock-based compensation     28,470       -  
Loss on stock issuance for payable settlement     108,000       -  
Warrants granted for services     531,000       -  
Shares issued for services     1,400       28,396  
Interest and fees included in note payable     34,784       -  
Amortization of deferred gain     (15,699 )     -  
Gain on extinguishment of derivative liability     (185,604 )     -  
Change in fair value of derivative liability     50,629       -  
Changes in operating assets and liabilities:                
Decrease in prepaid expenses and deposits     6,003       4,931  
(Increase) decrease in inventory     (4,994 )     4,673  
Increase in accounts payable     57,362       53,854  
Decrease in lease incentive liability     (20,863 )     (28,175 )
Decrease in accrued expenses     (69,610 )     (114,009 )
(Decrease) Increase in deferred revenue     (2,941 )     19,691  
Net cash used in operating activities     (174,180 )     (256,961 )
                 
Cash flows from financing activities                
Payments on promissory note payable     (11,497 )     -  
Proceeds from related party     25,000       -  
Proceeds from common stock issuable     25,000       -  
Net cash provided by financing activities     38,503       -  
                 
NET DECREASE IN CASH     (135,677 )     (256,961 )
CASH AT BEGINNING OF PERIOD     144,520       334,191  
                 
CASH AT END OF PERIOD   $ 8,843     $ 77,230  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Interest paid   $ 4,359     $ -  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:                
Shares issued to settle convertible notes payable   $ 272,847     $ -  
Reclass of notes payable to accrued interest   $ 12,235     $ -  
Shares issued to settle accounts payable   $ 72,000     $ 31,500  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

  F- 4  
   

 

GIGGLES N’ HUGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the THIRTEEN Weeks ended April 2, 2017 and March 27, 2016

(Unaudited)

 

NOTE 1 – HISTORY AND ORGANIZATION

 

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

 

On December 30, 2011, GIGL Inc. completed the acquisition of all the issued and outstanding shares of GNH, Inc. (“GNH”), a Nevada corporation, pursuant to a Stock Exchange Agreement. For accounting purposes, the acquisition of GNH by GIGL Inc. has been recorded as a reverse merger.

 

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

 

NOTE 2 – BASIS OF PRESENTATION

 

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

 

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

 

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

 

  F- 5  
   

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Going concern

 

The accompanying 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 consolidated financial statements, during the thirteen weeks ended April 2, 2017, the Company incurred a net loss of $756,186, used cash in operations of $174,180, and had a stockholders’ deficit of $1,810,494 as of that date. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. In addition, the Company’s independent registered public accounting firm in its report on the January 1, 2017 financial statements has raised substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

The Company had cash on hand in the amount of $8,843 as of April 2, 2017. Management estimates that the current funds on hand will be sufficient to continue operations through May 2017. Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company 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 stockholders, in case or equity financing.

 

Principles of consolidation

 

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

 

Use of estimates

 

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

 

  F- 6  
   

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Derivative Financial Instruments

 

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

 

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

 

Loss per common share

 

Net loss per share is provided in accordance with ASC Subtopic 260-10. We present basic loss per share (“EPS”) and diluted EPS on the face of statements of operations. Basic EPS is computed by dividing reported losses by the weighted average shares outstanding. Except where the result would be anti-dilutive to income from continuing operations, diluted earnings per share has been computed assuming the conversion of the convertible long-term debt and the elimination of the related interest expense, and the exercise of stock options and warrants. Loss per common share has been computed using the weighted average number of common shares outstanding during the year. For the period ended April 2, 2017 and March 27, 2016, the assumed conversion of convertible note payable and the exercise of stock warrants are anti-dilutive due to the Company’s net losses and are excluded in determining diluted loss per share.

 

  F- 7  
   

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recent Accounting Standards

 

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

 

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

 

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

 

  F- 8  
   

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at:

 

    April 2, 2017     January 1, 2017  
Leasehold improvements   $ 1,889,027     $ 1,889,027  
Fixtures and equipment     60,310       60,310  
Computer software and equipment     264,890       264,890  
Property and equipment, total     2,214,227       2,214,227  
Less: accumulated depreciation     (1,284,168 )     (1,220,099 )
Property and equipment, net   $ 930,059     $ 994,128  

 

Depreciation and amortization expenses for the thirteen weeks ended April 2, 2017 and March 27, 2016 were $64,069 and $89,141, respectively, Repair and maintenance expenses for the thirteen weeks ended April 2, 2017 and March 27, 2016 were $15,542 and $28,992, respectively.

 

NOTE 5 – ADVANCE FROM OFFICER

 

During the period ended April 2, 2017, an officer made an unsecured non-interest bearing advance of $25,000 to the Company with no formal terms of repayment. The $25,000 advance remains outstanding as of April 2, 2017.

 

  F- 9  
   

 

NOTE 6 – NOTE PAYABLE, LESSOR

 

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

 

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

 

On August 12, 2016 the Company entered into a third amendment on its lease at The Glendale Galleria. The amendment covered several areas, including adjustment to percentage rent payable, reduced the minimum rent payable, along with the payment and principal of Promissory Note. The Promissory Note was adjusted to a balance due of $763,261 from $683,316, with no interest, payable in equal monthly instalments of $5,300 through maturity of Note on May 31, 2028. The Company imputed interest using a discount rate of 10% to determine a fair value of the note of $443,521, resulting in a valuation discount of $319,740. As of April 2, 2017 and December 31, 2016, the balance of note payable was $726,869, and unamortized note discount was $294,153, with a net balance due of $432,717.

 

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

 

The lender under the Note is GGP Limited Partnership (GGP). GGP is an affiliate of Glendale II Mall Associates, the lessor of the Company’s Glendale Mall restaurant location. In accordance with the note agreement, an event of default would occur if the Borrower defaults under the lease between the Company and Glendale II Mall Associates. Upon the occurrence of an event of default, the entire balance of the Note payable and accrued interest would become due and payable, and the balance due becomes subject to a default interest rate (which is 5% higher than the defined interest rate). As of April 2, 2016, the Company was delinquent in its payments to GGP under the note, but has subsequently brought the note current.

 

  F- 10  
   

 

NOTE 7 – CONVERTIBLE NOTE PAYABLE

 

A summary of convertible debentures payable as of April 2, 2017 and January 1, 2017 is as follows:

 

    April 2, 2017     January 1, 2017  
Iconic Holdings, LLC   $ -     $ 84,191  
J&N Invest LLC     50,000       50,000  
Accrued interest     -       17,192  
Total Convertible Notes     50,000       151,383  
Net Convertible Notes   $ 50,000     $ 151,383  

 

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

 

On July 11, 2016, the company modified the conversion feature of the Iconic note eliminating the conversion floor. The company determined that since the conversion floor had been eliminated, that the company could no longer determine if it had enough authorized shares to fulfil the conversion obligation. As such, the Company determined that the conversion feature created a derivative (see Note 10).

 

During the period ended April 2, 2017, the Company converted the remaining balance of the principal into 38,457,435 shares of common stock at average conversion price $0.00259 per share. Upon extinguishment of note, the derivative was eliminated (see Note 10).

 

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

 

  F- 11  
   

 

NOTE 8 – PROMISSORY NOTE

 

On December 18, 2015, the Company issued a six-month unsecured promissory note in the principal sum of $265,000 in favor of St. George Investments, LLC, pursuant to the terms of a securities purchase agreement of the same date. The Note went into default when the Company failed to make payment on the due date. Consequently, on July 8, 2016, the Company entered into an Exchange Agreement with St. George Investments, LLC, to replace the original Promissory Note with a new Convertible Promissory Note (“Note”) carrying the following terms and conditions:

 

  1. The new Note will add 10% ($26,500) to the original principal as an Exchange Fee, making the new principal amount $291,500, and the Note shall carry an interest rate of 8% per annum. The amount of the exchange fee was recognized as a finance cost.
     
  2. The Note carries a Conversion clause that allows the Holder to have a cashless conversion into shares of Common Stock for all or part of the principal, at a price equal to the average market price for 20 days prior to the conversion.
     
  3. In conjunction with the conversion provision, the Company agreed to an Irrevocable Letter of Instructions to Transfer Agent, along with a Secretary’s Certificate and Board Resolution, which allows a Share Reserve equal to three times the number of shares of Common Stock divided by outstanding debt by the defined conversion price, but not less than 18,000,000 shares.
     
  4. In addition, the Company executed a Share Issuance Resolution Authorizing the Issuance of New Shares of Common Stock. This document, in effect, allows the Holder to provide, at their discretion, a Conversion Notice directly to the Transfer Agent to receive unrestricted shares under the terms of this Exchange Agreement.
     
  5. Further to this Exchange Agreement, the Company executed an Authorization to Initiate ACH Debit Entries that allowed the Holder to receive a daily payment of $312.50 ($7,500 per month). The Company can cancel such authorization with five days’ written notice.

 

The company determined that since the conversion floor had no limit to the conversion price, that the company could no longer determine if it had enough authorized shares to fulfil the conversion obligation. As such, the Company determined that the conversion feature created a derivative at the date of the modification

 

During the period ended April 2, 2017, the Company paid $7,517 of the principal balance.  In addition, the Holder converted $48,914 of debt into 15,660,611 shares of Common Stock based on instructions the Holder sent to the transfer agent.  However, the parties disagree as to the conversion price set in the note agreement due to execution by the parties of different versions of the document, and the Company believes that the balance converted was in excess of at least $100,000 more than that claimed by the holder.   The amount reflected herein due the Holder as April 2, 2017 was $32,928, but the company believes that amount is in dispute and not due. Accordingly, the company has filed a lawsuit to protect its rights, which is described in this report. 

 

On March 23, 2017, St. George served an arbitration demand and summons claiming that the Company had breached its obligations under the convertible note by preventing St. George from converting the remaining balance of the note to common stock. The parties disagree as to the conversion price set in the note agreement due to execution by the parties of different versions of the document.

 

On May 3, 2017, the Company counter-sued for full damages for breaching the contract, claiming mistakes, rescission, breach of the covenant of good faith and fair dealing and unjust enrichment.

 

  F- 12  
   

 

NOTE 9 – BUSINESS LOAN AND SECURITY AGREEMENT

 

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

 

The loan requires a loan fee of 0.5% of the outstanding balance as of each disbursement date. At April 2, 2017 and January 1, 2017, $4,741 and $136,629 was outstanding and is included in accrued expenses.

 

NOTE 10 - DERIVATIVE LIABILITY

 

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

 

The derivative liabilities were valued using a probability weighted average Black-Scholes-Merton pricing model with the following assumptions:

 

    January 1, 2017     April 2, 2017  
Exercise Price   $ 0 .07.05-0.01     $ 0 .07.05-0.01  
Risk-free interest rate     0.57 %     0.57  
Expected volatility     216 %     216 %
Expected life (in years)     1       1 %
Expected dividend yield     0       0  
                 
Fair Value:   $ 357,411   $ 222,436  

 

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the conversion feature of the notes was based on the remaining term of the notes, or an estimate of until such notes would be converted. The expected dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future.

 

During the period ended April 2, 2017, the Company converted $172,847 of convertible notes payable resulting in a gain on the extinguishment of derivative liabilities of $185,604. In addition, the Company recognized a cost of $50,629 during the period ended April 2, 2017 relating to the change in the fair value of the derivative liabilities.

 

  F- 13  
   

 

NOTE 11 – COMMON STOCK

 

Issuance of Common Stock

 

During the thirteen weeks ended April 2, 2017, the Company granted and issued to officers and employees 10,170,000 shares of restricted common stock with a fair value of $28,470, and a non-employee 500,000 shares with a fair value of $1,400 based on the fair value of the shares on the date of grant.

 

During the thirteen weeks ended April 2, 2017, the Company issued 1,500,000 shares of common stock in settlement of an accounts payment of $72,000. The fair value of the shares issued was $180,000 based on the fair value of the shares on the date of grant resulting in an additional cost to the Company of $108,000.

 

During the thirteen weeks ended April 2, 2017, the Company received $25,000 from the sales of 277,777 shares of stock. Such shares have not yet been issued.

 

During the thirteen weeks ended April 2, 2017, the Company issued total of 54,118,046 shares of its common stock for conversion of convertible notes in the amount of $272,847.

 

Employee Stock Options

 

The following table summarizes the changes in the options outstanding at April 2, 2017, and the related prices for the shares of the Company’s common stock issued to employees of the Company under a non-qualified employee stock option plan.

 

          Weighted  
          Average  
    Stock     Exercise  
    Options     Price  
Outstanding, January 1, 2017     115,000     $ 4.50  
Granted     -       -  
Exercised     -       -  
Outstanding, April 2, 2017     115,000     $ 4.50  
Exercisable, April 2, 2017     115,000     $ 4.50  

 

As of April 2, 2017, the stock options had no intrinsic value.

 

There were no options granted during the fiscal quarter ended April 2, 2017, and there was no stock-based compensation expense in connection with options granted to employees recognized in the consolidated statement of operations for the thirteen weeks ended April 2, 2017.

 

  F- 14  
   

 

NOTE 11 – COMMON STOCK (CONTINUED)

 

Warrants

 

The following table summarizes the changes in the warrants outstanding at April 2, 2017, and the related prices.

 

A summary of the Company’s warrants as of April 2, 2017 is presented below:

 

          Weighted  
          Average  
          Exercise  
    Warrants     Price  
Outstanding, January 1, 2017     606,500     $ 0.13  
Granted     5,150,000       0.15  
Exercised     -       -  
Outstanding, April 2, 2017     5,756,500     $ 0.15  
Exercisable, April 2, 2017     5,756,500     $ 0.15  

 

                  Weighted              
            Weighted     Average           Weighted  
Range of           Average     Remaining           Average  
Exercise     Number     Exercise     Contractual     Number     Exercise  
Prices     Outstanding     Price     Life     Exercisable     Price  
  $0.01 ~ $0.15       5,756,500     $ 0.15       4.20       5,756,000     $ 0.15  
                                             
          5,756,500               4.20       5,756,000          

 

On May 17, 2016, GIGL entered into a Strategic Alliance Agreement with Kiddo, Inc., a Florida corporation (“consultant”) whereby consultant will provide marketing and branding services as well as introductions to potential strategic partners and investors.

 

As consideration for consultant’s services pursuant to the Strategic Alliance Agreement, GIGL agreed to issue to consultant a warrant to purchase up to 4,400,000 shares of GIGL’s common stock at an exercise price of $0.075 per share, which warrant vests in increments based upon the achievement of certain milestones. As of September 25, 2016, 440,000 of these warrants with a fair value of $31,000 were deemed have been achieved and are included in the table of outstanding warrants above. At April 2, 2017, the achievement of the corresponding milestones for the remaining warrants to acquire 3,960,000 has been determined to be remote or undeterminable due to the early stages of the agreement, as such, the warrants have not been included as outstanding in the table above.

 

During the period ended April 2, 2017, the Company entered into agreements to issue warrants to acquire 5,150,000 shares of common stock for celebrities services to promote the Company’s business. The warrants were fully vested upon issuance, expire 5 years from the date of issuance, and 5,000,000 of the warrants are exercisable at $.10 per share and 150,000 of the warrants are exercisable at $.20 per share. The total fair value of these options at grant date was $531,000 using the Black-Scholes Option Pricing model with the following assumptions: life of 5 years; risk free interest rate of 1.73%; volatility of 350% and dividend yield of 0%.

.

  F- 15  
   

 

NOTE 12- LEASES

 

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

 

Minimum base rent for the Company’s operating leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over the lease term. The initial rent term includes the build-out, or rent holiday period, for the Company’s leases, where no rent payments are typically due under the terms of the lease. Deferred rent liabilities are recorded to the extent it exceeds minimum base rent per the lease agreement. Rent expense for the Company’s restaurant operating leases was $100,773 and $148,500 for the thirteen weeks ended April 2, 2017 and March 27, 2016, respectively.

 

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

 

On August 12, 2016, the Company entered into a third amendment on its lease at The Glendale Galleria. The amendment covered several areas, including adjustment to percentage rent payable, reduced the minimum rent payable and payment and principal of the Promissory Note payable to GGP which resulted in an aggregate gain of $455,287 which has been deferred, and will amortized on the straight-line basis over the remaining life of the lease as an adjustment to rent expense. During the year ended January 1, 2017, $26,172 of the deferred gain was amortized and offset to rent expense, resulting in a remaining deferred gain balance of $429,115 as of January 1, 2017. During the period ended April 2, 2017, $15,699 of the deferred gain was amortized and offset to rent expense, resulting in a remaining deferred gain balance of $413,416 as of April 2, 2017.

 

The balance of the incentive from lessor as of April 2, 2017 and January 1, 2017, were $719,565 and $740,428, and included deferred rent of $121,988 and $117,056, respectively. As of April 2, 2017, $91,071 of the incentive from lessor was current and $628,494 was long term. Amortization of the incentive from lessor was $20,863 and $28,175 for the thirteen weeks ended April 2, 2017 and March 27, 2016, respectively.

 

  F- 16  
   

 

NOTE 13 – COMMITMENTS AND CONTINGENCIES

 

Litigation

 

On March 23, 2017, St. George Investments, LLC ("St. George") served an arbitration demand and summons claiming that the Company had breached its obligations under a convertible note by preventing St. George from converting the remaining balance of the note to common stock. The parties disagree as to the conversion price set in the note agreement due to execution by the parties of different versions of the document. St. George has claimed for additional damages. We believe these claims lack merit and the Company has retained counsel to vigorously defend this action. Effective May 3, 2017, the Company has counter-sued for full damages for breaching the contract, claiming mistakes, rescission, breach of the covenant of good faith and fair dealing and unjust enrichment.

 

NOTE 14 – SUBSEQUENT EVENTS

 

On May 2, 2017, the Company issued to a consultant 300,000 unrestricted shares of common stock at fair value of $24,000 for services.

 

On May 15, 2017, the Company issued 100,000 restricted shares of common stock at a fair value of $8,000 for services.

 

  F- 17  
   

 

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

 

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

 

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

 

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

 

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

 

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

 

3  

 

 

Overview

 

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

 

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

 

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

 

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

 

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

 

4  

 

 

RESULTS OF OPERATIONS

 

Results of Operations for the Thirteen Weeks Ended April 2, 2017 and March 27, 2016:

 

COSTS AND OPERATING EXPENSES

 

    For Thirteen     For Thirteen        
    Weeks Ended     Weeks Ended     Increase (Decrease)  
    April 2, 2017     March 27, 2016     $     %  
                         
Revenue:   $ 661,703     $ 878,932     $ (217,229 )   $ -24.7 %
Net sales                                
                                 
Costs and operating expenses:                                
Cost of operations     503,791       770,518       (266,727 )     -34.6 %
General and administrative expenses     935,734       324,192       611,542       188.6 %
Depreciation and amortization     64,069       89,141       (25,072 )     -28.1 %
Total operating expenses     1,503,594       1,183,851       319,743       27.0 %
                                 
Loss from Operations     (841,891 )     (304,919 )     (536,972 )     176.1 %
Other expenses:                                
Finance and interest expenses     (49,270 )     (88,953 )     39,683       -44.6 %
Change in fair value of derivatives     (50,629 )     -       (50,629 )     *  
Gain on extinguishment of derivatives     185,604       -       185,604       *  
Total other expenses     (756,186 )     (393,872 )     174,658       -44.3 %
                                 
Provision for income taxes     -       (800 )     800       -100.0 %
Net Loss   $ (756,186 )     (394,672 )   $ (577,453 )     146.3 %

 

Notes to Costs and Operating Expenses Table:

 

Net sales. Net sales for the thirteen weeks ended April 2, 2017 and March 27, 2016 were $661,703 and $878,932 respectively. The decrease of $217,229 (-24.7%) was mostly attributable to the closing of the Century City store at the end of the 2 nd quarter, 2016.

 

Cost of operations. Costs of operations of $503,791, and $770,518 for the thirteen weeks ended April 2, 2017 and March 27, 2016, respectively, reflecting a decline of $266,727 (-34.6%). The reduced amount was essentially the result of the closing of the Century City store.

 

General and administrative expenses. General and administrative expenses for the thirteen weeks ended April 2, 2017 and March 27, 2016 were $935,734 and $324,192, respectively. This significant increase of $611,542 (188.6%) was mainly due to the fair value of $531,000 for warrants granted for services and a $108,000 charge relating to settlement of outstanding payable.

 

Depreciation and amortization. The depreciation and amortization was $64,069 compared to the $89,141 for the thirteen weeks ended April 2, 2017 and March 27, 2016, respectively. This reduction of $25,072 or -28.1% is primarily due to the closing and sell off the fixed assets related to the closing of the Century City store at the end of the second quarter of 2016.

 

Finance and interest expense . The total finance and interest expenses of $49,270 for the thirteen weeks ended April 2, 2017 decreased by $39,683, from the $88,953 for the thirteen weeks ended March 27, 2016, and was a result of the partial conversion of the Notes with St. George Investment and the Iconic.

 

Net Loss. The overall net losses of $756,186 and $394,672 for the thirteen weeks ended April 2, 2017 and March 27, 2016, respectively, reflects an increase in the net loss of $577,453 (-146.3%). This increase in the operating loss is mostly attributable to the fair value of $531,000 for warrants granted for services and a $108,000 charge relating to settlement of outstanding payable and charges for the fair value of the derivatives related to certain notes payable ($50,629).

 

5  

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of April 2, 2017, the Company has $8,843 in cash and cash equivalents, $25,325 in inventory, and $7,803 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 April 2, 2017 and March 27, 2016:

 

    For Thirteen Weeks     For Three Months  
    Ended     Ended  
    April 2, 2017     March 27, 2016  
Net cash used in operating activities   $ (174,180 )   $ (256,961 )
Net cash provided by financing activities     38,503       -  
Net increase (decrease) in Cash     (135,677 )     (256,961 )
Cash, beginning of period     144,520       334,191  
Cash, end of period   $ 8,843     $ 77,230  

 

Operating activities

 

Net cash used in operating activities was $174,180 for the thirteen weeks ended April 2, 2017 compared to $256,961 used in operating activities for the thirteen weeks ended March 27, 2016. This improvement of $82,781 mostly resulted from reduced cost from the closing of Century City store.

 

Investing activities

 

There were no investing activities for both periods ended April 2, 2017 and March 27, 2016.

 

Financing activities

 

Net cash provided was $38,502 and zero for the thirteen weeks ended April 2, 2017 and March 27, 2016, respectively. The improvement was cash receipts from the related party and future common stock issuable.

 

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.

 

6  

 

 

Going Concern and Liquidity

 

The accompanying 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 thirteen weeks ended April 2, 2017, the Company incurred a net loss of $756,186, used cash in operations of $174,180 and had a stockholders’ deficit of $1,810,494 as of that date. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The Company’s independent registered public accounting firm in its report on the January 1, 2017 financial statements has raised substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

At April 2, 2017, the Company had cash on hand in the amount of $8,843. Management estimates that the current funds on hand would be sufficient to continue operations through May 2017. Management is currently seeking additional funds through sponsorships and promotions to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case or equity financing.

 

Notes Payable

 

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

 

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

 

On August 12, 2016, the Company entered into a third amendment on its lease at The Glendale Galleria. The amendment covered several areas, including adjustment to percentage rent payable, reduced the minimum rent payable, along with the payment and principal of Promissory Note. The Promissory Note was adjusted to a balance due of $763,261.57 from $683,316, with zero percent interest, payable in equal monthly instalments of $5,300 through maturity of Note on May 31, 2028. The Company imputed interest using a discount rate of 10% to determine a fair value of the note of $443,521, resulting in a valuation discount of $319,740. As of April 2, 2017, and December 31, 2016, the balance of note payable was $726,869, and unamortized note discount was $294,153, with a net balance due of $432,716.

 

7  

 

 

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

 

Convertible Notes Payable

 

Iconic Holdings, LLC - On December 21, 2015, Giggle N Hugs, Inc., a Nevada corporation (the “Registrant”), issued an 8% unsecured convertible promissory note in favor of Iconic Holdings, LLC, in the principal sum of $161,250. The note may be converted, in whole or in part, at any time at the option of the holder into the Registrant’s common stock at a price per share equal to 65% of the lowest volume weighted average price of the Company’s common stock during the 10 consecutive trading days prior to the date on which Holder elects to convert all or part of the note. The conversion floor price was set at $0.08.

 

During the period ended April 2, 2017, the Company converted the remaining balance of the principal into 38,457,435 shares of common stock at average conversion price $0.00259 per share. Upon extinguishment of note, the derivative was eliminated (see Note 7).

 

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

 

8  

 

 

Promissory Note

 

On December 18, 2015, the Company issued a six month unsecured promissory note in the principal sum of $265,000 in favor of St. George Investments, LLC, pursuant to the terms of a securities purchase agreement of the same date.

 

The Note went into default when the Company failed to make payment on the due date. Consequently, on July 8, 2016, the Company entered into an Exchange Agreement with St. George Investments, LLC, to replace the original Promissory Note with a new Convertible Promissory Note (“Note”) carrying the following terms and conditions:

 

  1. The new Note will add 10% ($26,500) to the original principal as an Exchange Fee, making the new principal amount $291,500, and the Note shall carry an interest rate of 8% per annum. The amount of the exchange fee was recognized as a finance cost.
     
  2. The Note carries a Conversion clause that allows the Holder to have a cashless conversion into shares of Common Stock for all or part of the principal, at a price equal to the average market price for 20 days prior to the conversion.
     
  3. In conjunction with the conversion provision, the Company agreed to an Irrevocable Letter of Instructions to Transfer Agent, along with a Secretary’s Certificate and Board Resolution, which allows a Share Reserve equal to three times the number of shares of Common Stock divided by outstanding debt by the defined conversion price, but not less than 18,000,000 shares.
     
  4. In addition, the Company executed a Share Issuance Resolution Authorizing the Issuance of New Shares of Common Stock. This document, in effect, allows the Holder to provide, at their discretion, a Conversion Notice directly to the Transfer Agent to receive unrestricted shares under the terms of this Exchange Agreement.
     
  5. Further to this Exchange Agreement, the Company executed an Authorization to Initiate ACH Debit Entries that allowed the Holder to receive a daily payment of $312.50 ($7,500 per month). The Company can cancel such authorization with five days’ written notice.

 

During the period ended April 2, 2017, the Company paid $7,517 of the principal balance.  In addition, the Holder converted $48,914 of debt into 15,660,611 shares of Common Stock based on instructions the Holder sent to the transfer agent.  However, the parties disagree as to the conversion price set in the note agreement due to execution by the parties of different versions of the document, and the Company believes that the balance converted was in excess of at least $100,000 more than that claimed by the holder. The amount reflected herein due the Holder as April 2, 2017 was $32,928, but the company believes that amount is in dispute and not due. Accordingly, the company has filed a lawsuit to protect its rights, which is described in this report. 

 

On May 3, 2017, the Company counter-sued for full damages for breaching the contract, claiming mistakes, rescission, breach of the covenant of good faith and fair dealing and unjust enrichment.

 

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Recent Accounting Pronouncements

 

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

 

Critical Accounting Policies

 

Use of Estimates

 

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

 

Long-Lived Assets

 

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

 

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

 

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Stock-Based Compensation

 

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

 

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

 

Off-Balance Sheet Arrangements

 

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

 

Without sufficient cash flow from operations we will require additional cash resources, including the sale of equity or debt securities, to meet our planned capital expenditures and working capital requirements 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.

 

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

 

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

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affected, the Company’s internal control over the 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.

 

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PART II—OTHER INFORMATION

 

ITEM 1. Legal Proceedings.

 

On March 23, 2017, St. George Investments, LLC ("St. George") served an arbitration demand and summons claiming that the Company had breached its obligations under a convertible note by preventing St. George from converting the remaining balance of the note to common stock. The parties disagree as to the conversion price set in the note agreement due to execution by the parties of different versions of the document. St. George has claimed for additional damages. On May 3, 2017, the Company counter-sued for full damages for breaching the contract, claiming mistakes, rescission, breach of the covenant of good faith and fair dealing and unjust enrichment.

 

ITEM 1A. Risk Factors

 

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

 

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

 

During the period covered by the report, the Company issued the following unregistered securities:

 

10,170,000 shares of restricted common stock to employees;

500,000 shares of restricted common stock to a consultant;

 

The Company issued these securities reliance on the exemption from registration afforded by Section 4(a)(2) of Securities on the basis the transactions did not involve public offerings.

 

Issuer Purchases of Equity Securities

 

None

 

ITEM 3. Defaults Upon Senior Securities.

 

On March 23, 2017, St. George served an arbitration demand and summons claiming that the Company had breached its obligations under a convertible note in favor of St. George. The Company believes it has satisfied the obligation under the note; however, St. George is asserting a default and claiming additional damages. The parties disagree as to the conversion price set in the note agreement due to execution by the parties of different versions of the document.

 

On May 3, 2017, the Company counter-sued for full damages for breaching the contract, claiming mistakes, rescission, breach of the covenant of good faith and fair dealing and unjust enrichment.

 

ITEM 4. Mine Safety Disclosures.

 

Not applicable.

 

ITEM 5. Other Information.

 

None.

 

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ITEM 6. Exhibits.

 

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

 

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

 

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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 May 22, 2017 By: /s/ Joey Parsi
    Joey Parsi
    Chief Executive Officer
    (Principal Executive Officer and duly authorized signatory)

 

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