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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board - Other OTC  >  Giggles N Hugs Inc    GIGL

GIGGLES N HUGS INC

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Giggles N Hugs : ' HUGS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/14/2019 | 05:18pm EDT
This Report on Form 10-Q contains forward-looking statements and involves risks
and uncertainties that could materially affect expected results of operations,
liquidity, cash flows, and business prospects. These statements include, among
other things, statements regarding:



  ? our ability to diversify our operations;

  ? inability to raise additional financing for working capital;

? the fact that our accounting policies and methods are fundamental to how we

report our financial condition and results of operations, and they may require

our management to make estimates about matters that are inherently uncertain;

  ? our ability to attract key personnel;

  ? our ability to operate profitably;

  ? deterioration in general or regional economic conditions;

? adverse state or federal legislation or regulation that increases the costs of

compliance, or adverse findings by a regulator with respect to existing

operations;

? changes in U.S. GAAP or in the legal, regulatory and legislative environments

    in the markets in which we operate;

  ? the inability of management to effectively implement our strategies and
    business plan;

  ? inability to achieve future sales levels or other operating results;

  ? the unavailability of funds for capital expenditures;

  ? other risks and uncertainties detailed in this report;




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



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



The Company adopted a 52/53 week fiscal year ending on the Sunday closest to December 31st for financial reporting purposes. For the years 2018 and 2019 consists of a year ending December 30, 2018 and December 29, 2019.



  3







Overview



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



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



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



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



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



  4







RESULTS OF OPERATIONS



Results of Operations for the Thirteen Weeks Ended June 30, 2019 and July 1,
2018:



                          COSTS AND OPERATING EXPENSES



                                For Thirteen       For Thirteen
                                Weeks Ended        Weeks Ended           Increase (Decrease)
                               June 30, 2019       July 1, 2018           $               %
Revenue:
Net sales                      $      554,062$      579,937$    (25,875 )         -4.5 %

Costs and operating
expenses:
Cost of operations                    408,628            466,786          (58,158 )        -12.5 %
General and administrative
expenses                              233,717            303,515          (69,798 )        -23.0 %
Depreciation and
amortization                           49,751             58,516           (8,765 )        -15.0 %
 Total operating expenses             692,096            828,817         (136,721 )        -16.5 %

Loss from Operations                 (138,034 )         (248,880 )        110,846          -44.5 %
Other expenses:
Finance and interest
expenses                              (11,590 )          (11,747 )            157           -1.3 %
Loss before provision for
income taxes liability               (149,624 )         (260,627 )        111,003          -42.6 %

Provision for income taxes             (2,400 )                -           (2,400 )            *
Net Loss                       $     (152,024 )$     (260,627 )$    108,603          -41.7 %



Notes to Costs and Operating Expenses Table:

Net sales. Net sales for the thirteen weeks ended June 30, 2019 and July 1, 2018 were $554,062 and $579,937 respectively. The decrease of $25,875 (4.5%) was mostly attributable to reduced food sales and play area fees.




Cost of operations. Costs of operations consist of cost of goods sold,
restaurant utilities, supplies, administrative and other operating expenses,
labor cost, and occupancy cost. For the thirteen weeks ended June 30, 2019 and
July 1, 2018, cost of operations were $408,628 and $466,786, respectively. The
decrease of $58,158 was mainly attributable to the reduced food costs,
restaurant supplies and new lease accounting standards that amortization of
tenant allowance netted to the rent expenses.



General and administrative expenses. General and administrative expenses for the
thirteen weeks ended June 30, 2019 and July 1, 2018 were $233,718 and $303,515,
respectively. This decrease of $69,797 was mainly attributable to reduced legal
fees, and CEO salary, to offset increased stock-based employee compensation
which included $55,995 fair value of warrants granted during the current period.



Depreciation and amortization. Depreciation and amortization were $49,751 and $58,516 for the thirteen weeks ended June 30, 2019 and July 1, 2018, respectively. The decrease was due to some assets that have been fully depreciated.




Finance and interest expense. The total finance and interest expenses of $11,590
for the thirteen weeks ended June 30, 2019 virtually has no change compared to
the prior year at the quarter.



Net Loss. The overall net losses of $152,024 and $260,627 for the thirteen weeks ended June 30, 2019 and July 1, 2018, respectively, reflects a decrease of $108,602 was mostly attributable to decreased operating expenses.



  5







Results of Operations for the Twenty-Six Weeks Ended June 30, 2018 and July 1,
2018:



                          COSTS AND OPERATING EXPENSES



                                For Twenty-Six       For Twenty-Six
                                 Weeks Ended          Weeks Ended            Increase (Decrease)
                                June 30, 2019         July 1, 2018             $              %
Revenue:
Net sales                      $      1,253,288$      1,193,300        59,988.00            5.0 %

Costs and operating
expenses:
Cost of operations                      904,290              966,463          (62,173 )         -6.4 %
General and administrative
expenses                                502,504              581,742          (79,238 )        -13.6 %
Depreciation and
amortization                            101,998              120,150          (18,152 )        -15.1 %
Total operating expenses              1,508,792            1,668,355         (159,563 )         -9.6 %

Loss from Operations                   (255,504 )           (475,055 )        219,551          -46.2 %

Other income (expenses):
Finance and interest
expenses                                (22,026 )            (26,137 )          4,111          -15.7 %
Loss on settlement                            -               (1,000 )          1,000              *
Loss before provision for
income taxes                           (277,530 )           (502,192 )        224,662          -44.7 %
Provision for income taxes               (2,400 )                  -           (2,400 )            *

Net loss                       $       (279,930 )$       (502,192 )$    222,262          -44.3 %



Notes to Costs and Operating Expenses Table:

The net sales for the twenty-six weeks ended June 30, 2019 and July 1, 2018 were
$1,253,288 and $1,193,300, respectively. The 5% increase was mostly attributable
to the rainy winter we experienced during the first quarter.



Cost of operations. Costs of operations consist of cost of goods sold,
restaurant utilities, supplies, administrative and other operating expenses,
labor cost, and occupancy cost. For the twenty-six weeks ended June 30, 2019 and
July 1, 2018, cost of operations were $904,290 and $966,463, respectively. The
decrease of $62,173 (6.4%) was mostly attributable to reduced food costs, labor
cost, and implementing the new lease accounting standards that amortization of
tenant allowance netted to the rent expenses.



General and administrative expenses. General and administrative expenses for the twenty-six weeks ended June 30, 2019 and July 1, 2018 were $502,504 and $581,742, respectively. The reduction of $79,238 (13.6%) was mostly due to reduced legal fee, professional fee, and CEO salary, to offset increase stock-based compensation.




Depreciation and amortization. The depreciation and amortization were $18,152
less than the same period in the previous year. The decrease was due to some
assets have been completed depreciated.



Finance and interest expense. The total finance and operating expenses of
$22,026 and $26,137 for the twenty-six weeks ended June 30, 2019 and July 1,
2018, respectively. The decrease of $4,111 mostly attributable to eliminated
American Express loan.



Net Loss. The overall net losses of $279,930 and $502,192 for the twenty-sis
weeks ended June 30, 2019 and July 1, 2018, respectively, reflects a decrease of
$44.3% was mostly attributable to increased revenue and decreased operating
expenses.



  6







                        LIQUIDITY AND CAPITAL RESOURCES


As of June 30, 2019, the Company has $31,028 in cash and cash equivalents,
$23,437 in inventory, and $19,118 in prepaid expenses and other. The following
table provides detailed information about our net cash flows for all financial
statement periods presented in this report.



The following table sets forth a summary of our cash flows for the thirteen weeks ended June 30, 2019 and July 1, 2018:



                                                       For Twenty-Six       For Twenty-Six
                                                        Weeks Eneded         Weeks Eneded
                                                       June 30, 2019July 1, 2018
Net cash provided by (used in) operating activities   $        (23,622 )$       (560,566 )
Net cash used in investing activities                           (2,992 )                  -
Net cash provided by financing activities                            -     

593,755

Net (decrease) increae in Cash                                 (26,614 )   
         33,189
Cash, beginning of period                                       57,642              131,336
Cash, end of period                                   $         31,028     $        164,525




Operating activities


Net cash used in operating activities was $23,622 for the twenty-six weeks ended
June 30, 2019 compared to $560,566 provide in operating activities for the
thirteen weeks ended July 1, 2018. This significant increase of cash used is
mostly attributable to decreased liabilities.



Investing activities


Net cash used in investing activities was $2,992 and zero, respectively, for the twenty-six weeks ended June 30, 2019 and July 1, 2018,



Financing activities


Net cash provided by financing activities for the twenty-six weeks ended June 30, 2019 and July 1,2018 was zero and $593,755, respectively.

The Company is not required to provide a tabular disclosure of contractual obligations, as it is a smaller reporting company as defined under Rule 12b-2 of the Exchange Act.



  7







Going Concern and Liquidity



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 period ended June 30, 2019, the Company incurred a net loss of
$279,930, and $23,622 of cash used in operations, and had a stockholders'
deficit of $2,158,041 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 for one year from 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 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. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.



At June 30, 2019, the Company had cash on hand in the amount of $31,028.
Management estimates that the current funds on hand would be sufficient to
continue operations through September 2019. Management is currently seeking
additional funds through sponsorships and promotions to operate our business. No
assurance can be given that any future financing will be available or, if
available, that it will be on terms that are satisfactory to the Company. Even
if the Company is able to obtain additional financing, it may contain undue
restrictions on our operations, in the case of debt financing or cause
substantial dilution for our stock holders, in case or equity financing.



Notes Payable - 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.
The Note Payable accrued interest at a rate of 10% through October 15, 2015, 12%
through October 31, 2017, and 15% through October 31, 2023 and matures on
October 31, 2023.



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

On August 12, 2016, the Company entered into a third amendment on its lease at
The Glendale Galleria. The amendment covered several areas, including adjustment
to percentage rent payable, reduced the minimum rent payable, along with the
payment and principal of Promissory Note. The Promissory Note was adjusted to a
balance due of $763,261.57 from $683,316, with zero percent interest, payable in
equal monthly instalments of $5,300 through maturity of Note on May 31, 2028.



The 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 June 30, 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.



Convertible Notes 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 matures on August
31, 2016. The Lender may also convert all or a portion of the Note Payable at
any time into shares of common stock at a price of $0.10 per share.



  8






Recent Accounting Pronouncements

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



Critical Accounting Policies



Use of Estimates



The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Note 3 to the Condensed Consolidated Financial
Statements describes the significant accounting policies and methods used in the
preparation of the Consolidated Financial Statements. Estimates are used for,
but not limited to, impairment analyses, accounting for contingencies and equity
instruments issued for services. Actual results could differ materially from
those estimates. The following critical accounting policies are impacted
significantly by judgments, assumptions, and estimates used in the preparation
of the Consolidated Financial Statements.



Long-Lived Assets



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



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



  9







Stock-Based Compensation


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



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



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.



Off-Balance Sheet Arrangements




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



Without sufficient cash flow from operations we will require additional cash
resources, including the sale of equity or debt securities, to meet our planned
capital expenditures and working capital requirements for the next 12 months. We
will require additional cash resources due to changed business conditions to
implement of our strategy to successfully expand our operations. If our own
financial resources and then-current cash-flows from operations are insufficient
to satisfy our capital requirements, we may seek to sell additional equity or
debt securities or obtain additional credit facilities. The sale of additional
equity securities will result in dilution to our existing stockholders. The
incurrence of indebtedness will result in increased debt service obligations and
could require us to agree to operating and financial covenants that could
restrict our operations or modify our plans to grow the business. Financing may
not be available in amounts or on terms acceptable to us, if at all. Any failure
by us to raise additional funds on terms favorable to us, or at all, will limit
our ability to expand our business operations and could harm our overall
business prospects.



  10

© Edgar Online, source Glimpses

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Managers
NameTitle
Phillip C. Gay Chief Executive Officer & Director
Joey Parsi Chairman, President & Treasurer
Sean Richards Chief Operating Officer & Secretary
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