NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Twenty-six Weeks ended June 26, 2016 and June 28, 2015
(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 2016 and 2015 consists of a year ending December 29, 2016 and December 27, 2015.
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 December 27, 2015 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 December 27, 2015 included herein was derived from the audited consolidated financial
statements as of that date, but does not included all disclosures, including notes, required by GAAP.
Results
of operations for the interim periods may not be indicative of annual results.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going
concern
The
accompanying 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 thirty-nine weeks ended September 25, 2016, the Company incurred a net loss of $1,218,841,
used cash in operations of $578,502, and had a stockholders’ deficit of $1,975,772 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 December 27, 2015 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 $100,816 as of September 25, 2016. Management estimates that the current funds on hand
will be sufficient to continue operations through December 2016. 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 stock holders, in case or equity financing.
Principles
of consolidation
At
September 25, 2016, the 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, GNH Topanga, Inc. for restaurant operations in Westfield
Topanga Shopping Center in Woodland Hills, California, and Glendale Giggles N Hugs, Inc. for restaurant operations in Glendale
Galleria in Glendale, California. Intercompany balances and transactions have been eliminated. Giggles N Hugs, Inc., GNH, Inc.,
GNH CC, Inc., GNH Topanga, Inc., and Glendale Giggles N Hugs, Inc. will be collectively referred herein to as the “Company”.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates
and assumptions used by management affected impairment analysis for inventory, and fixed assets, amounts of potential liabilities
and valuation of issuance of equity securities issued for services. Actual results could differ from those estimates.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair
value of financial instruments
The
Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial
instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to
measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value
measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37
establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three
(3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical
assets or liabilities and the lowest priority to unobservable inputs.
The
three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
Level
1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level
2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
Level
3: Pricing inputs that are generally observable inputs and not corroborated by market data.
The
carrying amount of the Company’s financial assets and liabilities, such as cash and cash equivalents, inventory, prepaid
expenses, and accounts payable and accrued expenses approximate their fair value due to their short term nature. The carrying
values of financing obligations approximate their fair values due to the fact that the interest rates on these obligations are
based on prevailing market interest rates.
The
carrying amount of the company’s derivative liability of $367,904 as of September 25, 2016 was based on level 2 measurements.
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.
Income
taxes
The
Company accounts for income taxes under the provisions of ASC 740 “Accounting for Income Taxes,” which requires a
company to first determine whether it is more likely than not (which is defined as a likelihood of more than fifty percent) that
a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will
examine the position and have full knowledge of all relevant information. A tax position that meets this more likely than not
threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized
upon effective settlement with a taxing authority.
Deferred
income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used for tax purposes at each year end, based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation
allowance is recognized when, based on the weight of all available evidence, it is considered more likely than not that all, or
some portion, of the deferred tax assets will not be realized. The Company evaluates its valuation allowance requirements based
on projected future operations. When circumstances change and cause a change in management’s judgment about the recoverability
of deferred tax assets, the impact of the change on the valuation is reflected in current income. Income tax expense is the sum
of current income tax plus the change in deferred tax assets and liabilities.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property
and equipment
The
Company records all property and equipment at cost less accumulated depreciation. Improvements are capitalized while repairs and
maintenance costs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful
life of the assets or the lease term, whichever is shorter. Leasehold improvements include the cost of the Company’s internal
development and construction department. Depreciation periods are as follows:
Leasehold
improvements
|
|
10
years
|
Restaurant
fixtures and equipment
|
|
10
years
|
Computer
software and equipment
|
|
3
to 5 years
|
Management
assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows 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. For the year ended December 27, 2015, the
Company recorded a loss on impairment of $353,414 relating to its Glendale store location. For the period ended September 25,
2016, there are no further indications of impairment based on management’s assessment of these assets.
Leases
The
Company currently leases its restaurant locations. The Company evaluates the lease to determine its appropriate classification
as an operating or capital lease for financial reporting purposes. Effective June 26, 2016, the Company terminated its lease for
its Century City location (See Note 13) and has two remaining leases up as of September 25, 2016, which were classified as operating
leases.
Minimum
base rent for the Company’s operating leases, which generally have escalating rentals over the term of the lease, is recorded
on a straight-line basis over the lease term. The initial rent term includes the build-out, or rent holiday period, for the Company’s
leases, where no rent payments are typically due under the terms of the lease. Deferred rent expense, which is based on a percentage
of revenue, is also recorded to the extent it exceeds minimum base rent per the lease agreement.
The
Company disburses cash for leasehold improvements and furniture, fixtures and equipment to build out and equip its leased premises.
The Company also expends cash for structural additions that it makes to leased premises of which $700,000, $506,271, and $475,000
were initially reimbursed to Century City, 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.
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.
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 (FASB) 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 stock option and warrant 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 stock options or warrants,
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 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.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loss
per common share
Net
loss per share is provided in accordance with ASC Subtopic 260-10. We present basic loss per share (“EPS”) and diluted
EPS on the face of statements of operations. Basic EPS is computed by dividing reported losses by the weighted average shares
outstanding. Except where the result would be anti-dilutive to income from continuing operations, diluted earnings per share has
been computed assuming the conversion of the convertible long-term debt and the elimination of the related interest expense, and
the exercise of stock 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 September 25, 2016 and September 27, 2015, 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.
Revenue
recognition
Our
revenues consist of sales from our restaurant operations and sales of memberships entitling members unlimited access to our play
areas for the duration of their membership. As a general principle, revenue is recognized when the following criteria are met:
(i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and services have been rendered, (iii) the price
to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.
With
respect to memberships, access to our play area extends throughout the term of membership. The vast majority of memberships sold
are for one month terms. Revenue is recognized on a straight line basis over the membership period. The company receives payment
from its customers at the start of the subscription period and the company records deferred revenue for the unearned portion of
the subscription period.
Revenues
from restaurant sales are recognized when payment is tendered at the point of sale. Revenues are presented net of sales taxes.
The sales tax obligation is included in other accrued expenses until the taxes are remitted to the appropriate taxing authorities.
We
recognize a liability upon the sale of our gift cards and recognize revenue when these gift cards are redeemed in our restaurants.
As of September 25, 2016 and December 27, 2015, the amount of gift cards sales was $0 and $4,448, respectively, and were
recorded as deferred revenue.
For
party rental agreements, we rely upon a signed contract between us and the customer as the persuasive evidence of a sales arrangement.
Party rental deposits are recorded as deferred revenue upon receipt and recognized as revenue when the service has been rendered.
Additionally,
revenues are recognized net of any discounts, returns, allowances and sales incentives, including coupon redemptions and complimentary
meals.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Standards
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts
with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition
guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09
will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract.
The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to
obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early
adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities
will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.
In
February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record
a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months.
ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted.
A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered
into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients
available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and
disclosures. The Company anticipates that this will add significant liabilities to the balance sheet.
In
March 2016, the FASB issued the ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting. The amendments in this ASU require, among other things, that all income tax effects of awards be recognized
in the income statement when the awards vest or are settled. The ASU also allows for an employer to repurchase more of an employee's
shares than it can today for tax withholding purposes without triggering liability accounting and allows for a policy election
to account for forfeitures as they occur. The amendments in this ASU are effective for fiscal years beginning after December 15,
2016, including interim periods within those fiscal years. Early adoption is permitted for any entity in any interim or annual
period. The Company is currently evaluating the expected impact that the standard could have on its financial statements and related
disclosures.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future consolidated financial statements.
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following at:
|
|
September
25, 2016
|
|
|
December
27, 2015
|
|
Leasehold improvements
|
|
$
|
1,889,027
|
|
|
$
|
2,847,565
|
|
Fixtures and equipment
|
|
|
60,310
|
|
|
|
85,267
|
|
Computer software
and equipment
|
|
|
264,890
|
|
|
|
283,001
|
|
Property and equipment, total
|
|
|
2,214,227
|
|
|
|
3,215,833
|
|
Less: accumulated
depreciation
|
|
|
(1,156,031
|
)
|
|
|
(1,485,997
|
)
|
Property
and equipment, net
|
|
$
|
1,058,196
|
|
|
$
|
1,729,836
|
|
Effective
June 30, 2016, the Company entered into a termination agreement with Westfield Mall Associates to close the Century City Store
resulting from a major reconstruction of the entire Mall. As such, the leasehold improvements with a cost basis of $958,538 and
accumulated amortization of $533,377 were written off and included in the gain on the lease termination (see Note 13). In conjunction
with the closing of the Century City store, the Company also sold for $10,500, all of its furniture, fixtures and office equipment
with a cost basis, net of accumulated depreciation, of $4,529 resulting in a gain of $5,971
Depreciation
and amortization expenses for the thirteen weeks and thirty-nine weeks ended September 25, 2016 were $64,069 and $241,950, respectively,
and for the thirteen weeks and thirty-nine weeks ended September 27, 2015 were $91,106 and $275,477, respectively. Repair and
maintenance expenses for the thirteen weeks and thirty-nine weeks ended September 25, 2016 were $18,447 and $70,273, respectively,
and for thirteen weeks and thirty-nine weeks ended September 27, 2015 were $34,073 and $81,737, respectively.
NOTE
5 – INCENTIVE FROM LESSOR
The
Company had previously received $700,000 for Century City, $506,271 for Topanga and $475,000 for Glendale from the Company’s
landlords as construction contributions pursuant to agreed-upon terms in the lease agreements.
Landlord
construction contributions usually take the form of up-front cash. Depending on the specifics of the leased space and the lease
agreement, amounts paid for structural components are recorded during the construction period as leasehold improvements or the
landlord construction contributions are recorded as an incentive from lessor. The incentive from lessor is amortized over the
life of the lease which is 10 years and netted against occupancy cost.
Effective
June 26, 2016, the Company entered into a lease termination agreement with the Westfield Mall Associates that released the Company
from any further obligations. As such, our remaining unamortized tenant improvement allowance of $225,739, and deferred rent of
$63,529 were written off an included in the gain on lease termination.
The
balance of the incentive from lessor as of September 25, 2016 and December 27, 2015, were $759,661 and $1,198,098, and included
deferred rent of $110,493 and $218,874, respectively. As of September 25, 2016, $83,834 of the incentive from lessor was current
and $675,827 was long term. Amortization of the incentive from lessor was $18,494 and $80,147 for the thirteen weeks and thirty-nine
weeks ended September 25, 2016 and $27,740 and $81,966 for the thirteen weeks and thirty-nine weeks ended September 27, 2015,
respectively.
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. Thereafter, principal and interest will be paid in equal monthly installments of $12,707, within increasing interest
rates. As of June 26, 2016 and December 27, 2015, the principal balance due under the note was $683,316.
Due
to the two-year interest free period, the Company recalculated the fair value of the note taking into account the payment stream
and the incremental changes in the interest rate and determined the fair value of the new note on the date of modification to
be $619,377, net of a discount of $63,939. The Company determined that the discount should be amortized over the two year period
where no interest was due or payable. As such, the Company amortized $15,985 of the discount during the twenty-six weeks ended
June 26, 2016. The unamortized discount at June 26, 2016 was $19,109, and the net balance due was $664,207.
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 $763,262 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 $433,521.
The
exchange of the notes 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 will be deferred, and amortized on the straight line basis 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 September 25, 2016, the Company was past
due in its rental obligation and the Note is in default. As such, the entire principal and accrued interest became due and payable
and was classified as current liability as of September 25, 2016. Landlord shall have the unconditional right to terminate the
Lease by giving Tenant at least 120 days’ advance written notice of Landlord’s election to terminate the Lease, under
lease amendment.
NOTE
7 – CONVERTIBLE NOTE PAYABLE
A
summary of convertible debentures payable as of September 25, 2016 and December 27, 2015 is as follows:
|
|
September
25, 2016
|
|
|
December
27, 2015
|
|
Iconic Holdings, LLC
|
|
$
|
113,750
|
|
|
$
|
161,250
|
|
J&N Invest LLC
|
|
|
50,000
|
|
|
|
50,000
|
|
Accrued interest
|
|
|
14,182
|
|
|
|
-
|
|
Total Convertible Notes
|
|
|
177,932
|
|
|
|
211,250
|
|
Less: Discount
|
|
|
(26,446
|
)
|
|
|
(139,471
|
)
|
Net Covertible Notes
|
|
$
|
151,487
|
|
|
$
|
71,779
|
|
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 carries a guaranteed 10% interest rate, matures on December 21, 2016 and is 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. The note also contains a make-good provision requiring the Registrant to make a payment to the holder
in the event the Registrant’s trading price at the time the conversion notice is submitted is below $0.11. Any shares issued
upon conversion of the note shall have piggyback registration rights and failure to do so could result in damages up to 30% of
the principal sum of the note, but not less than $20,000. The note contains various default provisions including a requirement
for the Company to maintain a prescribed closing bid price for a certain number of days, and a continued listing in a principal
market.
The
Company determined that the ability of the holder to convert the note to common shares at 65% of the market created a beneficial
conversion feature upon issuance. The Company also considered if the conversion feature required liability accounting under current
accounting guidelines but determined that the conversion of the shares were indexed to the Company’s stock, and that the
floor of $0.08 would not allow the conversion to exceed the Company’s authorized share limit. Based on the current market
price on the date of issuance of the note of $0.13 and the discount of 65%, the Company calculated an initial beneficial conversion
feature of $86,827. The total note discount was $109,327 including the $22,500 discussed above. Such amount is being recognized
as a note discount and amortized over the life of the note. The balance of the unamortized note discount was $107,691 at December
27, 2015.The Company amortized $53,914 of the discount during the thirty-nine weeks ended September 25, 2016. The unamortized
discount at September 25, 2016 was $53,777.
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 with a fair
value of $79,376 at the date of the modification, and the value of such conversion feature should be considered a cost of debt
extinguishment since it resulted in more than a 10% change in the fair value of the note.
During
the period, the Company converted $47,500 of principal into 2,555,906 shares of common stock.
NOTE
7 – CONVERTIBLE NOTE PAYABLE (CONTINUED)
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. 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 will be amortized
over the life of the note. The balance of the unamortized note discount was $32,181 at December 27, 2015 The Company amortized
$24,787 of the discount during the thirty-nine weeks ended September 25, 2016. The unamortized discount at June 26, 2016 was $7,327.
NOTE
8 – PROMISSORY NOTE
On
December 18, 2015, the Company issued an 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 was subject to an original issue discount
of $60,000 and a $5,000 fee to cover certain expenses of lender. The note matures in six months and carries no interest unless
there is an event of default. The Company accounted for the discount as a contra account to the note to be amortized to interest
expense over the life of the note. The balance of the note outstanding as of December 27, 2015 was $265,000, net of an unamortized
discount of $60,306.
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 with a fair value of $98,544 at the date of the modification, and the value of such conversion feature should
be considered a finance cost.
During
the period ended September 25, 2016, the Holder converted $60,000 of debt into 2,223,330 shares of Common Stock,
at a conversion price $0.04043 per share. In addition, the Company paid $8,875 of the principal balance. The balance outstanding
as of September 25, 2016 was $222,625. As of September 25, 2016, the note was past due and in default.
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 September 30, $27,789 of the advance
for the month of September 2016 was still outstanding and is included in accrued expenses. There was no amount due As of December
27, 2015.
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.
As
of September 25, 2016 and upon issuance, the derivative liabilities were valued using a probability weighted average Black-Scholes-Merton
pricing model with the following assumptions:
Warrants:
|
|
Upon
Issuance
|
|
|
September
25, 2016
|
|
Exercise Price
|
|
$
|
0.07
|
|
|
|
$
0.07 .05-0.01
|
|
Stock Price
|
|
|
$
0.05-0.02
|
|
|
|
$
|
|
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:
|
|
$
|
177,920
|
|
|
$
|
367,904
|
|
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.
NOTE
11 – COMMON STOCK
Issuance
of Common Stock
During
the thirty-nine weeks ended September 25, 2016, the Company issued 497,500 shares of common stock issued for professional services
rendered, with a fair value of $37,170 based on the trading price of the common shares on date of grant.
During
the thirty-nine weeks ended September 25, 2016, the Company issued 525,000 shares of common stock issued in settlement of an accounts
payable with a fair value of $31,500.
During
the thirty-nine weeks ended September 25, 2016, the Company issued 150,000 shares of stock previously reflected as common stock
payable.
During
the thirty-nine weeks ended September 25, 2016, the Company issued 4,779,236 shares of its common stock for conversion of convertible
notes in the amount of $107,497
NOTE
12 – STOCK OPTIONS AND WARRANTS
Employee
Stock Options
The
following table summarizes the changes in the options outstanding at September 25, 2016, 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.
A
summary of the Company’s stock options as of September 25, 2016 is presented below:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Stock
|
|
|
|
Exercise
|
|
|
|
|
|
Options
|
|
|
|
Price
|
|
Outstanding,
December 27, 2015
|
|
|
|
115,000
|
|
|
$
|
4.50
|
|
Granted
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding,
September 25, 2016
|
|
|
|
115,000
|
|
|
$
|
4.50
|
|
Exercisable,
September 26, 2016
|
|
|
|
115,000
|
|
|
$
|
4.50
|
|
As
of September 25, 2016, the stock options had no intrinsic value.
There
were no options granted during the fiscal year ended September 25, 2016, and there was no stock-based compensation expense in
connection with options granted to employees recognized in the consolidated statement of operations for the thirty-nine weeks
ended September 25, 2016.
NOTE
12 – STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants
The
following table summarizes the changes in the warrants outstanding at September 25, 2016, and the related prices.
A
summary of the Company’s warrants as of September 25, 2016 is presented below:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
|
Options
|
|
|
Price
|
|
Outstanding,
December 27, 2015
|
|
|
|
166,500
|
|
|
$
|
0.13
|
|
Granted
|
|
|
|
440,000
|
|
|
|
0.08
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding,
September 25, 2016
|
|
|
|
606,500
|
|
|
$
|
0.09
|
|
Exercisalbe,
September 25, 2016
|
|
|
|
606,500
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
Range
of
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Number
|
|
|
Exercise
|
|
|
Prices
|
|
|
|
Outstanding
|
|
|
|
Price
|
|
|
|
Life
|
|
|
|
Exercisable
|
|
|
|
Price
|
|
$
|
0.01
to 0.09
|
|
|
|
606,500
|
|
|
$
|
0.09
|
|
|
|
3.05
|
|
|
|
606,500
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606,500
|
|
|
|
|
|
|
|
3.05
|
|
|
|
606,500
|
|
|
|
|
|
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 September
25, 2016, 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.
NOTE
13 – COMMITMENTS AND CONTINGENCIES
Westfield
Century City
. On January 13, 2010, the Company entered into a 10-year lease agreement with Westfield Century City for
a lease for a restaurant operation. In October 2015, Westfield Group, the landlord of the Century City location, embarked on a
massive $700 million renovation of the mall. In March 2016 they approached the Company about recapturing its Century City space
due to this remodeling. Currently, approximately 90% of the mall is closed or being remodeled with the completion expected sometime
during 2017. 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 was terminated in June, 2016 and the landlord agreed
to a monetary reimbursement of $350,000 which was received by June 26, 2016. For accounting purposes, the Company has removed
all the leasehold improvements (net of accumulated amortization) and removed the deferred incentive due the lessor relating to
tenant improvements and the remaining deferred rent existing at the date of termination resulting in a gain of $214,111.
Westfield
Topanga
. During the year ended December 31, 2012, GNH Topanga entered into a Lease Agreement with Westfield Topanga Owner,
LP, a Delaware limited partnership, to lease approximately 5,900 square feet in the Westfield Topanga Shopping Center. The lease
includes land and building shells, provides a construction reimbursement allowance of up to $475,000, requires contingent rent
above the minimum base rent payments based on a percentage of sales ranging from 7% to 10% and require other expenses incidental
to the use of the property. The lease also has a renewal option, which GNH Topanga may exercise in the future. The Company’s
current lease provides early termination rights, permitting the Company and its landlord to mutually terminate the lease prior
to expiration if the Company does not achieve specified sales levels in certain years. The lease commenced on March 23, 2013 and
expires on April 30, 2022.
Glendale
Mall Associates
. On April 1, 2013, the Company entered into a Lease Agreement with GLENDALE II MALL ASSOCIATES, LLC, a
Delaware limited liability company, to lease approximately 6,000 square feet in the Glendale Galleria in the City of Glendale,
County of Los Angeles, and State of California. The lease includes land and building shells, provides a construction reimbursement
allowance of up to $475,000, requires contingent rent above the minimum base rent payments based on a percentage of sales ranging
from 4% to 7% and require other expenses incidental to the use of the property. The lease commenced on November 21, 2013 and expires
on October 31, 2023. As of September 25, 2016 and December 27, 2015, the Company was in default of certain of the payments due
under this lease.
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. The Promissory Note was adjusted to a balance due of $763,262 from $683,316, with zero percent interest,
payable in equal monthly instalments of $5,300 through maturity of Note on May 31, 2028, creating a gain on extinguishment of
the old note of $220,686. (see Note 6). The change in the payment terms of the lease caused a change in the previously calculated
deferred rent of $69,614. For reporting purposes, 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 and the adjustment to the deferred rent
in the aggregate amount of $290,300 had 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 period ended September 25, 2016, $10,472 of the deferred rent was amortized
and offset to rent expense, resulting in a remaining deferred gain balance of $279,828 which will be amortized over the remainder
of the lease.
Rent
expense for the Company’s restaurant operating leases was $98,405 and $95,937 for the thirteen weeks ended September 25,
2016 and September 27, 2015, respectively, and $293,694 and $287,809 for the thirty-nine weeks ended September 25, 2016 and September
27, 2015, respectively.
NOTE
13 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation
On
April 20, 2016, the Company entered into a stipulated judgment in favor of TKM in the amount of $40,000. Under the stipulated
judgment, the Company would only be compelled to pay $20,000 in four equal installments of $5,000, provided they meet the ascribed
timely payments as set forth in the stipulated judgment. The Company has recorded the entire $40,000 judgment since the Company
did not meet the agreed payment schedule.
NOTE
14 – SUBSEQUENT EVENTS
In
October 2016, the Company issued 1,275,000 shares of its common stock to Iconic Holdings LLC upon conversion of $3,825 of notes
payable based on the conversion terms of the notes.
In
October 2016, the Company issued 3,345,639 shares of its common stock to St. George Investments LLC upon conversion of $14,500
of notes payable based on the conversion terms of the notes.
In November 2016, the Company issued 2,614,000
shares of its common stock to Iconic Holdings LLC upon conversion of $7,843 of notes payable based on the conversion terms of
the notes.