NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen Weeks ended March 31, 2019 and April 1, 2018

(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 2019 and 2018 consists of a year ending December 29, 2019 and December 30, 2018.

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 30, 2018 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 30, 2018 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 thirteen weeks ended March 31, 2019, the Company incurred a net loss of $127,906, used cash in operations of $29,043, and had a stockholders’ deficit of $2,064562 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 30, 2018 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 $28,599 as of March 31, 2019. Management estimates that the current funds on hand will be sufficient to continue operations through July 31, 2019. 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

The Company recognizes revenue in accordance with 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.

Leases

Prior to January 1, 2019, the Company accounted for leases under ASC 840, Accounting for Leases. Effective January 1, 2019, the Company adopted the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. The adoption of ASC 842 on January 1, 2019 resulted in the recognition of operating lease right-of-use assets of $911,966 and, liabilities for operating leases of $1,462,835. As part of the entry to record the lease liability, the Company removed approximate $133,833 of deferred rent and $417,000 of landlord lease incentives that existed as of December 31, 2018. There was no cumulative-effect adjustment to accumulated deficit necessary. See Note 9 for further information regarding the adoption of ASC 842.

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 March 31, 2019, the assumed conversion of convertible notes payable and the exercise of 52,964,917 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

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 are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

Depreciation and amortization expense for the thirteen weeks ended March 31, 2019 and April 1, 2018 was $52,247 and $61,635, respectively. Repair and maintenance expense for the thirteen weeks ended March 31, 2019 and April 1, 2018 were $12,551 and $15,560, 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 March 31, 2019 and December 30, 2018, there were no indications of 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 March 31, 2019, and December 30, 2018 the balance of note payable net of unamortized note discount was $420,881 respectively.

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 March 31, 2019, the Company was delinquent in its payments to GGP under the note, and as such, the Note has been reflected as currently due and disclosed as in default.

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. By oral agreement with the lender, the maturity date was extended, and the note is now considered to be due on demand.

NOTE 7 – COMMON STOCK

Issuance of Common Stock

During the thirteen weeks ended March 31, 2019, the Company granted and issued 300,000 shares of restricted common stock with a fair value of $2,100 to a consultant for services.

During the thirteen weeks ended March 31, 2019, the Company issued 50,000 shares of common stock at fair value of $350 to an employee for services.

Employee Stock Options

The following table summarizes the changes in the options outstanding at March 31, 2019, 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.

As of March 31, 2019, the stock options had no intrinsic value.

There were no options granted during the fiscal quarter ended March 31, 2019, and there was no stock-based compensation expense in connection with options granted to employees.

NOTE 8 – COMMON STOCK (CONTINUED)

Warrants

On January 1, 2019, the Company entered into employee agreements with three individuals. In accordance with the agreements, the employees are to receive warrants of 32,997,000 at an exercise price of $0.0001. A total of 1,000,000 warrants vested immediately and the others that vest over the reminder of the year. The Company calculated the fair value of the warrants to be $230,979 based on the fair value at the date of grant. During the period ended March 31, 2019, the Company amortized $62,995 of this amount as an expense which is included in general and administrative costs on the accompanying statement of operations. As of March 31, 2019 the remaining unamortized balance was $167,984 which will be amortized over the remainder of the year.

The following table summarizes the changes in the warrants outstanding at March 31, 2019, and the related prices.

A summary of the Company’s warrants as of March 31, 2019 is presented below:

The intrinsic value of the warrants outstanding as of March 31, 2019 was $167,000.

NOTE 9 – LEASES

Prior to January 1, 2019, the Company accounted for leases under ASC 840, Accounting for Leases . Effective January 1, 2019, the Company adopted the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. The adoption of ASC 842 on January 1, 2019 resulted in the recognition of operating lease right-of-use assets of $911,997 and lease liability of $1,462,835.As part of the entry to record the lease liability, the Company removed $133,833 of deferred rent and $417,000 of landlord lease incentives that existed as of December 31, 2018. There was no cumulative-effect adjustment to accumulated deficit necessary.

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 $315,282 as of March 31, 2019.

During the period ended March 31, 2019, $17,197 of deferred gain was amortized and offset to rent expense, resulting in a remaining deferred gain balance of $315,282 as of March 31, 2019 which will be amortized as an offset to rent expense over the remainder of the lease.

NOTE 9 – LEASES (CONTINUED)

Lease Obligations

The Company has operating lease agreements for Topanga and Glendale and with remaining lease terms of 3.8 years and 4.42 years, respectively. Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate determined to be 10%, in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and lease incentives were removed. The balance of the right of use asset at March 31, 2019 was $865,713, net of accumulated amortization of $43,929.

The following is related to leases for the period:

The Company’s total lease payment is as follows:

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Employment Agreements

Sean Richards : On January 1, 2019, we entered into an employment agreement with Sean Richards, pursuant to which Mr. Richards agreed to devote all of his working time to our business as our Chief Operating Officer and we agreed to pay Mr. Richards an annual base salary of $101,500, plus a onetime bonus of warrants exercisable for 1,000,000 shares of our common stock issued for a ten-year period with an exercise price of $0.0001 per share. In addition, we also agreed to pay the monthly premiums for health care coverage for Mr. Richards and the other members of his immediate family up to a maximum of $15,000 per year. Mr. Richards will receive an annual bonus in cash of up to $10,000, in our sole discretion and based on mutually agreed upon financial performance goals.

The employment agreement also contains covenants prohibiting Mr. Richards from competing with us during his employment, and from (i) competing with us in California and in any other states where we provide management services relating to our business, (ii) soliciting any of our employees or consultants and (iii) disparaging the Company or any of our officers, directors, employees or agents for a period of two years after his employment ends. The employment agreement also contains customary confidentiality provisions. The employment agreement may be terminated by either party for any reason at any time.

Joey Parsi : On January 1, 2019, we entered into an employment agreement with Joey Parsi, pursuant to which Mr. Parsi agreed to devote a majority of his working time to our business as our Co-Chief Executive Officer and we agreed to pay Mr. Parsi an annual base salary of $225,000, plus a onetime bonus of warrants exercisable for 25,997,000 shares of our common stock issued for a ten-year period with an exercise price of $0.0001 per share. In addition, we also agreed to pay the monthly premiums for health care coverage for Mr. Parsi and the other members of his immediate family. Mr. Parsi will receive an annual bonus in cash of up to $175,000, in our sole discretion and based on mutually agreed upon financial performance goals. Mr. Parsi will also be entitled to reimbursement for all ordinary and reasonable expenses incurred in the performance of his duties for the Company, including for a company car, lap top computer and cell phone. Mr. Parsi will also be entitled to six weeks of vacation annually.

The employment agreement may be terminated by either party for any reason at any time. If Mr. Parsi’s employment is terminated by the Company with or without cause, Mr. Parsi will be entitled to receive a severance payment in the amount of 12 months of his base salary plus all unvested options, warrants and shares.

The employment agreement also contains covenants prohibiting Mr. Parsi from disparaging the Company or any of our officers, directors, employees or agents for a period of two years after his employment ends. The employment agreement also contains customary confidentiality provisions.

Philip Gay : On January 1, 2019, we entered into an employment agreement with Philip Gay effective as of April 1, 2018, pursuant to which Mr. Gay agreed to serve as our Co-Chief Executive Officer and we agreed to pay Mr. Gay an annual base salary consisting of warrants exercisable for 6,000,000 shares of our common stock issued for a ten-year period with an exercise price of $0.0001 per share. These warrants will be paid on each anniversary date of Mr. Gay’s employment and each annually grant will vest at the rate of twenty-five percent (25%) per calendar quarter. Mr. Gay will also be entitled to reimbursement for all ordinary and reasonable expenses incurred in the performance of his duties for the Company, and he will receive an annual bonus in cash of up to $75,000, in our sole discretion and based on mutually agreed upon financial performance goals. If Mr. Gay’s employment is terminated by the Company with or without cause, all unvested equity, options and equity grants will be cancelled.

The employment agreement with Mr. Gay also contains customary confidentiality provisions and may be terminated by either party for any reason at any time.

Litigation

As of March 31, 2019, there was no material outstanding litigation.