NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Twenty Six Weeks ended July 1, 2018 and July 2, 2017
(Unaudited)
NOTE
1 – HISTORY AND ORGANIZATION
Giggles
N’ Hugs, Inc. (“GIGL Inc.” or the “Company”) was originally organized on September 17, 2004 under
the laws of the State of Nevada, as Teacher’s Pet, Inc. GIGL Inc. was organized to sell teaching supplies and learning tools.
On August 20, 2010, GIGL Inc. filed an amendment to its articles of incorporation to change its name to Giggles N’ Hugs,
Inc.
On
December 30, 2011, GIGL Inc. completed the acquisition of all the issued and outstanding shares of GNH, Inc. (“GNH”),
a Nevada corporation, pursuant to a Stock Exchange Agreement. For accounting purposes, the acquisition of GNH by GIGL Inc. has
been recorded as a reverse merger. Giggles N Hugs restaurant concept brings together high-end, organic food with the play elements
and entertainment for children. Giggles N Hugs offers an upscale, family-friendly atmosphere with a play area dedicated to children
ages 10 and younger with nightly entertainment, such as magic shows, concerts, puppet shows, as well as activities and games which
include face painting, dance parties, karaoke, and arts and crafts,
The
Company adopted a 52/53 week fiscal year ending on the Sunday closest to December 31
st
for financial reporting purposes.
Fiscal year 2018 and 2017 consists of a year ending December 30, 2018 and December 31, 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 December 31, 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 December 31, 2017 included herein was derived from the audited consolidated financial
statements as of that date, but does not included all disclosures, including notes, required by GAAP.
Results
of operations for the interim periods may not be indicative of annual results.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going
concern
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying
condensed consolidated financial statements, during the twenty-six weeks ended July 1, 2018, the Company incurred a net loss of
$502,192, used cash in operations of $560,566, and had a stockholders’ deficit of $1,773,284 as of that date. In addition,
the note payable to the Company’s landlord was in default. These factors raise substantial doubt about the Company’s
ability to continue as a going concern. 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 31, 2017 financial statements has raised substantial doubt about the Company’s
ability to continue as a going concern within one year from the date that the financial statements are issued. The financial statements
do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The
Company had cash on hand in the amount of $164,525 as of July 1, 2018. Management estimates that the current funds on hand will
be sufficient to continue operations through December 2018. Management is currently seeking additional funds, primarily through
the issuance of debt and equity securities for cash to operate our business. No assurance can be given that any future financing
will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company can obtain
additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial
dilution for our stock holders, in case or equity financing.
Principles
of consolidation
The
condensed consolidated financial statements include the accounts of Giggles N Hugs, Inc., GNH, Inc., GNH CC, Inc. for restaurant
operations in Westfield Mall in Century City, California (which was closed June 30, 2016 due to a complete remodel of the Mall),
GNH Topanga, Inc. for restaurant operations in Westfield Topanga Shopping Center in Woodland Hills, California, and Glendale Giggles
N Hugs, Inc. for restaurant operations in Glendale Galleria in Glendale, California. Intercompany balances and transactions have
been eliminated. Giggles N Hugs, Inc., GNH, Inc., GNH CC, Inc., GNH Topanga, Inc., and Glendale Giggles N Hugs, Inc. will be collectively
referred herein to as the “Company”.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates
and assumptions used by management including assumptions made in impairment analysis of fixed assets, accruals of potential liabilities,
valuation of derivative liabilities and equity securities issued for services and realization of deferred tax assets. Actual results
could differ from those estimates.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (ASC 606). The underlying principle
of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected.
ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which
includes (1) identifying the contract(s) or agreement(s) with a customer, (2) identifying our performance obligations in the contract
or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations,
and (5) recognizing revenue as each performance obligation is satisfied.
Under
ASC 606, revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for the
Company upon shipment or delivery of products or services to our customers based on written sales terms, which is also when control
is transferred. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the products
or services to a customer.
The
Company adopted the guidance of ASC 606 on January 1, 2018. The implementation of ASC 606 had no impact on the condensed consolidated
financial statements and no cumulative effect adjustment was recognized.
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 July 1, 2018, the assumed conversion of convertible notes payable and
the exercise of 19,967,917 stock warrants, and 115,000 options to acquire shares of common stock are anti-dilutive due to the
Company’s net losses and are excluded in determining diluted loss per share.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 the measurement date which is either a) the date at which a performance commitment is reached, or b) at
the date at which the necessary performance to earn the equity instruments is complete.
Recent
Accounting Standards
In
June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation – Stock Compensation (Topic 718). The pronouncement
was issued to clarify the accounting for share-based payments when the terms of an award provide that a performance target could
be achieved after the requisite service period. The pronouncement is effective for reporting periods beginning after December
15, 2015. The adoption of ASU 2014-12 is not expected to have a significant impact on the Company’s consolidated financial
position or results of operations.
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, and believes the adoption of the pronouncement will result in the recording of lease assets and lease liabilities
of approximately $1,500,000 to our balance sheet upon adoption.
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:
|
|
July 1, 2018
|
|
|
December 31, 2017
|
|
Leasehold improvements
|
|
$
|
1,889,027
|
|
|
$
|
1,889,027
|
|
Fixtures and equipment
|
|
|
60,310
|
|
|
|
60,310
|
|
Computer software and equipment
|
|
|
267,372
|
|
|
|
267,372
|
|
Property and equipment, total
|
|
|
2,216,709
|
|
|
|
2,216,709
|
|
Less: accumulated depreciation
|
|
|
(1,596,670
|
)
|
|
|
(1,476,520
|
)
|
Property and equipment, net
|
|
$
|
620,039
|
|
|
$
|
740,189
|
|
Depreciation
and amortization expense for the thirteen weeks and twenty-six weeks ended July 1, 2018 were $58,516 and $120,150, respectively,
and for the thirteen weeks and twenty-six weeks ended July 2, 2017 were $64,068 and $128,137, respectively. Repair and maintenance
expense for the thirteen weeks and twenty-six weeks ended July 1, 2018 were $14,959 and $30,518, respectively, and for thirteen
weeks and twenty-six weeks ended July 2, 2017 were $18,238 and $33,780, respectively,
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 periods ended July 1, 2018 and December
31, 2017, there were no indications of further impairment based on management’s assessment of these assets.
NOTE
5 – NOTE PAYABLE FROM LESSOR – In Default
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. 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. As of December 31, 2017 and July 1, 2018 the balance of note payable net of unamortized
note discount approximated $422,000 as no payments were made during the period.
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 July 1, 2018, the Company was delinquent
in its payments to GGP under the note, and as such, the Note has been reflected as currently due and disclosed as in default.
NOTE
6 – CONVERTIBLE NOTE PAYABLE
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. The
balance of the Note was $50,000 as of July 1, 2018 and December 31, 2017 and was past due.
NOTE
7 – BUSINESS LOAN AND SECURITY AGREEMENT
In
August 2015, the Company entered into a Business Loan and Security Agreement with American Express Bank, which allows the Company
to borrow up to $174,000. The loan originally matured in August 2016 but will remain in effect for successive one-year periods
unless terminated by either party. The loan is secured by credit card collections from the Company’s store operations. The
agreement provides that the Company will receive an advance of up to $180,000 at the beginning of each fiscal month and requires
the Company to repay the loan from the credit card deposits it receives from its customers. Assuming the balance has been paid
off by the end of the month, the Company will receive another advance up to the face amount of the note at the beginning of the
next fiscal month.
The
loan requires a loan fee of 0.5% of the outstanding balance as of each disbursement date. The Company received the last loan from
American Express Bank in May of 2018. At July 1, 2018, $6,601 was outstanding and recorded as part of Accrued Expenses in the
accompanying balance sheet. The outstanding balance was paid off on July 6, 2018 and the loan was terminated.
NOTE
8 – COMMON STOCK
Issuance
of Common Stock
On
April 19, 2018, Giggles N’ Hugs Inc. closed a public rights offering. The Company sold 19,791,829 units at a price of $.03
per unit. Each unit consists of one share of common stock and 0.70 of a warrant. Each whole warrant will be exercisable for one
share of common stock at a price of $.06. per share. In the aggregate 19,791,829 shares of common stock and 13,854,274 warrants
were issued for gross proceeds, before expenses and dealer-manager fees, of $593,755.
During
the twenty-six weeks ended July 1, 2018, the Company granted and issued 200,000 shares of restricted common stock with a fair
value of $4,600 for services.
During
the twenty-six weeks ended July 1, 2018, the Company issued 1,000,000 shares of common stock in settlement of an accounts payable
amounting to $35,000. The fair value of the shares issued was $36,000 based on the fair value of the shares on the date of settlement
resulting in an additional cost to the Company of $1,000.
During
the weeks ended July 1, 2018, the Company issued 590,000 shares of common stock at fair value of $12,130 for services.
Employee
Stock Options
The
following table summarizes the changes in the options outstanding at July l, 2018, 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.
|
|
Options
|
|
|
Exercise Price
|
|
Outstanding, December 31, 2017
|
|
|
115,000
|
|
|
$
|
4.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding, July 1, 2018
|
|
|
115,000
|
|
|
$
|
4.50
|
|
Exercisable, July 1, 2018
|
|
|
115,000
|
|
|
$
|
4.50
|
|
As
of July 1, 2018, the stock options had no intrinsic value.
There
were no options granted during the fiscal quarter ended July 1, 2018, and there was no stock-based compensation expense in connection
with options granted to employees.
NOTE
8 – COMMON STOCK (CONTINUED)
Warrants
The
following table summarizes the changes in the warrants outstanding at July 1, 2018, and the related prices.
A
summary of the Company’s warrants as of July 1, 2018 is presented below:
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding, December 31, 2017
|
|
|
6,113,643
|
|
|
$
|
0.11
|
|
Granted
|
|
|
13,854,274
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding, July 1, 2018
|
|
|
19,967,917
|
|
|
$
|
0.03
|
|
Exercisable, July 1, 2018
|
|
|
19,967,917
|
|
|
$
|
0.03
|
|
Range of Exercise
Prices
|
|
|
Number Outstanding
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted Average Remaining Contractual
Life
|
|
|
Number Exercisable
|
|
|
Weighted Average
Exercise
Price
|
|
$
|
0.01 ~ $0.37
|
|
|
|
6,113,643
|
|
|
$
|
0.07
|
|
|
|
2.56
|
|
|
|
6,113,643
|
|
|
$
|
0.05
|
|
|
|
|
|
|
13,854,274
|
|
|
|
0.06
|
|
|
|
4.75
|
|
|
|
13,854,274
|
|
|
|
0.06
|
|
|
|
|
|
|
19,967,917
|
|
|
|
|
|
|
|
7.31
|
|
|
|
19,967,917
|
|
|
|
|
|
NOTE
9 – LEASES
The
Company currently leases its restaurant locations. The Company evaluates each 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 $88,057
and $100,773 for the thirteen weeks ended July 1, 2018 and July 2, 2017, respectively, and $175,306 and $202,363 for the twenty-six
weeks ended July 1, 2018 and July 2, 2017.
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. 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 5). 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. In addition, past due rent of $164,987 was forgiven. As such the gain on the termination
of the note of $220,686, the adjustment to the deferred rent in the aggregate amount of $69,614, and the forgiveness of past due
rent of $164,987, resulting in an aggregate gain of $455,287 had been deferred, and is being amortized on the straight-line basis
over the remaining life of the lease as an adjustment to rent expense. The balance of the deferred gain was $401,260 as of December
31, 2017.
During
the period ended July 1, 2018, $34,392 of deferred gain was amortized and offset to rent expense, resulting in a remaining deferred
gain balance of $366,870 as of July 1, 2018 which will be amortized as an offset to rent expense over the remainder of the lease.
The
balance of the incentive from lessor as of July 1, 2018 and December 31, 2017, were $603,130 and $653,007, and included deferred
rent of $134,531 and $132,818, respectively. As of July 1, 2018, $109,774 of the incentive from lessor was current and $493,356
was long term. Amortization of the incentive from lessor was $25,362 and $21,679 for the thirteen weeks ended July 1, 2018 and
July 2, 2017, respectively, and $49,877 and $42,543 for twenty-six weeks ended July 1, 2018 and July 2, 2017, respectively.
NOTE
10 – COMMITMENTS AND CONTINGENCIES
Litigation
As
of July 1, 2018, there was no material outstanding litigation.
NOTE
11 – SUBSEQUENT EVENTS
In
August 6, 2018, the Company issued total of 440,000 shares of common stock at fair value of $4,708 to two consultants for service
rendered.