NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Giggles
N’ Hugs, Inc. (“GIGL Inc.”) was originally organized on September 17, 2004 (Date of Inception) 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.
The Company is authorized to issue 1,125,000,000 shares of $0.001 par value common stock.
The
Company adopted a 52/53 week fiscal year ending on the Sunday closest to December 31st for financial reporting purposes. Fiscal
year 2018 consists of a year ending December 30, 2018. Fiscal year 2017 consists of a year ending December 31, 2017.
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 year ended December 30, 2018, the Company incurred a net loss of $691,369, used
cash in operations of $610,874 and had a stockholders’ deficit of $2,002,101 as of that date. In addition, the Company was
in default of a note payable to one of its landlords. These factors raise substantial doubt about the Company’s ability
to continue as a going concern within one year after the date that the financial statements are issued. The ability of the Company
to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business
plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as
a going concern.
The
Company has and will continue to use significant capital to grow and acquire market share At December 30, 2018,
the
Company had cash on hand in the amount of $57,642. Management estimates that the current funds on hand will be sufficient to continue
operations through May 2019. Management continues to seek 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
For
the years ended December 30, 2018 and December 31, 2017, the consolidated financial statements include the accounts of Giggles
N’ Hugs, Inc., GNH, Inc., 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 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 include estimates made for impairment analysis for fixed assets and other long term assets,
estimates of potential liabilities and, assumptions made in valuing derivative liabilities, the valuation of issuance of debt
and equity securities, and realization of deferred tax assets. Actual results could differ from those estimates.
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration
of Credit Risk
The
Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts
or other foreign hedging arrangements. The Company maintains the majority of its cash balances with financial institutions, in
the form of demand deposits. The Company believes that no significant concentration of credit risk exists with respect to these
cash balances because of its assessment of the creditworthiness and financial viability of these two financial institutions.
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 financing obligations approximate their fair values due to the fact that the interest rates on these obligations are based
on prevailing market interest rates.
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Cash
and cash equivalents
For
the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are
considered to be cash equivalents. The carrying value of these investments approximates fair value.
Inventories
Inventories
are stated at the lower of cost or market on a first-in, first-out basis and consist of restaurant food and other supplies.
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. 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 years ended December 30, 2018 and
December 31, 2017 there were no indications of impairment based on management’s assessment of these assets.
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The Company currently has two leases, which are 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 its leased premises which are reimbursed to
the Company by its 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.
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – 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 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.
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 years ended December 30, 2018 and December 31, 2017, warrants to acquire 19,967,917
and 6,113,643 shares of common stock, respectively , and options to acquire 115,000 shares of common stock are anti-dilutive due
to the Company’s net losses and are excluded in determining diluted loss per share.
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Through
December 31, 2017, the Company recognized revenue from restaurant sales when payment was tendered at the point of sale. Revenues
are presented net of sales taxes. The obligation is included in other accrued expenses until the taxes are remitted to the appropriate
taxing authorities
On
January 1, 2018, the Company adopted ASC 606 using the modified retrospective method. This standard provides that revenues are
to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration
expected to be received for those goods or services. This standard does not impact the Company’s recognition of revenue
from Company-operated restaurants as those sales are recognized on a cash basis at the time of the underlying sale and are presented
net of sales tax and other sales-related taxes.
The
standard also does not change the recognition of revenue from restaurant membership fees. 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.
The
adoption of ASC 606 had no effect on previously reported amounts
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 December 30, 2018 and December 31, 2017, the amount of gift cards sales were $1,647 and ($2,338) 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.
Advertising
costs
Advertising
costs are expensed as incurred. During the fiscal years ended December 30, 2018 and December 31, 2017, there were $34,539 and
$29,939, respectively in advertising costs included in general and administrative expenses.
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 – PROPERTY AND EQUIPMENTS
Property
and equipment consisted of the following at:
|
|
December 30, 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
|
|
|
(1,708,865
|
)
|
|
|
(1,476,520
|
)
|
Property and equipment, net
|
|
$
|
507,844
|
|
|
$
|
740,189
|
|
Depreciation
expense was $232,345 and $256,421 for the fiscal years ended December 30, 2018 and December 31, 2017, respectively. Repair and
maintenance expenses for the years ended December 30, 2018 and December 31, 2017 were $59,684 and $58,724, respectively.
NOTE
3 – INCENTIVE FROM LESSOR
The
Company previously received $506,271 for Topanga and $475,000 for Glendale restaurant locations from the Company’s landlords
as construction contributions pursuant to agreed-upon terms in the lease agreements as of December 27, 2015.
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.
The
balance of the incentive from lessor as of December 30, 2018 and December 31, 2017 was $550,839 and $653,007 respectively, and
included deferred rent of $133,832 and $132,818, respectively. As of December 30, 2018, $117,460 of the incentive from lessor
was current and $433,379 was long term. Amortization of the incentive from lessor was
$102,168
and $87,420 for the fiscal years ended December 30, 2018 and December 31, 2017, respectively.
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 – NOTE PAYABLE 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, LLC. On March 1, 2015, the Company and the lender renegotiated the terms of the Promissory
Note and agreed t a new note with a principal balance due of $683,316. As part of the new agreement, the Lender waived principal
and interest payment 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 $763,262 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 $443,521. As of December 30, 2018 and December 31, 2017, the balance of the
note payable net of unamortized note discount were $420,881 and $422,361, respectively.
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 (see Note 8) were agreed to at the same time, that the change in
the lease payment terms of 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 related revision of lease were agreed to at the same time, that
the change in the lease payment terms and 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 aggregated 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 $332,478 as of, December 30, 2018.
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 December 30, 2018, the Company was delinquent
in its payments to GGP under the note, accordingly, the full amount is in current.
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 – CONVERTIBLE NOTE PAYABLE – PAST DUE
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. The
balance of the Note was $50,000 as of December 30, 2018 and December 31, 2017 and was past due.
NOTE
6 – SETTLED NOTES
St.
George Investments
On
December 18, 2015, the Company issued a six-month unsecured promissory note in the principal sum of $265,000 in favor of St. George
Investments, LLC, pursuant to the terms of a securities purchase agreement of the same date. The Note went into default when the
Company failed to make payment on the due date. Consequently, on July 8, 2016, the Company entered into an Exchange Agreement
with St. George Investments, LLC, to replace the original Promissory Note with a new Convertible Promissory Note (“Note”).
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.. As of January 1,
2017, the amount due under the promissory note was $193,450.
During
January and February of 2017. the Holder converted $48,914 of its debt into 15,660,611 shares of Common Stock with a fair value
of $48,914. In addition, the Company paid $7,517 of the principal balance. On March 23, 2017, St. George Investments, LLC (“St.
George”) served an arbitration demand and summons claiming that the Company had breached its obligations under a convertible
note by preventing St. George from converting the remaining balance of the note to common stock. The parties disagreed as to the
conversion price set in the note agreement due to execution by the parties of different versions of the document. St. George claimed
for additional damages. The Company believed these claims lacked merit and the Company retained counsel to vigorously defend this
action. Effective May 3, 2017, the Company counter-sued for full damages for breaching the contract, claiming mistakes, rescission,
breach of the covenant of good faith and fair dealing and unjust enrichment. On August 14, 2017, the Company and St. George entered
into a settlement agreement whereby the Company agreed to deliver 7,900,000 unrestricted free-trading shares to St. George upon
signing a final settlement agreement. The fair value of shares issued was determined to be $553,000 based on the trading price
of the shares at the date of the settlement. The company considered the settlement as a debt extinguishment and accounted for
the issuance of the 7,900,000 shares valued at $553,000 offset by the extinguishment of the aggregate face value of the note and
accrued interest of $143,740, and the remaining value of the derivative liability of $160,240, resulting in a loss on extinguishment
of $249,014.
As
part of the settlement agreement, St. George agreed to purchase an additional 1,100,000 shares of common stock for a purchase
price of $110,000 at $0.10 per share.
As
of fiscal year ended December 31, 2017, all the terms and conditions of the settlement have been completed.
Iconic
Holdings
As
of January 1, 2017, the balance of a convertible note payable to Iconic Holdings was $84,191. During the year ended December 31,
2017, the entire note principal and accrued interest aggregating $121,232 was converted to 38,457,435 shares of common stock.
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 – COMMON STOCK
Issuance
of Common Stock
During
the fiscal year ended December 30, 2018,
●
|
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. Direct costs of the offering
were $51,575 and were charged to paid in capital.
|
|
|
●
|
The Company granted
and issued 200,000 shares of restricted common stock with a fair value of $4,600 for an employee compensation.
|
|
|
●
|
The Company issued
1,500,000 shares of common stock in settlement of an accounts payable amounting to $39,250. The fair value of the shares issued
was $40,650 based on the fair value of the shares on the date of settlement resulting in an additional cost to the Company
of $1,400.
|
|
|
●
|
The Company issued
1,330,000 shares of common stock at fair value of $19,415 for services rendered.
|
During
the fiscal year ended December 31, 2017, the Company issued
●
|
The
Company granted and issued to officers and employees 10,170,000 shares of restricted common stock with a fair value of $28,470.
The shares were valued based on the closing price of the stock on the date of agreement.
|
|
|
●
|
The
Company issued 2,384,226 shares of common stock in settlement of an accounts payable amounting to $156,800. The fair value
of the shares issued was $265,896 based on the fair value of the shares on the date of settlement resulting in an additional
cost to the Company of $109,096. In addition, The Company issued 500,000 shares of common stock at fair value of $10,000 in
settlement of an additional accounts payable.
|
|
|
●
|
The
Company received $75,000 from the sale of 992,602 shares of common stock and warrants to acquire 357,142 shares of common
stock at an excise price of $0.12 per share that expire in June 2020. The shares have not yet been issued and are included
in common stock issuable.
|
|
|
●
|
the
Company issued 1,495,774 shares of common stock at fair value of $51,645 for services rendered. The shares were valued based
on the closing price of the stock on the date of agreement.
|
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 – COMMON STOCK (CONTINUED)
Employee
Stock Options
The
following table summarizes the changes in the options outstanding at December 30, 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.
A
summary of the Company’s stock awards for options as of December 30, 2018 and changes for the fiscal year ended December
31, 2017 is presented below:
|
|
Stock
|
|
|
Weighted Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
Outstanding, January 1, 2017
|
|
|
115,000
|
|
|
$
|
4.50
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired/Cancelled
|
|
|
—
|
|
|
|
—
|
|
Outstanding, December 31, 2017
|
|
|
115,000
|
|
|
$
|
4.50
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired/Cancelled
|
|
|
—
|
|
|
|
—
|
|
Outstanding, December 30, 2018
|
|
|
115,000
|
|
|
$
|
4.50
|
|
Exercisable, December 30, 2018
|
|
|
115,000
|
|
|
$
|
4.50
|
|
As
of December 30, 2018, the stock options had no intrinsic value.
There
were no options granted during the fiscal year ended December 30, 2018.
There
was no stock-based compensation expense in connection with options granted to employees recognized in the consolidated statement
of operations for the fiscal years ended December 30, 2018 and December 31, 2017.
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 – COMMON STOCK (CONTINUED)
Warrants
The
following table summarizes the changes in the warrants outstanding at December 30, 2018, and the related prices.
A
summary of the Company’s warrant as of December 30, 2018 is presented below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
Outstanding, January 1, 2017
|
|
|
606,500
|
|
|
$
|
0.13
|
|
Granted
|
|
|
5,507,143
|
|
|
|
0.10
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2017
|
|
|
6,113,643
|
|
|
$
|
0.11
|
|
Granted
|
|
|
13,854,274
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 30, 2018
|
|
|
13,854,274
|
|
|
$
|
0.07
|
|
Exercisable, December 30, 2018
|
|
|
13,854,274
|
|
|
$
|
0.07
|
|
As
of December 30, 2018, the stock warrants had no intrinsic value.
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
Range of
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Number
|
|
|
Exercise
|
|
Prices
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life
|
|
|
Exercisable
|
|
|
Price
|
|
|
$0.01 $0.37
|
|
|
|
6,113,643
|
|
|
$
|
0.07
|
|
|
|
2.31
|
|
|
|
6,113,643
|
|
|
$
|
0.05
|
|
|
$0.06
|
|
|
|
13,854,274
|
|
|
|
0.06
|
|
|
|
4.50
|
|
|
|
13,854,274
|
|
|
|
0.06
|
|
|
|
|
|
|
19,967,917
|
|
|
|
|
|
|
|
6.81
|
|
|
|
19,967,917
|
|
|
|
|
|
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 January 1, 2017, 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 December
30, 2018, the achievement of the corresponding milestones for the remaining warrants to acquire 3,960,000 has been determined
to be remote or undeterminable, as such, the warrants have not been included as outstanding in the table above.
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 – COMMON STOCK (CONTINUED)
During
the year ended December 31, 2017, the Company entered into agreements to issue warrants to acquire 5,150,000 shares of common
stock for celebrity services to promote the Company’s business. The warrants were fully vested upon issuance, expire 5 years
from the date of issuance, and 5,000,000 of the warrants are exercisable at $0.10 per share and 150,000 of the warrants are exercisable
at $0.20 per share. The total fair value of these warrants at grant date was $531,000 and was recognized a compensation costs
during the year ended December 31, 2017. The fair value was calculated using a Black-Scholes Option Pricing model with the following
assumptions: life of 5 years; risk free interest rate of 1.73%; volatility of 350% and dividend yield of 0%.
During
the year ended December 31, 2017, the Company issued a warrant to acquire 357,142 shares of common stock at an exercise price
of $.12 per share and expiring 2020 to an investor who acquired 714,285 shares of common stock for aggregate proceeds of $50,000
(the shares are reflected as common stock issuable on accompanying balance sheet.)
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 – COMMITMENTS AND CONTINGENCIES
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
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 4) were agreed to at the same time, that the change in the lease payment terms of 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 related revision of lease were agreed to at the same time, that the change in the lease payment terms
and 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 aggregated 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 $332,472 as of, December 30, 2018.
Rent
expense for the Company’s restaurant operating leases for the year ended December 30, 2018 and December 31, 2017 was $353,024
and $341,270, respectively
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
As
of December 30, 2018, the aggregate minimum annual lease payments under operating lease as follows:
2019
|
|
$
|
437,100
|
|
2020
|
|
|
452,956
|
|
2021
|
|
|
469,398
|
|
2022
|
|
|
279,077
|
|
Thereafter
|
|
|
151,172
|
|
Total
|
|
$
|
1,789,703
|
|
Litigation
As
of December 30, 2018, there was no material outstanding litigation.
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 – RELATED PARTY TRANSACTIONS
During
the years ended December 30, 2018 and December 31, 2017, the Company incurred salary costs of $250,000 and $300,000 for Mr. Joey
Parsi, our Co-Chief Executive Officer. As of December 30, 2018 and December 31, 2017, Mr. Parsi was owed $466,541 and $375,900,
respectively, for accrued salary.
During
the years ended December 30, 2018 and December 31, 2017, the Company incurred $66,840 and $66,839 of costs for management and
accounting services from a company controlled by Phillip Gay, our Co-Chief Executive Officer. As of December 30, 2018 and December
31, 2017, this company was owed $10,720 and $10,380 for such costs.
NOTE
10 – INCOME TAXES
For
the fiscal years ended December 30, 2018 and December 31, 2017 GNH, Inc. incurred net operating losses and, accordingly, no provision
for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization
of any tax assets. At December 30, 2018 the Company had $8,103,000 of federal and state net operating losses. The net operating
loss carryforwards, if not utilized, will begin to expire in 2023.
A
reconciliation of tax expense computed at the statutory federal tax rate income (loss) from operations before income taxes to
the actual income tax expense is as follows:
|
|
December 30, 2018
|
|
|
December 31, 2017
|
|
Tax provision (benefits) computed at the statutory rate (21% and 34%)
|
|
$
|
(145,000
|
)
|
|
$
|
(256,000
|
)
|
State income tax, net of federal benefit
|
|
|
(30,000
|
)
|
|
|
(44,000
|
)
|
Change in valuation allowance
|
|
|
175,800
|
|
|
|
300,800
|
|
Provision for income tax
|
|
$
|
800
|
|
|
$
|
800
|
|
Deferred
tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial
statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between
financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences
are expected to reverse
Deferred
income taxes include the net tax effects of net operating loss (NOL) carryforwards and the temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components
of the Company’s deferred tax assets are as follows:
|
|
December 30, 2018
|
|
|
December 31, 2017
|
|
Net operating loss carryover
|
|
$
|
2,250,000
|
|
|
$
|
1,900,000
|
|
Depreciation and other
|
|
|
174,000
|
|
|
|
175,000
|
|
Total deferred tax assets
|
|
|
2,424,000
|
|
|
|
2,075,000
|
|
Valuation allowance
|
|
|
(2,424,000
|
)
|
|
|
(2,075,000
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
GIGGLES
N’ HUGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 – INCOME TAXES (CONTINUED)
The
Company has provided a valuation reserve against the full amount of the net deferred tax assets, because in the opinion of management,
it is more likely than not that these tax assets will not be realized.
The
Company’s NOL and tax credit carryovers may be significantly limited under the Internal Revenue Code (IRC). NOL and tax
credit carryovers are limited under Section 382 when there is a significant “ownership change” as defined in the IRC.
During the fiscal year December 30, 2018 and in prior years, the Company may have experienced such ownership changes, which could
impose such limitations.
The
limitation imposed by the IRC would place an annual limitation on the amount of NOL and tax credit carryovers that can be utilized.
When the Company completes the necessary studies, the amount of NOL carryovers available may be reduced significantly. However,
since the valuation allowance fully reserves for all available carryovers, the effect of the reduction would be offset by a reduction
in the valuation allowance.
The
Company files income tax returns in the U.S. federal jurisdiction, and the State of Nevada.
NOTE
11 – SUBSEQUENT EVENTS
In
January 2019, the Company issued total of 350,000 shares of common stock for services, with a fair value of $2,800.
On
January 1, 2019, the Company 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.
On
January 1, 2019, the Company 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.